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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

x      Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the Quarterly Period Ended June 30, 2011

 

OR

 

o         Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the Transition Period from                     to                   :

 

Commission file number:  333-170100

 

OnCure Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5211697

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

188 Inverness Drive West, Suite 650
Englewood, Colorado 80112
(303) 643-6500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section15(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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o  No x

 

As of August 11, 2011, 26,317,675 shares of OnCure Holdings Inc. common stock were outstanding, none of which were publicly traded.

 

 

 




Table of Contents

 

Part I

 

MARKET AND INDUSTRY DATA

 

Market data and other statistical information used throughout this quarterly report on Form 10-Q are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some data is also based on our good faith estimates, which are derived from management’s review of internal data and information, as well as the independent sources listed above.

 

BASIS OF PRESENTATION

 

Unless the context indicates otherwise, references to “we,” “our,” “us,” “Oncure” and the “Company” refer to OnCure Holdings, Inc. and its consolidated subsidiaries. References to “Oncure Medical” refer to our wholly-owned subsidiary, Oncure Medical Corp. References to the “guarantors” refer to our domestic restricted subsidiaries that guarantee the notes.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21 of the Securities Exchange Act of 1934, as amended, concerning our current expectations, estimates and projections about our operations, industry, financial condition and liquidity. Such statements are based on current expectations, and are not strictly historical statements. In some cases, you can identify forward-looking statements by terminology such as “if,” “may,” “should,” “believe,” “anticipate,” “future,” “forward,” “potential,” “estimate,” “reinstate,” “opportunity,” “goal,” “objective,” “exchange,” “growth,” “outcome,” “could,” “expect,” “intend,” “plan,” “strategy,” “provide,” “commitment,” “result,” “seek,” “pursue,” “ongoing,” “include” or in the negative of such terms or comparable terminology. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” herein. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this quarterly report.

 

Forward-looking statements include, among other things, general market conditions, competition and pricing and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this quarterly report under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Factors and risks that could cause actual results or circumstances to differ materially from those set forth or contemplated in forward looking statements include those set forth in “Risk Factors.”

 

As such, actual results or circumstances may vary materially from such forward-looking statements or expectations. Readers are also cautioned not to place undue reliance on these forward-looking statements which speak only as of the date these statements were made. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

 

1



Table of Contents

 

Item 1.   Financial Statements

 

OnCure Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

6,162

 

$

7,047

 

Accounts receivable, less allowances of $1,607 and $1,137, respectively

 

18,629

 

17,273

 

Deferred income taxes

 

936

 

936

 

Prepaid expenses

 

2,475

 

2,555

 

Other current assets

 

2,653

 

2,880

 

Total current assets

 

30,855

 

30,691

 

Property and equipment, net

 

34,096

 

37,483

 

Goodwill

 

174,353

 

174,353

 

Management service agreements, net

 

48,487

 

51,923

 

Other assets, net

 

12,239

 

12,905

 

Assets of discontinued operations

 

70

 

191

 

Total assets

 

$

300,100

 

$

307,546

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,752

 

$

2,475

 

Accrued expenses

 

7,045

 

6,451

 

Accrued interest

 

3,084

 

3,136

 

Current portion of note payable

 

48

 

284

 

Current portion of obligations under capital leases

 

1,411

 

1,610

 

Other current liabilities

 

221

 

353

 

Current liabilities of discontinued operations

 

64

 

126

 

Total current liabilities

 

13,625

 

14,435

 

Long-term debt, net of unamortized discount of $3,247 and $3,432, respectively, less current portion

 

206,753

 

206,568

 

Capital leases, less current portion

 

2,808

 

3,487

 

Other long-term liabilities

 

2,295

 

2,272

 

Deferred income tax liabilities

 

14,436

 

16,790

 

Total liabilities

 

239,917

 

243,552

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 1,000,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, $0.001 par value, 50,000,000 shares authorized, 26,317,675 shares issued and outstanding

 

26

 

26

 

Additional paid-in capital

 

96,513

 

96,323

 

Accumulated deficit

 

(36,356

)

(32,355

)

Total stockholders’ equity

 

60,183

 

63,994

 

Total liabilities and stockholders’ equity

 

$

300,100

 

$

307,546

 

 

See accompanying notes.

 

2



Table of Contents

 

OnCure Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net revenue

 

$

26,062

 

$

24,860

 

$

52,529

 

$

48,744

 

Cost of operations:

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

8,308

 

8,442

 

16,865

 

18,081

 

Depreciation and amortization

 

4,521

 

4,563

 

9,086

 

9,262

 

Management fees

 

375

 

375

 

750

 

750

 

General and administrative expenses

 

9,564

 

10,332

 

18,538

 

18,074

 

Total operating expenses

 

22,768

 

23,712

 

45,239

 

46,167

 

Income from operations

 

3,294

 

1,148

 

7,290

 

2,577

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(6,715

)

(5,452

)

(13,379

)

(9,466

)

Debt extinguishment costs

 

 

(2,932

)

 

(2,932

)

Loss on interest rate swap

 

 

(22

)

 

(267

)

Equity interest in net earnings of joint venture

 

85

 

130

 

162

 

297

 

Interest income and other expense, net

 

(328

)

(21

)

(428

)

(244

)

Total other expense

 

(6,958

)

(8,297

)

(13,645

)

(12,612

)

Loss from continuing operations before income taxes

 

(3,664

)

(7,149

)

(6,355

)

(10,035

)

Income tax benefit

 

1,358

 

2,968

 

2,354

 

3,767

 

Net loss

 

$

(2,306

)

$

(4,181

)

$

(4,001

)

$

(6,268

)

 

See accompanying notes.

 

3



Table of Contents

 

OnCure Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

Operating activities

 

 

 

 

 

Net loss

 

$

(4,001

)

$

(6,268

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Equity interest in net earnings of joint venture

 

(162

)

(297

)

Depreciation

 

5,686

 

5,866

 

Amortization

 

3,400

 

3,396

 

Amortization of loan fees and deferred interest expense

 

741

 

810

 

Debt extinguishment costs

 

 

2,932

 

Deferred income tax provision

 

(2,354

)

(3,767

)

Stock-based compensation

 

190

 

382

 

Provision for doubtful accounts

 

1,345

 

1,163

 

Change in fair value of interest rate swap

 

 

(436

)

Other, net

 

636

 

388

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(2,701

)

973

 

Prepaid expenses and other current assets

 

307

 

(1,933

)

Accounts payable and accrued expenses

 

(180

)

4,363

 

Other liabilities

 

(35

)

(1,891

)

Net cash provided by operating activities

 

2,872

 

5,681

 

Investing activities

 

 

 

 

 

Purchases of property and equipment

 

(2,822

)

(2,333

)

Distribution received from unconsolidated joint venture

 

196

 

358

 

Net cash used in investing activities

 

(2,626

)

(1,975

)

Financing activities

 

 

 

 

 

Proceeds from issuance of debt

 

 

206,348

 

Principal repayments of debt

 

(236

)

(196,612

)

Principal repayments of capital leases

 

(878

)

(858

)

Payment of debt issuance costs

 

(17

)

(8,922

)

Net cash used in financing activities

 

(1,131

)

(44

)

Net (decrease) increase in cash

 

(885

)

3,662

 

Cash, beginning of period

 

7,047

 

5,365

 

Cash, end of period

 

$

6,162

 

$

9,027

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest paid

 

$

12,690

 

$

5,869

 

Income taxes paid, net

 

$

 

$

246

 

 

See accompanying notes.

 

4



Table of Contents

 

OnCure Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011

 

1. Basis of Presentation

 

OnCure Holdings, Inc. and Subsidiaries (collectively, the “Company” or “OnCure”) is a Delaware corporation formed in 2006 to acquire 100% of the issued and outstanding common stock of Oncure Medical Corp. (“the Merger”). OnCure is substantially owned by funds managed by Genstar Capital, LLC. The Company has 1,000,000 shares of authorized preferred stock of which none is issued or outstanding.

 

OnCure is principally engaged in providing capital equipment and business management services to radiation oncology physician groups (“Groups”) that treat patients at cancer centers (“Centers”). The Company owns the Centers’ assets and provides services to the Groups through exclusive, long-term management services agreements. OnCure provides the Groups with oncology business management expertise and new technologies including radiation oncology equipment and related treatment software. Business services that OnCure provides to the Groups include non-physician clinical and administrative staff, operations management, purchasing, managed care contract negotiation assistance, reimbursement, billing and collecting, information technology, human resource and payroll, compliance, accounting, and treasury. Under the terms of the management service agreements, the Company is reimbursed for certain operating expenses of each Center and earns a monthly management fee from each Group that is primarily based on a predetermined percentage of each Group’s earnings before interest, income taxes, depreciation, and amortization (EBITDA). The Company manages the radiation oncology business operations of six Groups in Florida, six Groups in California, one Group in Indiana for a fee that ranges from 50% to 60% of EBITDA; and one Group in California for a fee that is 74% of net revenue.

 

These unaudited interim consolidated financial statements do not include all of the information or notes necessary for a complete presentation of financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and, accordingly should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 15, 2011. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP and include all adjustments of a normal, recurring nature that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented. The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year. The Company has evaluated subsequent events through the issuance date of these unaudited interim consolidated financial statements.

 

The Company’s receivables, prepaids, payables and accrued liabilities are current assets and obligations on normal terms and, accordingly, the recorded values are believed by management to approximate fair value due to the short-term maturity of these instruments.

