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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 March 31, 2012

 

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

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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 May 9, 2012, 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 subsidiaries that guarantee certain of our indebtedness.

 

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 of future events or performance contained in this quarterly report under the headings “Risk Factors,” “Legal Proceedings” 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)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

14,101

 

$

6,988

 

Accounts receivable, less allowances of $1,909 and $1,788, respectively

 

17,635

 

18,812

 

Deferred income taxes

 

1,391

 

1,391

 

Prepaid expenses

 

2,495

 

2,477

 

Other current assets

 

1,056

 

991

 

Total current assets

 

36,678

 

30,659

 

Property and equipment, net

 

29,415

 

31,117

 

Goodwill

 

174,353

 

174,353

 

Management service agreements, net

 

43,759

 

45,295

 

Other assets, net

 

12,484

 

12,055

 

Total assets

 

$

296,689

 

$

293,479

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,487

 

$

1,709

 

Accrued expenses

 

7,498

 

6,436

 

Accrued interest

 

9,253

 

3,084

 

Current portion of note payable

 

159

 

292

 

Current portion of obligations under capital leases

 

1,324

 

1,341

 

Other current liabilities

 

525

 

446

 

Total current liabilities

 

20,246

 

13,308

 

Long-term debt, net of unamortized discount of $2,946 and $3,049, respectively, less current portion

 

207,054

 

206,951

 

Capital leases, less current portion

 

1,827

 

2,146

 

Other long-term liabilities

 

2,415

 

2,403

 

Deferred income tax liabilities

 

11,649

 

12,608

 

Total liabilities

 

243,191

 

237,416

 

Stockholders’ equity:

 

 

 

 

 

OnCure Holdings, Inc. 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

 

96,430

 

96,299

 

Accumulated deficit

 

(45,417

)

(42,668

)

Total OnCure Holdings, Inc. stockholders’ equity

 

51,039

 

53,657

 

Noncontrolling interest

 

2,459

 

2,406

 

Total stockholders’ equity

 

53,498

 

56,063

 

Total liabilities and stockholders’ equity

 

$

296,689

 

$

293,479

 

 

See accompanying notes.

 

2



Table of Contents

 

OnCure Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Net revenue

 

$

24,582

 

$

25,760

 

Cost of operations:

 

 

 

 

 

Salaries and benefits

 

8,322

 

8,557

 

Depreciation and amortization

 

3,943

 

4,565

 

General and administrative expenses

 

9,324

 

8,642

 

Total operating expenses

 

21,589

 

21,764

 

Income from operations

 

2,993

 

3,996

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(6,720

)

(6,664

)

Equity interest in net earnings of joint venture

 

112

 

78

 

Interest income and other (expense), net

 

(40

)

(101

)

Total other expense

 

(6,648

)

(6,687

)

Loss before income taxes

 

(3,655

)

(2,691

)

Income tax benefit

 

959

 

996

 

Net loss

 

(2,696

)

(1,695

)

Less: Net income attributable to noncontrolling interest

 

53

 

 

Net loss attributable to OnCure Holdings, Inc.

 

$

(2,749

)

$

(1,695

)

 

See accompanying notes.

 

3



Table of Contents

 

OnCure Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Operating activities

 

 

 

 

 

Net loss

 

$

(2,696

)

$

(1,695

)

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

 

 

 

 

 

Equity interest in net earnings of joint venture

 

(112

)

(78

)

Depreciation

 

2,422

 

2,862

 

Amortization

 

1,521

 

1,703

 

Amortization of loan fees and deferred interest expense

 

403

 

367

 

Deferred income tax provision

 

(959

)

(996

)

Stock-based compensation

 

131

 

95

 

Provision for bad debts

 

622

 

707

 

Other, net

 

57

 

211

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

555

 

(2,438

)

Prepaid expenses and other current assets

 

(83

)

(61

)

Accounts payable and accrued expenses

 

7,009

 

6,171

 

Other liabilities

 

228

 

(46

)

Net cash provided by operating activities

 

9,098

 

6,802

 

Investing activities

 

 

 

 

 

Purchases of property and equipment

 

(719

)

(1,654

)

Distribution received from unconsolidated joint venture

 

103

 

75

 

Investment in unconsolidated joint venture

 

(900

)

 

Net cash used in investing activities

 

(1,516

)

(1,579

)

Financing activities

 

 

 

 

 

Principal repayments of debt

 

(133

)

(132

)

Principal repayments of capital leases

 

(336

)

(428

)

Payment of debt issuance costs

 

 

(17

)

Net cash used in financing activities

 

(469

)

(577

)

Net increase in cash

 

7,113

 

4,646

 

Cash, beginning of period

 

6,988

 

7,047

 

Cash, end of period

 

$

14,101

 

$

11,693

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

149

 

$

179

 

Income taxes, net

 

 

 

 

See accompanying notes.

 

4


 


Table of Contents

 

OnCure Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2012

 

1. Basis of Presentation

 

OnCure Holdings, Inc. is a Delaware corporation formed in 2006 to acquire 100% of the issued and outstanding common stock of Oncure Medical Corp. OnCure is substantially owned by funds managed by Genstar Capital, LLC.

 

OnCure is principally engaged in providing capital equipment and business management services to 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.  The management fee is primarily based on a predetermined percentage of each Group’s earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) associated with the provision of radiation therapy. The Company manages the radiation oncology business operations of three Groups in Florida, six Groups in California, and 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 72% of net revenue.