 

The fair value of the Company’s debt was $216.3 million and $199.5 million at June 30, 2011 and December 31, 2010, respectively.  While the Company’s long-term debt has not been listed on any securities exchange or inter-dealer automated quotation system, the Company has estimated the fair value of its long-term debt based on indicative pricing published by investment banks.  While the Company believes these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.  At June 30, 2011 and December 31, 2010, the carrying value of the Company’s debt was $206.8 million and $206.6 million, respectively.

 

Recent Accounting Pronouncements

 

In July, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-07, Health Care Entities (Topic 954), Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus of the FASB Emerging Issues Task Force).  This ASU contains amendments that require health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue, net of contractual allowances and discounts.  The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011.  The Company expects to implement the standard beginning with the first quarter of 2012, with retrospective application required.  The Company does not expect that the adoption of this ASU will have any impact on net income or loss.

 

5



Table of Contents

 

2. Net Revenue

 

Net revenue is recorded at the amount earned by the Company under the management services agreements. Services rendered by the respective Groups are billed by the Company, as the exclusive billing agent of the Groups, to patients, third-party payors, and others. The Company’s management fees are dependent on the EBITDA (or in one case, revenue) of each treatment center. As such, revenues generated by the Groups significantly impact the amount of management fees recognized by the Company. If differences between the Groups’ revenues and the expected reimbursement are identified based on actual final settlements, there would be an impact to the Company’s net revenue. There was no material adjustment in the Company’s net revenue for the three and six months ended June 30, 2011 and 2010. Amounts distributed to the Groups for their services under the terms of the management services agreements totaled $6.9 million and $6.5 million for the three months ended June 30, 2011 and 2010, respectively, and $14.3 million and $13.1 million for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011 and December 31, 2010, amounts payable to the Groups for their services of $2.9 million and $2.6 million, respectively, were included in accrued expenses.

 

The Groups derive a significant portion of revenue from amounts billed to Medicare, Medicaid, and other payors that receive discounts from the Groups’ approved gross billing amount. As the Company is not a medical provider, all contracts are between the Group and the responsible parties, but the negotiation of contract terms is one of the business services provided by the Company under its management services agreements. The Company must estimate the total amount of these discounts, which reduce revenue for both the Groups and the Company, to prepare its consolidated financial statements. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and subject to interpretation and adjustment. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.

 

During the three months ended June 30, 2011 and 2010, approximately 42% and 44%, respectively, of the Groups’ revenues related to services rendered under the Medicare and Medicaid programs. For the six months ended June 30, 2011 and 2010, approximately 44% and 44%, respectively, of the Groups’ revenues related to services rendered under the Medicare and Medicaid programs. In the ordinary course of business, the Company, as the Group’s billing agent, and the Groups are potentially subject to a review by regulatory agencies concerning the accuracy of billings and sufficiency of supporting documentation of procedures performed. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that estimates will change by a material amount in the near term.

 

The Company has two management agreements that generated approximately 24% and 12% of revenue, respectively, for the three months ended June 30, 2011 and 25% and 13% of revenue, respectively, for the three months ended June 30, 2010. These same two management agreements generated approximately 25% and 13% of revenue, respectively, for the six months ended June 30, 2011 and 26% and 13% of revenue, respectively, for the six months ended June 30, 2010.

 

3. Long-Term Debt

 

As of June 30, 2011 and December 31, 2010, the Company’s long-term debt consisted of the following (in thousands):

 

 

 

June 30,
2011

 

December 31,
2010

 

Senior secured notes

 

$

210,000

 

$

210,000

 

Note payable

 

48

 

284

 

 

 

210,048

 

210,284

 

Less unamortized discount

 

(3,247

)

(3,432

)

Less current portion of note payable

 

(48

)

(284

)

 

 

$

206,753

 

$

206,568

 

 

The principal terms of the agreements that govern the Company’s outstanding indebtedness are summarized below:

 

11.75% Senior Secured Notes

 

On May 13, 2010, the Company concluded an offering for $210.0 million of 11.75% Senior Secured Notes (“Senior Notes”) which will mature on May 15, 2017. The offering of the Senior Notes closed on May 13, 2010 with generated net proceeds to the Company of $206.3 million which was utilized to repay the outstanding balances of the Company’s Senior term loan and Subordinated debt along with $9.0 million of expenses of the offering. The Senior Notes are secured by the assets of the Company and its subsidiaries and are guaranteed by the Company’s subsidiaries. Prior to May 15, 2013, up to 35% of the Senior Notes are redeemable at the option of the Company with proceeds from an equity offering at a redemption price of 111.75%. On or after

 

6



Table of Contents

 

May 15, 2014, 2015 and 2016 the notes are redeemable at the option of the Company at redemption prices of 105.875%, 102.938% and 100.0%, respectively.

 

In connection with the offering of the Senior Notes, the Company entered into a Registration Rights Agreement between the Company and its Guarantors and the initial Purchaser, for the benefit of any holder of the Senior Notes, dated May 13, 2010. The registration rights agreement provides that the Company shall use commercially reasonable efforts to prepare and file with the SEC, no later than the 330th day after the closing date of the offering of the Senior Notes, an effective registration statement to enable the holders of the Senior Notes to exchange the unregistered Senior Notes for notes registered under the Securities Act of 1933 with substantially identical terms.

 

The Company completed the exchange offer during January 2011 and did not incur any increased interest under the Registration Rights Agreement.

 

The Senior Notes are governed by an indenture that contains certain restrictive covenants. These restrictions affect, and in many respects limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock of subsidiaries, create liens, sell assets, and engage in mergers and consolidations.

 

Revolving Credit Facility

 

Concurrently with the closing of the offering of the Senior Notes, the Company’s direct wholly-owned subsidiary, Oncure Medical Corp. and each of its direct and indirect subsidiaries entered into a new senior secured revolving credit facility (“Revolving Credit Facility”) with GE Capital Markets, Inc., as sole lead arranger and book manager, General Electric Capital Corporation, as administrative agent and collateral agent, and the other lenders from time to time party thereto.

 

The Revolving Credit Facility provides for aggregate commitments of up to $40.0 million, including a letter of credit sub-facility of $2.0 million and a swing line sub-facility of $2.0 million, and provides for the increase, at the Company’s option, of aggregate commitments by $10.0 million, subject to certain conditions. The Revolving Credit Facility bears interest at a rate of Prime plus 3.5% (6.75% at June 30, 2011) or LIBOR plus 4.5% (4.69% at June 30, 2011). The revolving line of credit is subject to an unused line fee of 0.75% to be paid quarterly. The Revolving Credit Facility is undrawn as of June 30, 2011 and expires in May 2015.

 

The credit agreement for the Revolving Credit Facility contains certain financial covenants that the Company and its subsidiaries must comply with if the Company draws on the Revolver. As of June 30, 2011, no events of default have occurred with respect to any of the Company’s debt agreements.

 

Loan Fees

 

As of June 30, 2011 and December 31, 2010, the remaining unamortized balance of deferred loan fees was $7.7 million and $8.3 million, respectively.

 

4. Capital Leases

 

The Company is the lessee to several lease agreements to purchase software and medical equipment. Interest rates on the leases range from 8.01% to 8.80%. The leases require monthly principal and interest payments and mature in 2011 through 2014. The leases are collateralized by the equipment leased.

 

 

 

June 30,
2011

 

December 31,
2010

 

 

 

(In Thousands)

 

Minimum lease payable

 

$

4,783

 

$

5,857

 

Less interest

 

(564

)

(760

)

Present value of minimum lease payments

 

4,219

 

5,097

 

Less current portion

 

(1,411

)

(1,610

)

 

 

$

2,808

 

$

3,487

 

 

7



Table of Contents

 

5. Unconsolidated Joint Venture

 

The Company owns a 24.5% interest in the Memorial Southside Cancer Center (“Memorial”) and records its ownership interest under the equity method of investment in an unconsolidated joint venture. The Chairman of the Board is a partner in Ninth City Landowners, LLP (Ninth City), which also owns 24.5% of the Southside joint venture.  (See subsequent event note regarding Chairman of the Board).

 

At June 30, 2011 and December 31, 2010, the Company’s investment in the unconsolidated joint venture was approximately $3.6 million and $3.7 million, respectively, and is recorded in other assets in the accompanying consolidated balance sheets.

 

The condensed financial position and results of operations of the unconsolidated joint venture are as follows (in thousands):

 

 

 

Three Months ended
June 30,

 

 

 

2011

 

2010

 

Net revenues

 

$

790

 

$

962

 

Expenses

 

444

 

431

 

Net income

 

$

346

 

$

531

 

 

 

 

Six Months ended
June 30,

 

 

 

2011

 

2010

 

Net revenues

 

$

1,380

 

$

2,208

 

Expenses

 

717

 

994

 

Net income

 

$

663

 

$

1,214

 

 

A summary of the changes in the equity investment in the unconsolidated joint venture is as follows (in thousands):

 

Balance at December 31, 2010

 

$

3,669

 

Distributions from joint venture

 

(196

)

Equity interest in net earnings of joint venture

 

162

 

Balance at June 30, 2011

 

$

3,635

 

 

On May 3, 2011, the Company was notified by Northeast Florida Cancer Services, LLC (“NFCS”) an affiliate of Hospital Corporation of America, of its intent to divest of its 51% ownership in Memorial. The Company and Ninth City Landowners, LLP (“Ninth City”), in which the Company’s Chairman of the Board is a partner, each own a 24.5% interest in Memorial. The Company and Ninth City will jointly acquire NFCS’s 51% ownership. Subsequent to the transaction, the Company and Ninth City will each own 50% of Memorial. The assets of the cyber knife business, a component of the Memorial Joint Venture, will be distributed to NFCS in addition to cash representing the difference in the value of the cyber knife assets distributed and the value of the 51% NFCS ownership interest in Memorial.  The transaction is expected to close during the third quarter of 2011.