 

The 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 27, 2012. 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.

 

Certain previously reported financial information has been reclassified to conform to the current presentation. Such reclassifications did not materially affect the Company’s consolidated financial condition, net loss, or cash flows as previously reported.

 

The Company’s receivables, payables, prepaids, 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 long-term debt was approximately $139.7 million and $168.0 million as of March 31, 2012 and December 31, 2011, 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.

 

2. Net Revenue

 

The provisions of Accounting Standards Update No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (“ASU 2011-07”) were adopted in 2012.  ASU 2011-07 requires health care entities to change the presentation of the statement of operations by reclassifying the provision for doubtful accounts from an operating expense to a deduction from patient service revenues.  All periods presented in these consolidated financial statements and notes to consolidated financial statements have been reclassified in accordance with ASU 2011-07.

 

5



Table of Contents

 

Our affiliated physician groups receive payments for their services and treatments rendered to patients covered by Medicare, Medicaid, third-party payors and self-pay.  Revenue consists primarily of net patient service revenue that is recorded based upon established billing rates less allowances for contractual adjustments.  Third-party payors include private health insurance, as well as related payments for co-insurance and co-payments.  Estimates of contractual allowances for patients with healthcare coverage are based upon the payment terms specified in the related contractual agreements.  Revenue related to uninsured patients and co-payment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts).  We also record a provision for bad debts based primarily on historical collection experience related to these uninsured accounts to record the net self-pay accounts receivable at the estimated amounts we expect to collect.

 

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

 

 

 

Three Months
Ended
March 31,

 

 

 

2012

 

2011

 

Third-party payors

 

54

%

53

%

Medicare

 

39

%

40

%

Medicaid

 

6

%

6

%

Self-pay

 

1

%

1

%

 

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. As a result of these changes to the Groups’ revenues and related EBITDA, there was no material adjustment in the Company’s net revenue for the three months ended March 31, 2012 and 2011. Amounts distributed to the Groups for their services under the terms of the management services agreements totaled $6.7 million and $7.4 million for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012 and December 31, 2011, amounts payable to the Groups for their services of $3.1 million and $3.0 million, respectively, were included in accrued expenses. Net revenue is presented net of bad debt expense of $0.1 million for each of the periods ended March 31, 2012 and 2011.

 

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 March 31, 2012 and 2011, approximately 45% and 46%, 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 26% and 13% of revenue, respectively, for the three months ended March 31, 2012, and 25% and 13% of revenue, respectively, for the three months ended March 31, 2011.

 

Integrated Community Oncology Network, LLC (“ICON”) notified the Company on July 8, 2011, that it sought to terminate the ICON MSA effective October 11, 2011, alleging material changes in the management fees and management services under the ICON MSA as grounds for the termination.  The ICON MSA represents approximately 13% of the Company’s revenue for each of the three months ended March 31, 2012 and 2011.  The Company and ICON participated in mediation to resolve the matter, but were unable to reach an agreement.  Subsequently, the Company and ICON attempted to resolve the dispute pursuant to the arbitration provisions provided for in the ICON MSA.  To that end, the Company and ICON entered into a Standstill Agreement under which each agreed to continue to perform and discharge their respective obligations under the ICON MSA from the date of the Standstill Agreement until either: (i) an arbitrator issues a final award allowing ICON to terminate the ICON MSA; or (ii) the ICON MSA terminates by its own terms or by agreement of the parties. The Company and ICON are currently engaged in arbitration.

 

6



Table of Contents

 

3. Accounts Receivable

 

We receive payments for services rendered from Medicare and Medicaid, third-party payors, and self-pay patients.  Fees billed to contracted third-party payors and government sponsored programs are automatically adjusted to the allowable payment amount at the time of billing.  We recognize that revenues and receivables from government agencies are significant to our operations, but do not believe there are significant credit risks associated with these government agencies.  We do not believe there are any other significant concentrations of revenues from any particular payor that would subject us to any significant credit risks in the collection of our accounts receivable.

 

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.

 

Accounts receivable are reduced by an allowance for doubtful accounts.  Additions to the allowance for doubtful accounts are made by means of the provision for bad debts.  The amount of the provision for bad debts is based upon management’s assessment of historical and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators.  The majority of bad debt adjustments are on guarantor balances representing charges due directly from patients (including co-payment and deductible amounts from patients who have health care coverage and charges from uninsured patients).  Accounts are written off when all reasonable internal and external collection efforts have been exhausted.  Write-offs are based upon specific identification and the write-off process requires a write-off adjustment entry to the patient accounting system.  Management relies on the results of detailed reviews of historical write-offs and recoveries at our treatment centers related to guarantor balances as a primary source of information to utilize in estimating the provision for bad debt adjustments and allowance for doubtful accounts.  The analysis is performed monthly and the allowance for bad debt accounts is adjusted accordingly.  At March 31, 2012 and December 31, 2011, the allowance for doubtful accounts was $1.9 million and $1.8 million, respectively.

 

4. Long-Term Debt

 

As of March 31, 2012 and December 31, 2011, the Company’s long-term debt consisted of the following (in thousands):

 

 

 

March 31,
2012

 

December 31,
2011

 

Senior secured notes

 

$

210,000

 

$

210,000

 

Note payable

 

159

 

292

 

 

 

210,159

 

210,292

 

Less unamortized discount

 

(2,946

)

(3,049

)

Less current portion of note payable

 

(159

)

(292

)

 

 

$

207,054

 

$

206,951

 

 

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, which were exchanged in January 2011 for registered notes with substantially identical terms. The offering of the Senior Secured 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 May 15, 2014, 2015 and 2016 the Senior Notes are redeemable at the option of the Company at redemption prices of 105.875%, 102.938% and 100.0%, respectively.

 

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.

 

7



Table of Contents

 

Revolving Credit Facility

 

Concurrent with the closing of the offering of the Senior Notes, 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 will provide 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 March 31, 2012) or LIBOR plus 4.5% (4.74% at March 31, 2012) at the election of the Company. 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 March 31, 2012 and expires in May 2015.

 

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 March 31, 2012, no events of default have occurred with respect to any of the Company’s debt agreements.

 

On October 26, 2011, Oncure Medical Corp., and each of its direct and indirect subsidiaries, entered into an amendment (the “Amendment”) to the Revolving Credit Facility.  The Amendment provides that the quarterly consolidated fixed charge coverage ratio compliance test set forth in the Revolving Credit Facility is now only required to the extent that there is an outstanding balance under the Revolving Credit Facility.  In addition, among other things, the Amendment provides that subsequently, if (i) one or more permitted acquisitions have occurred with a combined EBITDA (as defined in the Revolving Credit Facility) of at least $4.0 million and (ii) the Consolidated EBITDA (as defined in the Revolving Credit Facility) of Oncure Medical Corp. is $38.0 million or more, the consolidated fixed charge coverage ratio will no longer be a maintenance test, but rather will be tested only upon a draw or issuance of a letter of credit under the Revolving Credit Facility.

 

Loan Fees

 

As of March 31, 2012 and December 31, 2011, the remaining unamortized balance of deferred loan fees was $7.0 million and $7.3 million, respectively. The Company recorded $9.0 million of deferred debt issuance costs as a result of the issuance of the Senior Notes and Revolving Credit Facility, which are amortized to interest expense over the term of the respective debt arrangements.

 

5. 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 8.61%. The leases require monthly principal and interest payments and mature in 2012 through 2014. The leases are collateralized by the equipment leased.

 

 

 

March 31,
2012

 

December 31,
2011

 

 

 

(In Thousands)

 

Minimum lease payable

 

$

3,482

 

$

3,889

 

Less imputed interest

 

(331

)

(402

)

Present value of minimum lease payments

 

3,151

 

3,487

 

Less current portion

 

(1,324

)

(1,341

)

 

 

$

1,827

 

$

2,146

 

 

6. Income Taxes

 

The tax benefit of net operating losses, temporary differences, and credit carryforwards is recorded as a deferred tax asset to the extent that management assesses that realization of that deferred tax asset is “more likely than not.” Realization of the future tax benefit is dependent on the Company’s ability to generate sufficient taxable income to utilize these tax benefits within their carryforward period. As a result of cumulative losses, the Company’s temporary differences reversing during the carryforward period are not sufficient to support the recovery of the deferred tax assets recorded for the three months ended March 31, 2012 and the Company has recorded a valuation allowance of $0.4 million as of March 31, 2012. The establishment of a valuation allowance does

 

8



Table of Contents

 

not impair the Company’s ability to use the deferred tax assets, such as net operating loss and tax credit carryforwards, upon achieving sufficient profitability.

 

The Company’s effective tax rate on pre-tax income for the three months ended March 31, 2012 and 2011 was 26.2% and 36.8%, respectively. The significant decrease in the Company’s effective tax rate for the three months ended March 31, 2012 is primarily due to a deferred tax asset valuation allowance of $0.4 million recorded during the period against the Company’s deferred tax assets.

 

7. Unconsolidated Joint Venture

 

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 Southside Cancer Center, LLC (“Memorial”). The Company and Ninth City Landowners, LLP (“Ninth City”), each owned a 24.5% interest in Memorial. On August 31, 2011, the Company and Ninth City jointly acquired NFCS’s 51% ownership. As a result of the transaction, the Company and Ninth City each own 50% of Memorial. The assets of the cyber knife business, a component of Memorial, were distributed to NFCS in addition to cash of approximately $0.8 million, 50% of which was paid by the Company, representing the difference in the value of the cyber knife assets distributed and the value of the 51% NFCS ownership interest in Memorial. The Company records its ownership interest under the equity method of accounting for an investment in an unconsolidated joint venture.

 

At March 31, 2012 and December 31, 2011, the Company’s investment in Memorial was approximately $4.0 million 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
March 31,

 

 

 

2012

 

2011

 

Net revenue

 

$

604

 

$

590

 

Expenses

 

379

 

273

 

Net income

 

$

225

 

$

317

 

 

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

 

Balance at December 31, 2011

 

$

3,951

 

Distributions from joint venture

 

(103

)

Equity interest in net earnings of joint venture

 

112

 

Balance at March 31, 2012

 

$

3,960

 

 

On March 31, 2012 we purchased a 50.1% membership interest in Santa Maria Radiation, LLC, which owns the treatment center and administrative building we currently lease at that location, for an aggregate purchase price of $0.9 million.