 

6. Related-Party Transactions

 

Transactions with the Chairman of the Board

 

The Company has a management services agreement with Integrated Community Oncology Network, LLC (“ICON”). The Chairman of the Company’s Board of Directors is a manager of and equity holder in ICON, and a beneficial owner of the Company. We earn a management fee based on a fixed percentage of the earnings, while ICON retains the remaining earnings. Under this agreement, ICON retained $0.5 million for each of the three months ended June 30, 2011 and 2010, and $1.1 million for each of the six months ended June 30, 2011 and 2010.  (See subsequent event note regarding Chairman of the Board).

 

The Company leases its space for three radiation treatment centers in Florida from entities affiliated with the Chairman of the Board. The Company recorded rent expense related to these centers of approximately $0.2 million for each of the three months ended June 30, 2011 and 2010, and $0.4 million and $0.3 million for the six months ended June 30, 2011 and 2010, respectively.

 

The Company has a management services agreement to provide management and administrative services to Cyclotron Center of Northeast Florida, LLC (“Cyclotron”) and PET/CT Center of North Florida, LLC (“PET/CT Center”) which own, operate, and

supply mobile PET/CT units in the same market. The Chairman of the Board has an ownership interest in these companies. The

 

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Company recognized a loss associated with this management services agreement of approximately $0.07 million for the three months ended June 30, 2011, revenue of approximately $0.1 million for the three months ended June 30, 2010, a loss of approximately $0.04 million for the six months ended June 30, 2011 and revenue of approximately $0.3 million for the six months ended June 30, 2010. The Company has accounts receivable due under the management services agreement of $0.05 million and $0.2 million at June 30, 2011 and December 31, 2010, respectively.

 

In connection with the management services agreements, the Company provides a payroll processing service for PET/CT Center and Cyclotron. The Company recorded receivables for reimbursement of these services of $0.8 million and $1.0 million at June 30, 2011 and December 31, 2010, respectively.

 

The Company owns a 24.5% interest in Memorial as does an entity in which the Chairman of the Company’s Board of Directors has an ownership interest. The Company records its ownership interest under the equity method of investment in an unconsolidated joint venture as described in Note 5.

 

Transactions with Other Related Parties

 

The Company has also agreed to pay an annual sponsor fee to Genstar Capital, LLC, the beneficial owner of common stock of the Company. The Company paid $0.4 million for each of the three months periods ended June 30, 2011 and 2010, and $0.8 million for each of the six months ended June 30, 2011 and 2010, which are included in management fees in the accompanying consolidated statements of operations.

 

The Company has a management services agreement with Coastal Radiation Oncology Medical Group, Inc. (‘‘Coastal’’). One of the members of the Company’s Board of Directors is a shareholder of Coastal. We earn a management fee based on a fixed percentage of the earnings, while Coastal retains the remaining earnings. Under this management services agreement, Coastal retained $1.7 million and $1.8 million for its medical services for the three months ended June 30, 2011 and 2010, respectively, and $3.7 million for its medical services for each of the six months ended June 30, 2011 and 2010.

 

The Company leases its space for three radiation oncology treatment centers and one facility used for administrative offices and physics services from entities affiliated with the above mentioned shareholder of Coastal. The Company recorded rent expense related to these leases of approximately $0.2 million for each of the three months ended June 30, 2011 and 2010, and approximately $0.5 million for each of the six months ended June 30, 2011 and 2010.

 

7. Subsequent Events

 

On July 8, 2011, ICON notified OnCure Medical that it intends to terminate the ICON MSA effective October 11, 2011. The initial term of the ICON MSA ends on October 11, 2011, but will be automatically extended for an additional 5 years unless (a) there has been a material change in: (i) the management fees provided for in the ICON MSA; (ii) the management services provided pursuant to the ICON MSA; or (iii) ICON’s clinical practice, in each case resulting from action taken by OnCure Medical, and (b) ICON provides OnCure Medical 90-days notice of its intent to terminate.  The notice alleges material changes in the management fees and management services.  The Company and OnCure Medical disagree with the allegations regarding material changes and do not believe that ICON has sufficient grounds to terminate the ICON MSA.  In response to the ICON notice, the Company intends to pursue all of its legal rights and remedies to enforce the automatic extension of the ICON MSA, including pursuing arbitration pursuant to the terms of the ICON MSA.  Per the terms of the MSA, the parties have tentatively planned a mediation session for August, 2011.

 

On July 8, 2011, concurrent with the proposed termination of the ICON MSA, a manager of and equity holder in ICON and a beneficial owner of the Company, resigned from the Company’s Board of Directors, including as Chairman of the Board of Directors, from the medical advisory board and from all other ancillary committees and duties relating to OnCure Medical and the Company.

 

9


 


Table of Contents

 

8. Guarantors of Debt

 

OnCure Holdings, Inc. is the borrower under the Senior Secured Notes, which includes full, unconditional and joint and several guarantees by the Company’s wholly-owned subsidiaries. All of the operating income and cash flow of OnCure Holdings, Inc. is generated by its subsidiaries. As a result, funds necessary to meet the debt service obligations under the Senior Notes are provided by the distributions or advances from the subsidiary companies. Entries necessary to consolidate all of the subsidiary companies are reflected in the Eliminations/Adjustments column. Certain previously reported financial information has been reclassified to conform to the current presentation. Such reclassifications did not affect the Company’s consolidated financial condition, net loss, or cash flows as previously reported. The condensed consolidating financial statements for OnCure Holdings, Inc., the guarantors and the non-guarantors are as follows:

 

Consolidating Balance Sheets

For the Six Months Ended June 30, 2011

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

6,162

 

$

 

$

 

$

6,162

 

Accounts receivable, less allowances of $1,607

 

 

18,629

 

 

 

18,629

 

Deferred income taxes

 

 

936

 

 

 

936

 

Other current assets and prepaid expenses

 

 

5,128

 

 

 

5,128

 

Total current assets

 

 

30,855

 

 

 

30,855

 

Property and equipment, net

 

 

34,096

 

 

 

34,096

 

Goodwill

 

 

174,353

 

 

 

174,353

 

Intangibles and other assets

 

6,616

 

54,110

 

 

 

60,726

 

Intercompany receivable

 

174,472

 

(174,593

)

121

 

 

 

Investment in subsidiaries

 

77,777

 

127

 

 

(77,904

)

 

Assets of discontinued operations

 

 

 

70

 

 

70

 

Total assets

 

$

258,865

 

$

118,948

 

$

191

 

$

(77,904

)

$

300,100

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,084

 

$

8,797

 

$

 

$

 

$

11,881

 

Current portion of long-term debt and capital leases

 

 

1,459

 

 

 

1,459

 

Other current liabilities

 

 

221

 

 

 

221

 

Current liabilities of discontinued operations

 

 

 

64

 

 

64

 

Total current liabilities

 

3,084

 

10,477

 

64

 

 

13,625

 

Long-term debt, net of unamortized discount of $3,247, less current portion

 

206,753

 

 

 

 

206,753

 

Capital leases, less current portion

 

 

2,808

 

 

 

2,808

 

Other long-term liabilities

 

 

2,295

 

 

 

2,295

 

Deferred income tax liabilities

 

(11,155

)

25,591

 

 

 

14,436

 

Total liabilities

 

198,682

 

41,171

 

64

 

 

239,917

 

Stockholders’ equity (deficit)

 

60,183

 

77,777

 

127

 

(77,904

)

60,183

 

Total liabilities and stockholders’ equity (deficit)

 

$

258,865

 

$

118,948

 

$

191

 

$

(77,904

)

$

300,100

 

 

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Table of Contents

 

Consolidating Balance Sheets

For the Year Ended December 31, 2010

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

7,047

 

$

 

$

 

$

7,047

 

Accounts receivable, less allowances of $1,137

 

 

17,273

 

 

 

17,273

 

Deferred income taxes

 

 

936

 

 

 

936

 

Other current assets and prepaid expenses

 

 

5,435

 

 

 

5,435

 

Total current assets

 

 

30,691

 

 

 

30,691

 

Property and equipment, net

 

 

37,483

 

 

 

37,483

 

Goodwill

 

 

174,353

 

 

 

174,353

 

Intangibles and other assets

 

7,026

 

57,802

 

 

 

64,828

 

Intercompany receivable

 

186,625

 

(186,687

)

62

 

 

 

Investment in subsidiaries

 

73,589

 

127

 

 

(73,716

)

 

Assets of discontinued operations

 

 

 

191

 

 

191

 

Total assets

 

$

267,240

 

$

113,769

 

$

253

 

$

(73,716

)

$

307,546

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,136

 

$

8,926

 

$

 

$

 

$

12,062

 

Current portion of long-term debt and capital leases

 

 

1,894

 

 

 

1,894

 

Other current liabilities

 

 

353

 

 

 

353

 

Current liabilities of discontinued operations

 

 

 

126

 

 

126

 

Total current liabilities

 

3,136

 

11,173

 

126

 

 

14,435

 

Long-term debt, net of unamortized discount of $3,432, less current portion

 

206,568

 

 

 

 

206,568

 

Capital leases, less current portion

 

 

3,487

 

 

 

3,487

 

Other long-term liabilities

 

 

2,272

 

 

 

2,272

 

Deferred income tax liabilities

 

(6,458

)

23,248

 

 

 

16,790

 

Total liabilities

 

203,246

 

40,180

 

126

 

 

243,552

 

Stockholders’ equity (deficit)

 

63,994

 

73,589

 

127

 

(73,716

)

63,994

 

Total liabilities and stockholders’ equity (deficit)

 

$

267,240

 

$

113,769

 

$

253

 

$

(73,716

)

$

307,546

 

 

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Table of Contents

 

Consolidating Statement of Operations

For the Three Months Ended June 30, 2011

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Net revenue

 

$

 

$

26,062

 

$

 

$

 

$

26,062

 

Total operating expenses

 

 

22,768

 

 

 

22,768

 

Income from operations

 

 

3,294

 

 

 

3,294

 

Total other expense, net

 

(6,377

)

(581

)

 

 

(6,958

)

(Loss) income from continuing operations before income taxes

 

(6,377

)

2,713

 

 

 

(3,664

)

Income tax benefit (expense)

 

2,359

 

(1,001

)

 

 

1,358

 

(Loss) income from continuing operations before equity in earnings of unconsolidated subsidiaries

 

(4,018

)

1,712

 

 

 

(2,306

)

Equity in earnings (losses) of unconsolidated subsidiaries

 

1,712

 

 

 

(1,712

)

 

Net (loss) income

 

$

(2,306

)

$

1,712

 

$

 

$

(1,712

)

$

(2,306

)

 

Consolidating Statement of Operations

For the Six Months Ended June 30, 2011

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Net revenue

 

$

 

$

52,529

 

$

 

$

 

$

52,529

 

Total operating expenses

 

 

45,239

 

 

 

45,239

 

Income from operations

 

 

7,290

 

 

 

7,290

 

Total other expense, net

 

(12,695

)

(950

)

 

 

(13,645

)

(Loss) income from continuing operations before income taxes

 

(12,695

)

6,340

 

 

 

(6,355

)

Income tax benefit (expense)

 

4,697

 

(2,343

)

 

 

2,354

 

(Loss) income from continuing operations before equity in earnings of unconsolidated subsidiaries

 

(7,998

)

3,997

 

 

 

(4,001

)

Equity in earnings (losses) of unconsolidated subsidiaries

 

3,997

 

 

 

(3,997

)

 

Net (loss) income

 

$

(4,001

)

$

3,997

 

$

 

$

(3,997

)

$

(4,001

)

 

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Table of Contents

 

Consolidating Statement of Operations

For the Three Months Ended June 30, 2010

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Net revenue

 

$

 

$

24,860

 

$

 

$

 

$

24,860

 

Total operating expenses

 

 

23,712

 

 

 

23,712

 

Income from operations

 

 

1,148

 

 

 

1,148

 

Total other expense, net

 

(3,366

)

(4,931

)

 

 

(8,297

)

Loss from continuing operations before income taxes

 

(3,366

)

(3,783

)

 

 

(7,149

)

Income tax benefit

 

1,241

 

1,727

 

 

 

2,968

 

Loss from continuing operations before equity in earnings of unconsolidated subsidiaries

 

(2,125

)

(2,056

)

 

 

(4,181

)

Equity in (losses) earnings of unconsolidated subsidiaries

 

(2,056

)

 

 

2,056

 

 

Net (loss) income

 

$

(4,181

)

$

(2,056

)

$

 

$

2,056

 

$

(4,181

)

 

Consolidating Statement of Operations

For the Six Months Ended June 30, 2010

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Net revenue

 

$

 

$

48,744

 

$

 

$

 

$

48,744

 

Total operating expenses

 

 

46,167

 

 

 

46,167

 

Income from operations

 

 

2,577

 

 

 

2,577

 

Total other expense, net

 

(3,366

)

(9,246

)

 

 

(12,612

)

Loss from continuing operations before income taxes

 

(3,366

)

(6,669

)

 

 

(10,035

)

Income tax benefit

 

1,241

 

2,526

 

 

 

3,767

 

Loss from continuing operations before equity in earnings of unconsolidated subsidiaries

 

(2,125

)

(4,143

)

 

 

(6,268

)

Equity in (losses) earnings of unconsolidated subsidiaries

 

(4,143

)

 

 

4,143

 

 

Net (loss) income

 

$

(6,268

)

$

(4,143

)

$

 

$

4,143

 

$

(6,268

)

 

13


 


Table of Contents

 

Consolidating Statements of Cash Flow

For the Six Months Ended June 30, 2011

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(4,001

)

$

3,997

 

$

 

$

(3,997

)

$

(4,001

)

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Equity interest in net earnings of joint venture

 

 

(162

)

 

 

(162

)

Depreciation and amortization

 

 

9,086

 

 

 

9,086

 

Deferred income tax provision

 

(4,697

)

2,343

 

 

 

(2,354

)

Other, net

 

 

2,912

 

 

 

2,912

 

Changes in operating assets and liabilities

 

8,698

 

(15,304

)

 

3,997

 

(2,609

)

Net cash provided by operating activities

 

 

2,872

 

 

 

2,872

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,823

)

 

 

(2,823

)

Distribution received from unconsolidated joint venture

 

 

197

 

 

 

197

 

Net cash used in investing activities

 

 

(2,626

)

 

 

(2,626

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Principal repayments of debt

 

 

(236

)

 

 

(236

)

Principal repayments of capital leases

 

 

(878

)

 

 

(878

)

Payment of debt issuance costs

 

 

(17

)

 

 

(17

)

Net cash used in financing activities

 

 

(1,131

)

 

 

(1,131

)

Net decrease in cash

 

 

(885

)

 

 

(885

)

Cash, beginning of period

 

 

7,047

 

 

 

7,047

 

Cash, end of period

 

$

 

$

6,162

 

$

 

$

 

$

6,162

 

 

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Table of Contents

 

Consolidating Statements of Cash Flow

For the Six Months Ended June 30, 2010

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(6,268

)

$

(4,143

)

$

 

$

4,143

 

$

(6,268

)

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Equity interest in net earnings of joint venture

 

 

(297

)

 

 

(297

)

Depreciation and amortization

 

 

9,262

 

 

 

9,262

 

Debt extinguishment costs

 

 

2,932

 

 

 

2,932

 

Deferred income tax provision

 

(1,241

)

(2,526

)

 

 

(3,767

)

Other, net

 

 

2,307

 

 

 

2,307

 

Changes in operating assets and liabilities

 

7,509

 

(1,854

)

 

(4,143

)

1,512

 

Net cash provided by operating activities

 

 

5,681

 

 

 

5,681

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,333

)

 

 

(2,333

)

Distribution received from unconsolidated joint venture

 

 

358

 

 

 

358

 

Net cash used in investing activities

 

 

(1,975

)

 

 

(1,975

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

206,348

 

 

 

206,348

 

Principal repayments of debt

 

 

(196,612

)

 

 

(196,612

)

Principal repayments of capital leases

 

 

(858

)

 

 

(858

)

Payment of debt issuance costs

 

 

(8,922

)

 

 

(8,922

)

Net cash used in financing activities

 

 

(44

)

 

 

(44

)

Net increase in cash

 

 

3,662

 

 

 

3,662

 

Cash, beginning of period

 

 

5,365

 

 

 

5,365

 

Cash, end of period

 

$

 

$

9,027

 

$

 

$

 

$

9,027

 

 

15



Table of Contents

 

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

 

Business Overview

 

We operate radiation oncology treatment centers for cancer patients. We contract with radiation oncology medical groups, which we refer to as our affiliated physician groups, and their radiation oncologists through long-term management services agreements, or MSAs, to offer cancer patients a comprehensive range of radiation oncology treatment options, including most traditional and next generation services. Radiation oncology treatments are primarily performed with a linear accelerator, or linac, which uses high-energy photons or electrons to destroy the tumor. We currently provide services to a network of 14 affiliated physician groups that treat cancer patients at our 37 radiation oncology treatment centers.

 

We typically lease the facilities where our radiation oncology treatment centers are located and own or lease all of the equipment and leasehold improvements at these centers. Through our MSAs, we provide our affiliated physician groups use of these facilities, certain clinical services of our treatment center staff, and administer the non-medical business functions of our treatment centers, such as technical staff recruiting, marketing, managed care contracting, receivables management and compliance, purchasing, information systems, accounting, human resource management and physician succession planning. Our affiliated physician groups and their physicians retain full control over the clinical aspects of patient care. This structure is designed to allow our affiliated physician groups to focus primarily on providing patient care and treatment center growth including expansion of their group’s services.

 

Our MSAs have an average term of 10 years and are generally renewable for an additional five year period. Pursuant to the MSAs, our management services revenues include compensation by the affiliated physician groups for expenses incurred in operating our treatment centers plus a fee based on the earnings of our affiliated physician groups. As such, the operating costs of the treatment centers are our responsibility. We believe this MSA structure allows us to ensure the affiliated physician group’s business interests are aligned with our own. We estimate that approximately 99% of our affiliated physician groups’ revenues depend on reimbursement by third party payors, including government payors. As such, our revenue is generated from our MSAs, but is impacted by the operations of the treatment centers especially as they relate to revenues generated by the affiliated physician groups.

 

Our network of 37 treatment centers is located in 37 markets and includes 15 treatment centers in California, 18 treatment centers in Florida and four treatment centers in Indiana.  We currently have MSAs with 14 affiliated physician groups consisting of approximately 70 physicians, who on average have over 15 years of experience.

 

We may either develop a treatment center at a “de novo” site or lease a previously existing treatment center and purchase the existing assets within such center. To date, only one of our current 37 treatment centers was developed as a de novo site, and we continue to evaluate opportunities to open additional de novo sites. We seek to purchase treatment centers or develop de novo treatment centers in locations in areas where there is high utilization of radiation oncology services and where we believe that we can maximize our profits by contracting with radiation oncology groups that can significantly benefit from our management services.