 

8. Related-Party Transactions

 

The Company has agreed to pay an annual sponsor fee to Genstar Capital, LLC, the beneficial owner of common stock of the Company. The Company accrued $0.4 million and paid $0.4 million for the three months ended March 31, 2012 and 2011, respectively, which is 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 $1.9 million and $2.0 million for its medical services for the three months ended March 31, 2012 and 2011, respectively.

 

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 March 31, 2012 and 2011.

 

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Table of Contents

 

9. Guarantors of Debt

 

The Company is the borrower under the Senior 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 the Company 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 previously reported. The condensed consolidating financial statements for the Company, the guarantors and the non-guarantors are as follows:

 

Consolidating Balance Sheets

For the Three Months Ended March 31, 2012

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

14,101

 

$

 

$

 

$

14,101

 

Accounts receivable, less allowances of $1,909

 

 

17,635

 

 

 

17,635

 

Deferred income taxes

 

 

1,391

 

 

 

1,391

 

Other current assets and prepaid expenses

 

 

3,551

 

 

 

3,551

 

Total current assets

 

 

36,678

 

 

 

36,678

 

Property and equipment, net

 

 

29,415

 

 

 

29,415

 

Goodwill

 

 

174,353

 

 

 

174,353

 

Intangibles and other assets

 

5,964

 

50,209

 

70

 

 

56,243

 

Intercompany receivable

 

161,730

 

(161,846

)

116

 

 

 

Investment in subsidiaries

 

82,660

 

127

 

 

(82,787

)

 

Total assets

 

$

250,354

 

$

128,936

 

$

186

 

$

(82,787

)

$

296,689

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

9,253

 

$

8,985

 

$

 

$

 

$

18,238

 

Current portion of long-term debt and capital leases

 

 

1,483

 

 

 

1,483

 

Other current liabilities

 

 

466

 

59

 

 

525

 

Total current liabilities

 

9,253

 

10,934

 

59

 

 

20,246

 

Long-term debt, net of unamortized discount of $2,946, less current portion

 

207,054

 

 

 

 

207,054

 

Capital leases, less current portion

 

 

1,827

 

 

 

1,827

 

Other long-term liabilities

 

 

2,415

 

 

 

2,415

 

Deferred income tax liabilities

 

(17,045

)

28,694

 

 

 

11,649

 

Total liabilities

 

199,262

 

43,870

 

59

 

 

243,191

 

Total Company stockholders’ equity

 

51,039

 

 

 

 

51,039

 

Noncontrolling interests

 

 

2,459

 

 

 

2,459

 

Subsidiary equity (deficit)

 

 

82,660

 

127

 

(82,787

)

 

Total equity

 

51,039

 

85,119

 

127

 

(82,787

)

53,498

 

Total liabilities and stockholders’ equity (deficit)

 

$

250,301

 

$

128,989

 

$

186

 

$

(82,787

)

$

296,689

 

 

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Table of Contents

 

Consolidating Balance Sheets

For the Year Ended December 31, 2011

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

6,988

 

$

 

$

 

$

6,988

 

Accounts receivable, less allowances of $1,788

 

 

18,812

 

 

 

18,812

 

Deferred income taxes

 

 

1,391

 

 

 

1,391

 

Other current assets and prepaid expenses

 

 

3,468

 

 

 

3,468

 

Total current assets

 

 

30,659

 

 

 

30,659

 

Property and equipment, net

 

 

31,117

 

 

 

31,117

 

Goodwill

 

 

174,353

 

 

 

174,353

 

Intangibles and other assets

 

6,184

 

51,096

 

70

 

 

57,350

 

Intercompany receivable

 

161,730

 

(161,848

)

118

 

 

 

Investment in subsidiaries

 

81,142

 

127

 

0

 

(81,269

)

 

Total assets

 

$

249,056

 

$

125,504

 

$

188

 

$

(81,269

)

$

293,479

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,084

 

$

8,145

 

$

 

$

 

$

11,229

 

Current portion of long-term debt and capital leases

 

 

1,633

 

 

 

1,633

 

Other current liabilities

 

 

385

 

61

 

 

446

 

Total current liabilities

 

3,084

 

10,163

 

61

 

 

13,308

 

Long-term debt, net of unamortized discount of $3,049, less current portion

 

206,951

 

 

 

 

206,951

 

Capital leases, less current portion

 

 

2,146

 

 

 

2,146

 

Other long-term liabilities

 

 

2,403

 

 

 

2,403

 

Deferred income tax liabilities

 

(14,636

)

27,244

 

 

 

12,608

 

Total liabilities

 

195,399

 

41,956

 

61

 

 

237,416

 

Total Company stockholders’ equity

 

53,657

 

 

 

 

53,657

 

Noncontrolling interests

 

 

2,406

 

 

 

2,406

 

Subsidiary equity (deficit)

 

 

81,142

 

127

 

(81,269

)

 

Total equity

 

53,657

 

83,548

 

127

 

(81,269

)

56,063

 

Total liabilities and stockholders’ equity (deficit)

 

$

249,056

 

$

125,504

 

$

188

 

$

(81,269

)

$

293,479

 

 

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Table of Contents

 

Consolidating Statement of Operations

For the Three Months Ended March 31, 2012

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Net revenue

 

$

 

$

24,582

 

$

 

$

 

$

24,582

 

Total operating expenses

 

 

21,589

 

 

 

21,589

 

Income from operations

 

 

2,993

 

 

 

2,993

 

Total other expense, net

 