 

Our treatment centers are fitted with clinical technological equipment that allows our affiliated physician groups to provide cancer patients the highest quality of care through clinically advanced treatment options. The early and continual adoption of cutting-edge technology by the physicians in our affiliated physician groups has enabled rapid sharing of this knowledge and best practices across the network to drive superior clinical results. Early adoption and appropriate utilization of these next generation technologies has resulted in more attractive reimbursement rates for our affiliated physician groups.

 

For the three months ended June 30, 2011, our net revenue, operating income and Adjusted EBITDA were $26.1 million, $3.3 million and $8.7 million, respectively, compared to $24.9 million, $1.1 million and $9.1 million, respectively, for the same period in 2010. For the six months ended June 30, 2011, our net revenue, operating income and Adjusted EBITDA were $52.5 million, $7.3 million and $18.3 million, respectively, compared to $48.7 million, $2.6 million and $17.0 million, respectively, for the same period in 2010. The year-over-year increase in net revenue, operating income and Adjusted EBITDA was principally due to increased IMRT and IGRT utilization, an increase in CMS reimbursement rates and one additional treatment day for the six months ended June 30, 2011.

 

Our Services

 

Radiation therapy treatments are primarily performed with a linear accelerator, or linac, which uses high-energy photons or electrons to destroy the tumor. Courses of treatment typically last from four to nine weeks. In advance of the actual treatments, a typical patient is provided the following services: (i) the patient is examined, counseled and advised of treatment options by a radiation oncologist; (ii) the agreed upon course of treatment is planned by a physicist under the oncologist’s direction; (iii) a trained dosimetrist designs and verifies that the treatment plan’s radiation dose and targeting are properly calibrated in the software that controls the linac; (iv) a trained radiation therapy technologist assists the patient to, and positions the patient on, the linac and (v) the

 

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technologist verifies the planned dose and beam target before delivering the radiation oncology treatment. Through the use of our treatment centers and equipment, our affiliated physician groups offer a wide array of radiation oncology treatments to cancer patients. The radiation oncologists maintain full control over the provision of medical services at our treatment centers while we provide the non-medical business functions, such as technical staff recruiting, marketing, managed care contracting, receivables management and compliance, purchasing, information systems, accounting, human resource management and physician succession planning. Many of our radiation oncology treatment centers also offer support services designed to enhance the patient experience such as support groups, psychological and nutritional counseling and transportation assistance.

 

The majority of individuals who undergo radiation therapy for cancer are treated with external beam radiation therapy. External beam radiation therapy involves exposing the patient to an external source of radiation through the use of special equipment that directs radiation at the cancer. Equipment utilized for external beam radiation therapy varies as some are better for treating cancers near the surface of the skin and others are better for treating cancers deeper in the body. A linac, the common piece of equipment used for external beam radiation therapy, can create both high-energy and low-energy radiation. High-energy radiation is used to treat many types of cancer while low-energy radiation is used to treat some forms of skin cancer. A course of external beam radiation therapy typically ranges from four to nine weeks. Treatments generally are given to a patient once each day with each session lasting approximately 15 to 20 minutes.

 

Another category of radiation therapy is internal radiation therapy, which involves the placement of the radiation source inside the body. The source of the radiation (such as radioactive iodine) is sealed in a small holder, known as an implant, and is introduced through the aid of thin wires or plastic tubes. Internal radiation therapy places the radiation source as close as possible to the cancer cells and delivers a higher dose of radiation in a shorter time than is possible with external beam treatments. Implants may be removed after a short time or left in place permanently (with the radioactivity of the implant dissipating over a short time frame). Temporary implants may be either low-dose rate or high-dose rate. Low-dose rate implants are left in place for several days while high-dose rate implants are removed after a few minutes.

 

Each of our treatment centers is designed to provide a comprehensive array of outpatient programs necessary to treat a cancer patient with radiation therapy. Of our 37 treatment centers, 33 are equipped with a linac that we own or lease. We have an advanced base of technology, including IMRT capabilities in all of our treatment centers and IGRT capabilities in a majority of our treatment centers. Our treatment centers provide a wide variety of therapies, however, our primary therapies are:

 

·                  Conventional Beam Therapy or CBT:  The dominant form of radiation oncology treatment, which may result in relatively high radiation exposure with limited precision, CBT enables radiation oncologists to utilize linac machines to direct radiation beams at the tumor location. After clinical treatment planning is completed, the final configuration of the treatment parameters in the linacs is tested on the patient using a computerized fluoroscopic simulator or by means of computer simulation. The simulator is employed to test the prescribed coordinates of the beam for effective treatment and minimization of exposure (and, therefore, risk of injury) of healthy tissue and critical body structures. Before radiation is administered, custom protective blocks are designed and shaped for each patient to ensure that non-targeted tissue is blocked as thoroughly as possible from radiation. These services are provided by all of our centers.

 

·                  Intensity Modulated Radiation Therapy or IMRT:  This state-of-the-art cancer treatment method utilizes computer-controlled x-ray accelerators to deliver precise doses of radiation that conform to the three dimensional shape of the tumor by modulating the intensity of an external beam. By targeting tumors more precisely than is possible with CBT, IMRT can deliver higher radiation doses directly to cancer cells while sparing surrounding healthy tissue. These services are provided by all of our centers.

 

·                  Image Guided Radiation Therapy or IGRT:  This treatment combines precise three dimensional imaging from computerized tomography scanning or precise x-ray with highly targeted radiation beams via IMRT. This technology allows clinicians to locate a tumor target prior to a radiation oncology treatment, dramatically reducing the need for large target margins, which have traditionally been used to compensate for errors in localization. As a result, the amount of healthy tissue exposed to radiation can be reduced, minimizing the incidence of side effects. The clinical application for expanded treatment sites using IGRT includes the pancreas, lung and liver. These services are provided by 23 of our centers.

 

In addition to the above mentioned therapies, we also offer other advanced services at various of our centers, including:

 

·                  Positron Emission Tomography or PET—Computed Tomography or CT:  Involves the injection of radioactive isotopes into a patient to obtain images of metabolic physiologic processes. The application of PET in the detection of cancer has become significant in the last two years, as it is the first diagnostic procedure that can detect and monitor a patient’s metabolic malignancies. PET/CT provides information that is not available with other medical imaging and combines the

 

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metabolic cancer cells detection of PET with an anatomical picture of the tumor on a CT. These services are provided by nine of our centers.

 

·                  High Dose Rate Brachytherapy:  This treatment involves the use of radioactive isotopes placed directly in contact with cancer tissues, which are then removed when a lethal dose of radiation has been delivered to the cancer. These services are provided by 16 of our centers.

 

·                  Simulation, Dosimetry and Three Dimensional Conformal Treatment Planning:  These procedures involve the use of a computer scan, allowing tumors to be visualized in a three dimensional format. This makes it possible to treat the cancer volume with very narrow margins, which greatly decreases the amount of normal tissue irradiated and treatment side effects. This technique also permits the delivery of a larger lethal dose of radiation to the cancer. These services are provided by all of our centers.

 

·                  Prostate Implantation:  Involves the use of palladium and iodine “seeds” and other radioactive implants (radioactive isotopes) in the treatment of prostate cancer while sparing the nearby organs and structures. These services are provided by 19 of our centers.

 

·                  Stereotactic Radiosurgery or SRS:  Enables delivery of concentrated, precise, high dose radiation beams to localized tumors. Historically, stereotactic radiosurgery was used primarily for contained lesions of the brain but recent advancements in imaging technologies have allowed more types of tumors to be targeted, therefore broadening the use of stereotactic radiosurgery for extra-cranial cancers. These services are provided by six of our centers.

 

·                  Cyber Knife:  A SRS device with a linac mounted on a robotic arm. Through the use of image guidance cameras, the cyber knife system locates the position of the tumor. The linac attached to the robotic arm delivers multiple beams of radiation that converge at the tumor site. Thus, the tumor receives a concentrated dose of radiation while minimizing exposure to surrounding normal tissue. With sub-millimeter accuracy, the cyber knife is used to treat vascular abnormalities, tumors and cancers of the body. These services are provided by our Southside joint venture.

 

Net Revenue and Expenses

 

Net Revenue.  We generate net revenue pursuant to long-term MSAs with affiliated physician groups. Pursuant to these MSAs, we provide our affiliated physician groups use of our facilities, certain clinical services of our treatment center staff and administer the non-medical business functions of our treatment centers, such as technical staff recruiting, marketing, managed care contracting, receivables management, compliance, purchasing, information systems, accounting, human resource management and physician succession planning. In return, our management services revenues include compensation by the affiliated physician groups for expenses incurred in operating our treatment centers plus a fee based on the earnings of our affiliated physician groups, with the exception of one MSA in California, under which we earn our management fee based on a fixed percentage of the affiliated physician group’s net revenue.  Net revenue for the three and six months ended June 30, 2011 was $26.1 million and $52.5 million, respectively.

 

The revenue of our affiliated physician groups is generated from reimbursement by third-party payors and government programs. As such, our revenue is generated from our MSAs, but is impacted by the operations of the treatment centers especially as they relate to revenues generated by the affiliated physician groups.

 

Operating Expenses.  Our operating expenses consist principally of (i) the salaries and benefits we pay to our employees, including our management, billing and collections staff, administrative staff, marketing group and the professionals and employees working at our treatment centers other than the radiation oncologists; (ii) general and administrative expenses, including maintenance, rent, bad debt expense, utilities, insurance and other expenses for our corporate and administrative offices and treatment centers; and (iii) depreciation and amortization. The operating costs of the treatment centers are our responsibility.  Operating expenses for the three and six months ended June 30, 2011 were $22.8 million and $45.2 million, respectively.

 

Factors Affecting our Growth

 

We seek to drive growth by increasing our same-center operating performance, acquiring and developing new treatment centers in both our current and new markets, leveraging our strengths to contract with additional third-party payors on favorable terms, capitalizing on our receivables management expertise to maximize collections and benefitting from payors’ increased acceptance of, and reimbursement for, next generation treatment technologies.

 

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Same-Center Growth

 

Referral source development, optimizing the utilization of new technologies, more efficient utilization of treatment center resources, a stable reimbursement environment and experienced management have resulted in our ability to maintain our financial performance. We have had success driving same-center growth through our proactive referral marketing programs, further advancements in web-based marketing, and targeted physician recruitment, which entails initiating physician recruitment only to the extent there is a need by one of our affiliated physician groups for additional practitioners within such group. Our referral marketing programs include assisting our affiliated physician groups with website development; search engine optimization; education oriented community awareness initiatives, such as community event participation; development of collateral material, such as brochures and newsletters and media advertisements; reports to track referral patterns; and periodic analyses of changes in referral sources. Our investment in, and implementation of, new state-of-the-art equipment has also helped drive same-center growth.

 

Acquisitions and Developments

 

We expect to continue to acquire and develop treatment centers in connection with the implementation of our growth strategy. When we acquire a treatment center, the purchase price is allocated to the assets acquired and liabilities assumed based upon their respective values on the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. We believe the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions. We do not currently have any binding commitments or agreements to make any acquisitions.

 

On July 19, 2011, we received approval from the State of California to provide cancer patient treatment at our de novo site in Yorba Linda, California.  The de novo site, developed in cooperation with one of our local affiliated physician groups, began providing cancer consultation services during July 2011.  We expect to begin cancer patient treatment during August 2011.

 

In January 2006, we formed the Vidalia Regional Cancer Center, LLC as a joint venture with Meadows Regional Medical Center, Inc., or Meadows, to develop and operate a new cancer treatment center in Vidalia, Georgia. Both the Company and Meadows committed to fund the initial capital requirements upon issuance of a certificate of need, or CON, by the Georgia Department of Community. The CON was issued to Meadows in 2010 and will be contributed to the joint venture as Meadows’ initial capital contribution. During 2011, Vidalia Regional Cancer Center, LLC was renamed Meadows Regional Cancer Center, LLC and the operating agreement was changed to include a 40% equity interest for the Company and Meadows and a 20% equity interest for Florida Radiation Oncology Group, LLC, a related party. On May 3, 2011, the Operating Agreement was executed by the parties named above. We have committed to provide $1.0 million of initial capital to Meadows Regional Cancer Center, LLC which includes operating lease guarantees, purchases of furniture and fixtures and initial funding of operating working capital. Development activities began during the second quarter of 2011 and are expected to conclude during the second quarter 2012 with the commencement of patient treatment.

 

Third-Party Contracting

 

Our affiliated physician groups receive payments for their services and treatments rendered to patients covered by third-party payors. Most of our affiliated physician groups’ revenue from third-party payors is from managed care organizations and is attributable to contracts we have negotiated with them. We believe that the scale of our treatment center network improves our ability to negotiate more attractive agreements with these payors. These agreements specify fixed fees for services provided at our treatment centers, and give the managed care organization the ability to market access to our affiliated physician groups and physicians to their members. This is a benefit to the managed care organization, and also gives our affiliated physician groups access to a larger pool of potential patients.

 

Receivables Management

 

Our affiliated physician groups provide radiation therapy services under a significant number of different professional and technical codes, which determine reimbursement. Our affiliated physician groups rely on us to provide the complex coding, billing and collections process. Fees billed to contracted third-party payors and government sponsored programs are automatically adjusted to the allowable payment amount at the time of billing. For third-party payors with whom we do not have contracts and self-pay patients, the amount we expect will be paid for services is estimated and recorded at the time of billing. We revise these estimates at the time billings are collected for any actual differences in the amount received and the net billings due.

 

Our billing office staff expedites the payment process using a number of methods, including electronic inquiries, phone calls and automated letters, which helps to facilitate timely payment by the relevant payor. We routinely prepare aging reports for accounts receivable by date of billing. Our collection team then utilizes these reports to assess and determine the payors requiring additional focus and collection efforts. Our accounts receivable exposure on Medicare, Medicaid and third-party payor balances are largely

 

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limited to contractual adjustments. Our exposure to bad debts on balances relating to these types of payors historically has been de minimis.

 

As part of the MSA, and in consideration of the management services we provide to them, the affiliated physician groups assign their accounts receivable to us.  Accounts receivable and the related cash flows upon collection of these accounts receivable are reported net of estimated allowances for doubtful accounts and contractual adjustments.

 

In the event of denial of payment, we follow the payor’s standard appeals process, both to secure payment and to negotiate with the payors, as appropriate, to modify their medical policies to expand coverage for the newer and more advanced treatment services that we provide. If all reasonable collection efforts with these payors have been exhausted by our central billing office staff, the account receivable is written off to the contractual allowance.

 

Sources of our Affiliated Physician Groups’ Net Revenue By Payor

 

Our affiliated physician groups’ net revenue is summarized by payor source in the following table:

 

 

 

Three Months
Ended
June 30,

 

Six Months
Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Third-party payors

 

57

%

54

%

55

%

55

%

Medicare

 

37

%

38

%

39

%

39

%

Medicaid

 

5

%

6

%

5

%

5

%

Self-pay

 

1

%

2

%

1

%

1

%

 

Our affiliated physician groups receive payments for their services and treatments rendered to patients covered by Medicare, Medicaid, third-party payors and self-pay. Generally, our affiliated physician groups’ net revenue is impacted by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures.

 

Third-Party Payors.  Third-party payors include private health insurance as well as related payments for co-insurance and co-payments. Most of our affiliated physician groups’ third-party payor revenue is attributable to contracts where a set fee is negotiated relative to services provided by our treatment centers. We do not have any contracts that individually represent over 5% of our affiliated physician groups’ net revenue. Although the terms and conditions of our managed care contracts vary, they are typically for terms of less than five years and provide for automatic renewals. If payments by managed care organizations and other third-party payors decrease then our net revenue and net income could decrease.

 

Medicare and Medicaid.  Since cancer disproportionately affects elderly people, a significant portion of our affiliated physician groups’ net revenue is derived from the Medicare program as well as related co-payments. Medicare reimbursement rates are determined by the Center for Medicare and Medicaid Services, or CMS, and are typically lower than our rates to third-party payors and self-pay patients. Further, Medicaid reimbursement rates are typically lower than Medicare rates. Government sponsored programs generally reimburse on a fee-for-service basis based on a predetermined reimbursement rate schedule. Medicare reimbursement rates are determined by a formula that typically changes on an annual basis. We depend on payments from government sources and any changes in Medicare or Medicaid programs could result in a decrease in our net revenue and net income.

 

Self-Pay.  Self-pay consists of payments for treatments by patients not otherwise covered by Medicare, Medicaid and third-party payors.

 

Seasonality

 

Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to fluctuate. Some of the patients of our Florida treatment centers are part-time residents in Florida during the winter months. Hence, these treatment centers have historically experienced higher utilization rates during the winter months than during the remainder of the year. In addition, referrals are typically lower in the summer months due to traditional vacation periods.

 

Results of Operations

 

The following summary results of operations data are qualified in their entirety by reference to, and should be read in conjunction with, our unaudited consolidated financial statements and the accompanying notes thereto.

 

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The following table presents summaries of results of operations for the three and six months ended June 30, 2011 and 2010:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

(in thousands)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Net revenue

 

$

26,062

 

$

24,860

 

$

52,529

 

$

48,744

 

Cost of operations:

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

8,308

 

8,442

 

16,865

 

18,081

 

Depreciation and amortization

 

4,521

 

4,563

 

9,086

 

9,262

 

General and administrative expenses

 

9,939

 

10,707

 

19,288

 

18,824

 

Total operating expenses

 

22,768

 

23,712

 

45,239

 

46,167

 

Income from operations

 

3,294

 

1,148

 

7,290

 

2,577

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(6,715

)

(5,452

)

(13,379

)

(9,466

)

Debt extinguishment costs

 

 

(2,932

)

 

(2,932

)

Loss on interest rate swap

 

 

(22

)

 

(267

)

Equity interest in net earnings of joint venture

 

85

 

130

 

162

 

297

 

Interest income and other expense, net

 

(328

)

(21

)

(428

)

(244

)

Total other expense

 

(6,958

)

(8,297

)

(13,645

)

(12,612

)

Loss before income taxes

 

(3,664

)

(7,149

)

(6,355

)

(10,035

)

Income tax benefit

 

1,358

 

2,968

 

2,354

 

3,767

 

Net loss

 

$

(2,306

)

$

(4,181

)

$

(4,001

)

$

(6,268

)

 

Comparison of the Three Months Ended June 30, 2011 and 2010

 

Net revenue.  Net revenue for the three months ended June 30, 2011 was $26.1 million compared to $24.9 million for the same period in 2010, an increase of $1.2 million or 4.8%. The year-over-year increase in net revenue was principally due to an 8% increase in IMRT treatments and a 35% increase in IGRT treatments in 2011, both of which are compensated at a higher rate than CBT and an increase in CMS reimbursement rates.