(6,492

)

(156

)

 

 

(6,648

)

(Loss) income before income taxes

 

(6,492

)

2,837

 

 

 

(3,655

)

Income tax benefit (expense)

 

2,409

 

(1,450

)

 

 

959

 

(Loss) income before equity in earnings of consolidated subsidiaries

 

(4,083

)

1,387

 

 

 

(2,696

)

Equity in earnings (losses) of consolidated subsidiaries

 

1,387

 

 

 

(1,387

)

 

Net (loss) income

 

(2,696

)

1,387

 

 

(1,387

)

(2,696

)

Less: Net income attributable to noncontrolling interest

 

 

53

 

 

(53

)

 

Net (loss) income attributable to the Company

 

$

(2,696

)

$

1,334

 

$

 

$

(1,334

)

$

(2,696

)

 

Consolidating Statement of Operations

For the Three Months Ended March 31, 2011

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Net revenue

 

$

 

$

25,760

 

$

 

$

 

$

25,760

 

Total operating expenses

 

 

21,764

 

 

 

21,764

 

Income from operations

 

 

3,996

 

 

 

3,996

 

Total other expense, net

 

(6,410

)

(277

)

 

 

(6,687

)

(Loss) income before income taxes

 

(6,410

)

3,719

 

 

 

(2,691

)

Income tax benefit (expense)

 

2,359

 

(1,363

)

 

 

996

 

(Loss) income before equity in earnings of consolidated subsidiaries

 

(4,051

)

2,356

 

 

 

(1,695

)

Equity in earnings (losses) of consolidated subsidiaries

 

2,356

 

 

 

(2,356

)

 

Net (loss) income

 

$

(1,695

)

$

2,356

 

$

 

$

(2,356

)

$

(1,695

)

 

12



Table of Contents

 

Consolidating Statements of Cash Flow

For the Three Months Ended March 31, 2012

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,696

)

$

1,387

 

$

 

$

(1,387

)

$

(2,696

)

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

 

 

 

 

 

 

 

 

 

 

 

Equity interest in net earnings of joint venture

 

 

(112

)

 

 

(112

)

Depreciation and amortization

 

 

3,943

 

 

 

3,943

 

Deferred income tax provision

 

(2,409

)

1,450

 

 

 

(959

)

Other, net

 

 

1,213

 

 

 

1,213

 

Changes in operating assets and liabilities

 

5,105

 

1,217

 

 

1,387

 

7,709

 

Net cash provided by operating activities

 

 

9,098

 

 

 

9,098

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(719

)

 

 

(719

)

Distribution received from unconsolidated joint venture

 

 

103

 

 

 

103

 

Investment in unconsolidated joint venture

 

 

(900

)

 

 

(900

)

Net cash used in investing activities

 

 

(1,516

)

 

 

(1,516

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Principal repayments of debt

 

 

(133

)

 

 

(133

)

Principal repayments of capital leases

 

 

(336

)

 

 

(336

)

Net cash used in financing activities

 

 

(469

)

 

 

(469

)

Net decrease in cash

 

 

7,113

 

 

 

7,113

 

Cash, beginning of period

 

 

6,988

 

 

 

6,988

 

Cash, end of period

 

$

 

$

14,101

 

$

 

$

 

$

14,101

 

 

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Table of Contents

 

Consolidating Statements of Cash Flow

For the Three Months Ended March 31, 2011

(In Thousands)

 

 

 

Issuer
OnCure
Holdings,
Inc.

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Eliminations/
Adjustments

 

Total

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,695

)

$

2,356

 

$

 

$

(2,356

)

$

(1,695

)

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

 

 

 

 

 

 

 

 

 

 

 

Equity interest in net earnings of joint venture

 

 

(78

)

 

 

(78

)

Depreciation and amortization

 

 

4,565

 

 

 

4,565

 

Deferred income tax provision

 

(2,359

)

1,363

 

 

 

(996

)

Other, net

 

 

1,380

 

 

 

1,380

 

Changes in operating assets and liabilities

 

4,054

 

(2,784

)

 

2,356

 

3,626

 

Net cash provided by operating activities

 

 

6,802

 

 

 

6,802

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,654

)

 

 

(1,654

)

Distribution received from unconsolidated joint venture

 

 

75

 

 

 

75

 

Net cash used in investing activities

 

 

(1,579

)

 

 

(1,579

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

Principal repayments of debt

 

 

(132

)

 

 

(132

)

Principal repayments of capital leases

 

 

(428

)

 

 

(428

)

Payment of debt issuance costs

 

 

(17

)

 

 

(17

)

Net cash used in financing activities

 

 

(577

)

 

 

(577

)

Net increase in cash

 

 

4,646

 

 

 

4,646

 

Cash, beginning of period

 

 

7,047

 

 

 

7,047

 

Cash, end of period

 

$

 

$

11,693

 

$

 

$

 

$

11,693

 

 

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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 and, in certain cases with integrated group practices, 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. Radiation oncology treatments are primarily performed with a linear accelerator, or linac, which uses high-energy photons or electrons to destroy a tumor. We currently provide services to a network of 11 affiliated physician groups that treat cancer patients at our 38 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 38 treatment centers includes 16 treatment centers in California, 18 treatment centers in Florida and four treatment centers in Indiana.  We currently have MSAs with 11 affiliated physician groups, consisting of approximately 65 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. 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 a high 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 have resulted in more attractive reimbursement rates for our affiliated physician groups.