 

Salaries and benefits.  Salaries and benefits for the three months ended June 30, 2011 decreased slightly by 1.6% to $8.3 million from $8.4 million for the same period in 2010.

 

Depreciation and amortization.  Depreciation and amortization expense for the three months ended June 30, 2011 decreased slightly to $4.5 million compared to $4.6 million for the same period of 2010.

 

General and administrative expenses.  General and administrative expenses for the three months ended June 30, 2011 decreased $0.7 million to $9.6 million, or 6.8%, from $10.3 million for the three months ended June 30, 2010. The decrease was principally due to decreased costs associated with operating a temporary vault while replacing a linac at a single-linac treatment center and legal costs related to a lease settlement in 2010 of $1.9 million and $0.5 million of conditional management retention expense paid in 2010 not included in 2011, offset by an increase of $0.3 million in operating lease expense from the addition of three linacs during the second half of 2010, an increase of $0.5 million in repairs and maintenance at the treatment centers, and an increase in other general and administrative expenses of $0.5 million primarily from increased contract physicist expense, center facility rent increases, increased property taxes, and professional fees related to public filings.

 

Interest expense.  Interest expense increased $1.2 million to $6.7 million or 21.8% for the three months ended June 30, 2011 compared to $5.5 million for the same period in 2010. The increase in interest expense was principally due to the refinancing of debt in 2010 and the issuance of $210.0 million of Senior Notes which bear interest at higher rates than the retired debt.

 

Income tax benefit.  Income tax benefit decreased $1.6 million for the three months ended June 30, 2011 compared to the same period in 2010.  The decrease was due to a $3.7 million loss before tax for the second quarter in 2011 compared to a $7.1 million loss before tax in the second quarter 2010.

 

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Comparison of the Six Months Ended June 30, 2011 and 2010

 

Net revenue.  Net revenue for the six months ended June 30, 2011 was $52.5 million compared to $48.7 million for the same period in 2010, an increase of $3.8 million or 7.8%. The year-over-year increase in net revenue was principally due to a 13% increase in IMRT treatments and a 38% increase in IGRT treatments in 2011, both of which are compensated at a higher rate than CBT, an increase in CMS reimbursement rates and one additional treatment day in the six months ended June 30, 2011.

 

Salaries and benefits.  Salaries and benefits for the six months ended June 30, 2011 decreased 6.6% to $16.9 million from $18.1 million for the same period in 2010, primarily due to a reduction of $0.8 million of non-recurring severance costs related to the departure of our former CEO in 2010 and $0.5 million conditional management retention expense paid in 2010 not included in 2011.

 

Depreciation and amortization.  Depreciation and amortization expense for the six months ended June 30, 2011 decreased slightly to $9.1 million compared to $9.3 million for the same period of 2010.

 

General and administrative expenses.  General and administrative expenses for the six months ended June 30, 2011 increased $0.4 million to $18.5 million, or 2.2%, from $18.1 million for the six months ended June 30, 2010. The increase was principally due to an increase of $0.5 million in operating lease expense from the addition of three linacs during the second half of 2010, an increase of $0.8 million in repairs and maintenance at the treatment centers, and an increase in other general and administrative expenses of $1.0 million primarily from increased bad debt expense, increased contract physicist expense, center facility rent increases, increased property and sales and use taxes, professional fees related to public filings, offset by costs associated with operating a temporary vault while replacing a linac at a single-linac treatment center and legal costs related to a lease settlement in 2010 of $2.1 million.

 

Interest expense.  Interest expense increased $3.9 million to $13.4 million or 41.1% for the six months ended June 30, 2011 compared to $9.5 million for the same period in 2010. The increase in interest expense was principally due to the refinancing of debt in 2010 and the issuance of $210.0 million of Senior Secured Notes which bear interest at higher rates than the retired debt.

 

Income tax benefit.  Income tax benefit decreased $1.4 million to $2.4 million for the six months ended June 30, 2011 compared to the same period in 2010.  The decrease was due to a $6.4 million loss before tax for the six months ended June 30, 2011 compared to a $10.0 million loss before tax for the same period in 2010.

 

Liquidity and Capital Resources

 

On May 13, 2010, we concluded the offering for $210.0 million of 11.75% Senior Secured Notes, or Senior Notes. Proceeds from the sale of the Senior Notes were used primarily to repay our then existing senior credit facility and subordinated debt. Concurrently with the closing of the offering, our direct wholly-owned subsidiary, Oncure Medical Corp., and each of its direct and indirect subsidiaries entered into a new Revolving Credit Facility with GE Capital Markets, Inc., as sole lead arranger and book manager, General Electric Capital Corporation, as administrative agent and collateral agent, and the other lenders from time to time party thereto.

 

The Revolving Credit Facility provides for aggregate commitments of up to $40.0 million, including a letter of credit sub-facility of $2.0 million and a swing line sub-facility of $2.0 million, and provides for the increase, at our option, of aggregate commitments by $10.0 million, subject to certain conditions. The Revolving Credit Facility is undrawn as of June 30, 2011 and expires in May 2015.

 

Our primary ongoing liquidity requirements are for working capital, debt service, capital expenditures and acquisitions. We finance these liquidity requirements through a combination of cash on hand, cash flows from operating activities and the incurrence of additional indebtedness, including borrowings under our Revolving Credit Facility.

 

On May 3, 2011, we were notified by Northeast Florida Cancer Services, or NFCS, an affiliate of Hospital Corporation of America, of its intent to divest of its 51% ownership in the Memorial Southside Cancer Center, or Memorial. We will jointly acquire, with Ninth City Landowners, LLP, or Ninth City, NFCS’ 51% ownership. Following the transaction both Ninth City and we will each own 50% of Memorial. The assets of the cyber knife business will be distributed to NFCS in addition to cash consideration to be agreed by the parties representing the difference in the value of the cyber knife assets distributed and the value of the 51% NFCS ownership interest in Memorial.  The transaction is expected to close during the third quarter of 2011.

 

As of June 30, 2011, we had total cash and cash equivalents of $6.2 million, $206.8 million of outstanding long-term indebtedness, net of discount, and availability under our revolving credit facility of up to $40.0 million, which may be increased pursuant to the terms of the indenture governing the notes and the agreement governing our Revolving Credit Facility.

 

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Based on our current business plan, we believe that our existing cash balances, cash generated from operations and availability under our Revolving Credit Facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our future cash requirements could be higher than we currently expect as a result of various factors. Our ability to meet our liquidity needs could be adversely affected if we suffer adverse results of operations, or if we violate the covenants and restrictions to which we are subject under our Revolving Credit Facility. Additionally, our ability to generate sufficient cash from our operating activities is subject to general economic, political, regulatory, financial, competitive and other factors beyond our control. Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our Revolving Credit Facility in an amount sufficient to enable us to pay our debt service, repay our indebtedness or to fund our other liquidity needs, and we may be required to seek additional financing through credit facilities with other lenders or institutions or seek additional capital through private placements or public offerings of equity or debt securities. No assurances can be given that we will be able to complete additional debt or equity financings on terms favorable to us or at all.

 

Cash Flows Provided By Operating Activities

 

Net cash provided by operating activities decreased $2.8 million to $2.9 million in the six months ended June 30, 2011 compared to $5.7 million in the same period in 2010. The decrease was primarily a result of a decrease in cash provided by accounts receivable of $3.7 million, and an increase of cash utilized for accounts payable and accrued expenses of $4.5 million primarily due to payment of accrued interest, offset by a decrease in net loss of $2.3 million and a decrease in cash utilized for prepaid expenses, other assets and liabilities of $4.1 million.

 

Cash Flows Used In Investing Activities

 

Net cash used in investing activities increased by $0.6 million to $2.6 million for the six months ended June 30, 2011 from $2.0 million for the six months ended June 30, 2010. The increase was primarily due to an increase in capital expenditures of $0.5 million.

 

For the six months ended June 30, 2011, $1.3 million of fixed asset expenditures relate to the construction of a de novo cancer center in California.  The cancer center is being developed in connection with an existing physician group with which we have an existing MSA.  We expect that certain physicians of the physician group will invest as minority joint venture partners in the cancer center.  We expect to consolidate the assets, liabilities and results of operations of the joint venture for financial reporting.

 

Historically, our capital expenditures have been primarily for equipment and information technology software systems and equipment. Capital expenditures for 2011, exclusive of any purchase of radiation oncology treatment centers, are expected to be approximately $7.0 million primarily related to equipment purchases and maintenance capital. To the extent that we acquire or internally develop additional radiation oncology treatment centers, we may need to increase our expected capital expenditures.

 

Cash Used In Financing Activities

 

Net cash used in financing activities increased by $1.1 million to $1.1 million for the six months ended June 30, 2011 from $0.04 million for the six months ended June 30, 2010. The increase was primarily due to payment of principle on debt and capital leases of $1.1 million during the six months ended June 30, 2011 compared to netting $206.3 million of proceeds from the issuance of Senior Notes in May 2010, offset by $196.6 million in debt repayments, related loan costs of $8.9 million during the six months ended June 30, 2010 and repayment of capital leases of $0.9 million.

 

On May 13, 2010, we concluded an offering for $210.0 million of Senior Notes which will mature on May 15, 2017. The offering of the Senior Notes closed on May 13, 2010 with generated net proceeds to us of $206.3 million which were utilized to repay the outstanding balances of our Senior term loan and Subordinated debt along with $9.0 million of expenses of the offering. The Senior Notes are secured by the assets of the Company and our subsidiaries and are guaranteed by our subsidiaries. Prior to May 15, 2013, up to 35% of the Senior Notes are redeemable at the option of the Company with proceeds from an equity offering at a redemption price of 111.75%.