 

For the three months ended March 31, 2012, our net revenue, operating income and Adjusted EBITDA (as defined below) were $24.6 million, $3.0 million and $8.1 million, respectively, compared to $25.8 million, $4.0 million and $9.6 million, respectively, for the same period in 2011. The year-over-year decrease in net revenue, operating income and Adjusted EBITDA were principally due to a decrease in CBT (as defined below) census and IMRT (as defined below) treatments in 2012, and a decrease in the Center for Medicare & Medicaid Services, or CMS, reimbursement rates for the three months ended March 31, 2012.

 

Our Services

 

Radiation therapy treatments are primarily performed with a linac which uses high-energy photons or electrons to destroy a 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 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

 

15



Table of Contents

 

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 38 treatment centers, 34 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 26 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:  PET 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 as it was 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 metabolic cancer cells detection of PET with an anatomical picture of the tumor on a CT. These services are provided by five of our centers.

 

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·                  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 18 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.

 

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 months ended March 31, 2012 was $24.6 million.

 

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 months ended March 31, 2012 were $21.6 million.

 

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.

 

Acquisitions and Developments

 

We expect to continue to selectively 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.

 

On March 31, 2012 we purchased a 50.1% membership interest in Santa Maria Radiation, LLC, which owns the treatment center and administrative building we currently lease in Santa Maria, California, for an aggregate purchase price of $0.9 million.

 

On July 19, 2011, we received approval from the State of California to provide cancer patient treatment at a 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 and began cancer patient treatments during August 2011.

 

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On May 3, 2011, the Company was notified by Northeast Florida Cancer Services, LLC, or NFCS, an affiliate of Hospital Corporation of America, of its intent to divest of its 51% ownership in Memorial Southside Cancer Center, LLC, or Memorial. The Company and Ninth City Landowners, LLP, or Ninth City, each owned a 24.5% interest in Memorial. On August 31, 2011, the Company and Ninth City jointly acquired NFCS’s 51% ownership. As a result of the transaction, the Company and Ninth City each own 50% of Memorial. The assets of the cyber knife business, a component of Memorial, were distributed to NFCS in addition to cash of approximately $0.8 million, 50% of which was paid by Oncure, representing the difference in the value of the cyber knife assets distributed and the value of the 51% NFCS ownership interest in Memorial. The Company records its ownership interest under the equity method of accounting for an investment in an unconsolidated joint venture.

 

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 was 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 amended to include a 40% equity interest for the Company and Meadows and a 20% equity interest for Florida Radiation Oncology Group, LLC. On May 3, 2011, the Amended and Restated 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. We have not contributed any money to the development as of March 31, 2012. Development activities began during the second quarter of 2011 and are expected to conclude during the fourth quarter 2012 with the commencement of patient treatment. The Company records its ownership interest under the equity method of accounting for an investment in an unconsolidated joint venture.

 

On December 1, 2011, the Company contributed all of the existing assets, operations and liabilities of its Simi Valley Cancer Center to a newly formed California limited liability company, Simi Valley Cancer Center Management LLC (the “Simi Valley LLC”). Simi Valley Hospital & Health Care Services, a nonprofit hospital, purchased a 50% interest in the Simi Valley LLC for $2.0 million. The Simi Valley LLC will provide technical clinical and management services to one of our affiliated physician groups.

 

Third-Party Contracting

 

Our affiliated physician groups receive payments for their services and treatments rendered to patients covered by third-party payors and government programs. 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 services necessary for payment. 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.

 

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.

 

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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
March 31,

 

 

 

2012

 

2011

 

Third-party payors

 

54

%

53

%

Medicare

 

39

%

40

%

Medicaid

 

6

%

6

%

Self-pay

 

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. Revenue consists primarily of net patient service revenue that is recorded based upon established billing rates less allowances for contractual adjustments.  Estimates of contractual allowances for patients with healthcare coverage are based upon the payment terms specified in the related contractual agreements.  Revenue related to uninsured patients and co-payment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts).  We record a provision for bad debts based primarily on historical collection experience related to these uninsured accounts to record the net self-pay accounts receivable at the estimated amounts we expect to collect. 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 CMS and are typically lower than 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. Further, under recent legislative reforms, identified Medicare overpayments that have not been repaid by our affiliated physician groups within 60 days are subject to False Claims Act liability, which include, among other things, civil penalties and exclusions from government healthcare groups. CMS recently proposed a rule that would create a 10-year “lookback period,” requiring repayment for such overpayments within 10 years of the date the monies were received. It is uncertain if the proposed rule would be finalized or how it would impact our revenues. We depend on payments from government sources and any changes in Medicare or Medicaid programs could result in an increase or 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 months ended March 31, 2012:

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Statement of Operations Data:

 

 

 

 

 

Net revenue

 

$

24,582

 

$

25,760

 

Cost of operations:

 

 

 

 

 

Salaries and benefits

 

8,322

 

8,557

 

Depreciation and amortization

 

3,943

 

4,565

 

General and administrative expenses

 

9,324

 

8,642

 

Total operating expenses

 

21,589

 

21,764

 

Income from operations

 

2,993

 

3,996

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(6,720

)

(6,664

)

Other income (expense)

 

72

 

(23

)

Total other expense

 

(6,648

)

(6,687

)

Loss before income taxes

 

(3,655

)

(2,691

)

Income tax benefit

 

959

 

996

 

Net loss

 

(2,696

)

(1,695

)

Less: Net income attributable to noncontrolling interest

 

53

 

 

Net loss attributable to OnCure Holdings, Inc.

 

$

(2,749

)

$

(1,695

)

 

Comparison of the Three Months Ended March 31, 2012 and 2011

 

Net revenue.  Net revenue for the three months ended March 31, 2012 was $24.6 million compared to $25.8 million for the same period in 2011, a decrease of $1.2 million or 4.7%, primarily due to a 7% decrease in CBT census, a 5% decrease in IMRT treatments in 2012 and approximately a 2.6% decrease in net revenue related to a decrease in CMS reimbursement rates for the three months ended March 31, 2012.

 

Salaries and benefits.  Salaries and benefits for the three months ended March 31, 2012 was $8.3 million compared to $8.6 million for the same period in 2011, a decrease of $0.3 million, or 3.5%, primarily due to a $0.3 million net decrease of incentive and retention based compensation expense for 2012.

 

Depreciation and amortization.  Depreciation and amortization expense for the three months ended March 31, 2012 was $3.9 million compared to $4.6 million for the same period in 2011, a decrease of $0.7 million, or 15.2%, primarily due to assets which became fully depreciated.

 

General and administrative expenses.  General and administrative expenses for the three months ended March 31, 2012 were $9.3 million compared to $8.6 million for the same period in 2011, an increase of $0.7 million, or 8.1%, primarily due to an increase of $0.2 million in operating lease expense from the addition of two linacs during the second half of 2011, an increase of $0.2 million in equipment related repairs and maintenance expense at the treatment centers, an increase of $0.1 million related to re-organizing physician groups in Florida into a consolidated billing entity, and an increase in other general and administrative expenses of $0.2 million primarily from increased center level operating expenses and outside services related to business development.

 

Interest expense.  Interest expense for the three months ended March 31, 2012 remained comparable to the same period in 2011 at $6.7 million.

 

Income tax benefit.  Income tax benefit for the three months ended March 31, 2012 remained comparable to the same period in 2011 at $1.0 million.

 

Net Loss.  Net loss for the three months ended March 31, 2012 was $2.7 million compared to $1.7 million for the same period in 2011, an increase of $1.0 million, or 58.8%, primarily due to a decrease in net revenue and an increase in general and administrative expenses, offset by a decrease in depreciation and amortization and an increase in income tax benefit as discussed above.

 

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Liquidity and Capital Resources

 

As of March 31, 2012, we had total cash and cash equivalents of $14.1 million, $207.1 million of outstanding long-term indebtedness, net of discount, and availability under our Revolving Credit Facility, subject to certain covenants and restrictions, of up to $40.0 million, which may be increased pursuant to the terms of the indenture governing the Senior Notes and the agreement governing our Revolving Credit Facility.

 

On May 13, 2010, we concluded an offering for $210.0 million of 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 restrictions and conditions. The Revolving Credit Facility is undrawn as of March 31, 2012 and expires in May 2015.

 

Our primary ongoing liquidity requirements are expected to be for working capital, debt service, capital expenditures and acquisitions. We may 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 March 31, 2012 we purchased a 50.1% membership interest in Santa Maria Radiation, LLC, which owns the treatment center and administrative building we currently lease at that location, for an aggregate purchase price of $0.9 million.

 

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 increased $2.3 million to $9.1 million for the three months ended March 31, 2012 compared to $6.8 million in 2011. The increase was primarily a result of an increase in cash provided by collections which reduced accounts receivable balances by $3.0 million and an increase in accounts payable and accrued expenses of $0.8 million, offset by an increase in net loss of $1.0 million and a decrease in noncash depreciation and amortization expense of $0.6 million.

 

Cash Flows Used In Investing Activities

 

Net cash used in investing activities decreased by $0.1 million to $1.5 million for the three months ended March 31, 2012 compared to $1.6 million in 2011. The decrease was primarily due to a decrease in capital expenditures of approximately $1.0 million offset by an investment in unconsolidated joint venture of $0.9 million.

 

Cash Used In Financing Activities

 

Net cash used in financing activities decreased by $0.1 million to $0.5 million for the three months ended March 31, 2012 compared to $0.6 million in 2011. The decrease was primarily due to a decrease of $0.1 million for principal repayments on capital leases.

 

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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, 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;

 

·                  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 
March 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Net loss

 

$

(2,749

)

$

(1,695

)

Depreciation and amortization

 

3,943

 

4,565

 

Interest expense

 

6,720

 

6,664

 

Interest and other income, net

 

40

 

101

 

Income tax benefit

 

(959

)

(996

)

EBITDA

 

6,995

 

8,639

 

Plus:

 

 

 

 

 

Management fees (a)

 

375

 

375

 

Stock-based compensation expense

 

131

 

95

 

Acquisition audits and related expenses (b)

 

103

 

10

 

MSA legal expenses (c)

 

65

 

 

Center closure costs (d)

 

 

100

 

Other expenses (e)

 

443

 

335

 

Adjusted EBITDA

 

$

8,112

 

$

9,554

 

 


(a)                                  Represents Genstar management fees.

 

(b)                                 Includes expenses for acquisition related activities.

 

(c)                                  Represents professional fees related to the ICON MSA renewal.