 

Concurrently with the closing of the offering of the Senior Notes, our direct wholly-owned subsidiary, Oncure Medical Corp. and each of its direct and indirect subsidiaries entered into a new senior secured revolving credit facility, or Revolving Credit Facility, with GE Capital Markets, Inc., as sole lead arranger and book manager, General Electric Capital Corporation, as administrative agent and collateral agent, and the other lenders from time to time party thereto. The new Revolving Credit Facility provided for aggregate commitments of up to $40.0 million, including a letter of credit sub-facility of $2.0 million and a swing line sub-facility of $2.0 million, and will provide for the increase, at our option, of aggregate commitments by $10.0 million, subject to certain conditions. The Revolving Credit Facility bears interest at a rate of Prime plus 3.5% (6.75% at June 30, 2011) or LIBOR plus 4.5%

 

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(4.69% at June 30, 2011). The revolving line of credit is subject to an unused line fee of 0.75% to be paid quarterly.  The Revolving Credit Facility is undrawn as of June 30, 2011.

 

Discussion of Non-GAAP Information

 

Adjusted EBITDA consists of net income as adjusted for depreciation and amortization, interest expense, interest and other income, income taxes, income from discontinued operations, non-cash equity based compensation expense, impairment loss resulting from discontinued operations, loss on interest rate swap, the management fee that we pay to Genstar and for certain other items that we believe are appropriate to manage the business and for the understanding of the reader, as detailed below. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis.

 

We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe this measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industries with similar capital structures. We believe issuers of “high yield” securities also present Adjusted EBITDA because investors, analysts and rating agencies consider it useful in measuring the ability of those issuers to meet debt service obligations. We believe that Adjusted EBITDA is an appropriate supplemental measure of debt service capacity, because cash expenditures for interest are, by definition, available to pay interest, and income tax expense is inversely correlated to interest expense because income tax expense goes down as deductible interest expense goes up and depreciation and amortization are non-cash charges.

 

Adjusted EBITDA has limitations as an analytical tool, and you should not consider this item in isolation, or as a substitute for an analysis of our results as reported under GAAP. Some of these limitations are:

 

·                  excludes certain income tax payments that may represent a reduction in cash available to us;

 

·                  does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

·                  does not reflect changes in, or cash requirements for, our working capital needs; and

 

·                  does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt, including the notes;

 

·                  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

·                  is adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

 

·                  other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure; and

 

·                  we include certain adjustments that may be recurring in nature and may not meet the GAAP definition of infrequent or unusual items, but we believe these items are appropriate to manage the business and for the understanding of the reader.

 

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.

 

In calculating Adjusted EBITDA, we make certain adjustments that are based on assumptions and estimates. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses, or realize benefits, similar to those adjusted in this presentation. We calculate Adjusted EBITDA in accordance with the debt covenants of our revolving credit agreement and certain adjustments are subject to debt administrator concurrence.

 

Adjusted EBITDA is a supplemental measure of our performance and our ability to service debt that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as measures of our liquidity. In addition, our measurements of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

 

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The following table reconciles net income to Adjusted EBITDA for the periods presented:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended June
30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

Net loss

 

$

(2,306

)

$

(4,181

)

$

(4,001

)

$

(6,268

)

Depreciation and amortization

 

4,521

 

4,563

 

9,086

 

9,262

 

Interest expense

 

6,715

 

5,452

 

13,379

 

9,466

 

Debt extinguishment costs

 

 

2,932

 

 

2,932

 

Interest and other income, net

 

328

 

21

 

428

 

244

 

Income tax benefit

 

(1,358

)

(2,968

)

(2,354

)

(3,767

)

EBITDA

 

7,900

 

5,819

 

16,538

 

11,869

 

Plus:

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

95

 

191

 

190

 

382

 

Loss on interest rate swap (a)

 

 

22

 

 

267

 

Acquisition related expenses (b)

 

11

 

94

 

21

 

118

 

MSA legal expenses (c)

 

195

 

 

195

 

 

Management fees (d)

 

375

 

375

 

750

 

750

 

Severance costs (e)

 

 

51

 

 

805

 

Center closure costs (f)

 

 

1,893

 

100

 

2,050

 

Other expenses (g)

 

136

 

666

 

472

 

720

 

Adjusted EBITDA

 

$

8,712

 

$

9,111

 

$

18,266

 

$

16,961

 

 


(a)                                  Loss on interest rate swap that did not qualify for hedge accounting.

 

(b)                                 Includes expenses related to acquisition related expenses.

 

(c)                                  Represents professional fees related to an MSA renewal.

 

(d)                                 Represents management fees paid to Genstar.

 

(e)                                  Represents severance costs related to the departure of our former CEO in 2010 and other workforce reduction costs during the six month period ended June 30, 2010.

 

(f)                                    Includes the disposal of assets at a previously closed center and costs related to a services rate reconciliation in 2011; and, temporary vault costs while replacing a linac at a single-linac treatment center and legal costs related to a lease settlement in 2010.

 

(g)                                 Includes deferred rent amortization of $0.1 million for each of the six months ended June 30, 2011 and 2010; $0.2 million and $0.1 million of costs related to re-organizing physician groups in Florida into a consolidated billing entity for the six months ended June 30, 2011 and 2010, respectively; and $0.1 million of professional fees associated with registration of Senior Notes under the Securities Act of 1933 in 2011.  The three months ended June 30, 2010 includes $0.5 million conditional management retention expense.

 

Contractual Obligations

 

There have been no material changes to the contractual obligations disclosed in our most recent Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

Off Balance Sheet Arrangements

 

We do not currently have any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

 

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Inflation

 

We are impacted by rising costs for certain inflation-sensitive operating expenses such as equipment, labor and employee benefits. We believe that inflation has not had a material impact on us, but may in the future.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to various market risks as a part of our operations, and we anticipate that this exposure will increase as a result of our planned growth. In an effort to mitigate losses associated with these risks, we may at times enter into derivative financial instruments. These derivative financial instruments may take the form of forward sales contracts, option contracts, and interest rate swaps. We have not and do not intend to engage in the practice of trading derivative securities for profit.

 

On May 13, 2010, we entered into a Credit Agreement for a revolving credit facility which provides for borrowings of up to $40.0 million in total, subject to certain restrictions.  Principal amounts outstanding under the Credit Agreement will bear interest at a rate of Prime plus 3.5% or LIBOR plus 4.5%.  As of June 30, 2011, there were no amounts outstanding under the facility, accordingly, there is no impact from interest rate risk related to our Credit Agreement for the revolving credit.

 

Our notes bear fixed interest rates, and therefore, would not be subject to interest rate risk.

 

Item 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date, our disclosure controls and procedures were effective such that the information relating to us, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission, SEC, reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no significant changes to our internal control over financial reporting during the six months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II

 

Item 1.   Legal Proceedings

 

We are from time to time party to legal proceedings which arise in the normal course of business. We are not currently involved in any material litigation, the outcome of which would, in management’s judgment based on information currently available, have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors

 

Our business is subject to a number of risks, some of which are beyond our control. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. — “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. Other than the risk factor described below, there have been no material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.

 

If our affiliated physician groups terminate or decline to renew their management services agreements, or MSAs, with us, we could be seriously harmed.

 

The MSAs we enter into with our affiliated physician groups are the result of arms’ length negotiations. Under certain circumstances, the affiliated physician groups are permitted, and may attempt, to terminate their MSAs with us. For example, an MSA can generally be terminated if we commence a voluntary or involuntary case of bankruptcy, fail to perform our duties and responsibilities under the MSA which breaches a material term or condition of the MSA and fail to cure such breach within a specified period, withdraw from participation in the Medicare program, or breach representations and warranties made by us in the MSAs. If any of the larger affiliated physician groups were to succeed in such a termination, our business could be seriously harmed. For the year ended December 31, 2010, approximately 37% of our net revenue came from management fees earned from two of our affiliated physician groups, one of which represents 13% of our revenue and expires in 2011 and one of which represents 24% of our revenue and expires in 2016. We may in the future have disputes with physician and/or affiliated physician groups that could result in harmful changes to our relationship with them or a termination of an MSA. Likewise, to the extent that our MSAs with affiliated physician groups expire and are not renewed, our business may be adversely affected. Our 14 MSAs are scheduled to expire periodically between 2011 and 2023, with no more than two expiring in any given year, except 2016 when four will expire.

 

                On July 8, 2011, ICON notified OnCure Medical that it intends to terminate the ICON MSA effective October 11, 2011.  The initial term of the ICON MSA ends on October 11, 2011, but will be automatically extended for an additional 5 years unless (a) there has been a material change in: (i) the management fees provided for in the ICON MSA; (ii) the management services provided pursuant to the ICON MSA; or (iii) ICON’s clinical practice, in each case resulting from action taken by OnCure Medical, and (b) ICON provides OnCure Medical 90-days notice of its intent to terminate.  The notice alleges material changes in the management fees and management services.  The Company and OnCure Medical disagree with the allegations regarding material changes and do not believe that ICON has sufficient grounds to terminate the ICON MSA.  In response to the ICON notice, the Company intends to pursue all of its legal rights and remedies to enforce the automatic extension of the ICON MSA, including pursuing arbitration pursuant to the terms of the ICON MSA.  Per the terms of the MSA, the parties have tentatively planned a mediation session for August, 2011.

 

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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4.   (Removed and Reserved)

 

Item 5.   Other Information

 

None.

 

Item 6.   Exhibits

 

Reference is made to the Index to Exhibits included herein.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 11, 2011.

 

 

ONCURE HOLDINGS, INC.