 

(d)                                 Includes the disposal of assets at a previously closed center and costs related to a services rate reconciliation in 2011.

 

(e)                                  Includes deferred rent amortization of $0.1 million for 2012 and 2011; costs related to re-organizing physician groups in Florida into a consolidated billing entity of $0.3 million and $0.1 million for 2012 and 2011, respectively; $0.1 million conditional management retention expense in 2012; and $0.1 million of professional fees associated with registration of Senior Notes under the Securities Act of 1933 for 2011.

 

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.

 

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 might at times enter into derivative financial

 

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Table of Contents

 

instruments, although we have not yet entered into any such arrangement or instrument. 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 March 31, 2012, 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 Senior 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

 

During the quarter ended March 31, 2012, there were no changes in our internal controls that have materially affected or are reasonably likely to have materially affected our internal control over financial reporting.

 

Part II

 

Item 1.          Legal Proceedings

 

We are involved in certain legal actions and claims arising in the ordinary course of its business. It is the opinion of management, based on advice of legal counsel, that such litigation and claims will be resolved without material adverse effect on our consolidated financial position, results of operations, or cash flows.

 

Pursuant to a Management Services Agreement (the “ICON MSA”), dated March 1, 2005, by and among USCC Florida Acquisition Corp., FROG Oncure Southside, LLC and Oncure Medical Corp., or collectively, OnCure Medical, and Integrated Community Oncology Network, LLC, or ICON, Oncure Medical currently provides management and administrative services to ICON in exchange for a management fee.  The ICON MSA fixed an initial term to run until October 11, 2011, but provided for an automatic renewal of the MSA for an additional five year term unless (a) there had 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 provided OnCure Medical 90-days notice of its intent to terminate.  On July 8, 2011, ICON notified OnCure Medical that it sought to terminate the ICON MSA effective October 11, 2011, alleging material changes in the management fees and management services under the ICON MSA as grounds for the termination.  OnCure Medical and ICON participated in mediation to resolve the matter, but were unable to reach an agreement.  Subsequently, OnCure Medical and ICON attempted to resolve the dispute pursuant to the arbitration provisions provided for in the ICON MSA.  To that end, OnCure Medical and ICON entered into a Standstill Agreement under which each agreed to continue to perform and discharge their respective obligations under the ICON MSA from the date of the Standstill Agreement until either: (i) an arbitrator issues a final award allowing ICON to terminate the ICON MSA; or (ii) the ICON MSA terminates by its own terms or by agreement of the parties.  Oncure Medical and ICON are currently engaged in arbitration.  If Oncure Medical is unsuccessful in enforcing the automatic renewal of the ICON MSA, or if it is unable to negotiate a new management services agreement with ICON on terms that are beneficial to Oncure Medical, the results of operations of the Company could be significantly impacted.

 

On October 28, 2011, we filed a complaint in the Delaware Court of Chancery against Shyam B. Paryani, M.D., the former Chairman of our board of directors, who is also a Director of ICON. The complaint alleges that Mr. Paryani breached his fiduciary duties of loyalty to the Company by engaging in self-dealing, self-enrichment, and other actions materially harmful to the Company’s

 

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business operations, particularly with regard to the ICON MSA.  The complaint seeks to recover for the damages caused by the breaches, in addition to all costs and expenses incurred in bringing the action.  We do not expect the outcome of this matter to have a material adverse effect on the financial condition, results of operations or cash flows when taken as a whole.

 

On November 1, 2011, ICON filed a petition for a declaratory statement from the Florida Board of Medicine.  In the petition, ICON claimed that its MSA with OnCure Medical violates federal and state law, including the Florida Anti-Fee Splitting Statute.  On November 14, 2011, Oncure Medical moved to intervene and to dismiss ICON’s petition.  On November 18, 2011, ICON withdrew its petition.

 

We are involved in various other lawsuits and claims arising in the ordinary course of business.  These other matters are, in the opinion of management, immaterial both individually and in the aggregate with respect to our consolidated financial position, liquidity or results of operations. Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation, investigation, inquiry or claim, management is currently unable to predict the ultimate outcome of any litigation, investigation, inquiry or claim, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome.  In view of the unpredictable nature of such matters, we cannot provide any assurances regarding the outcome of any litigation, investigation, inquiry or claim to which we are a party or the impact on us of an adverse ruling in such matters.

 

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, 2011, 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. 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.

 

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

 

None.

 

Item 3.          Defaults Upon Senior Securities

 

None.

 

Item 4.          Mine Safety Disclosures

 

None.

 

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 May 9, 2012.

 

 

ONCURE HOLDINGS, INC.

 

 

 

 

 

By:

/s/ TIMOTHY A. PEACH

 

 

Timothy A. Peach

 

 

Chief Financial Officer

 

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Exhibit Index

 

Exhibit

 

Description

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a — 14(a) and Rule 15d — 14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a — 14(a) and Rule 15d — 14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101*

 

The following financial information from the quarterly report on Form 10-Q of OnCure Holdings, Inc. for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheet at March 31, 2012 and December 31, 2011, (ii) the Consolidated Statement of Income for the three-month periods ended March 31, 2012 and 2011, (iii) the Consolidated Statement of Cash Flows for the three-month periods ended March 31, 2012 and 2011, and (iv) Notes to Consolidated Financial Statements.

 


*                                         Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 

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