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, assisting with 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. On July 6, 2012 the Center for
Medicare & Medicaid Services, or CMS, proposed an aggregate payment reduction of
15% for radiation oncology. The proposed changes, if finalized, would take
effect January 1, 2013, and have a material adverse impact on net revenue and
results of operations. For additional discussion regarding the CMS proposal and
attendant risks, please see Part II, Item 1A - "Risk Factors" in this report.
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 60 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 six months ended June 30, 2012, our net revenue, operating income and
Adjusted EBITDA (see "Discussion of Non-GAAP Information" below) were
$49.0 million, $5.6 million and $15.6 million, respectively, compared to
$51.2 million, $7.3 million and $18.3 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 the number of patients
being treated at our centers and a decrease in CMS reimbursement rates for the
six months ended June 30, 2012. If the CMS proposed payment reductions for free
standing radiation oncology clinics are finalized, we expect our net revenue,
operating income, and Adjusted EBITDA for fiscal 2013 and forward would be
adversely affected.
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
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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 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.
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
24 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
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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 four of
our centers.
† High Dose Rate Brachytherapy: This treatment involves the use of
radioactive isotopes placed directly in contact with cancer tissues, which are
then removed when a lethal dose of radiation has been delivered to the cancer.
These services are provided by 17 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 14 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 seven 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 and six months ended June 30, 2012 was $24.4
million and $49.0 million, respectively.
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 staff and the
professionals and employees working at our treatment centers other than the
radiation oncologists; (ii) general and administrative expenses, including
maintenance, rent, utilities, insurance and other expenses for our corporate and
administrative offices and treatment centers; and (iii) depreciation and
amortization. The operating costs of the treatment centers are our
responsibility. Operating expenses for the three and six months ended June 30,
2012 was $21.8 million and $43.4 million, respectively.
Factors Affecting our Growth
We seek to drive growth by increasing our same-center operating performance,
acquiring and developing new treatment centers in both our current and new
markets and capitalizing on our receivables management expertise to maximize
collections and benefitting from payors' increased acceptance of, and
reimbursement for, next generation treatment technologies. On July 6, 2012 CMS
proposed an aggregate payment reduction of 15% for radiation oncology. The
proposed changes, if finalized, would take effect January 1, 2013, and have a
material adverse impact on net revenue and results of operations. We plan to
mitigate some of the adverse impact on 2013 and future net revenue and results
of operations by improving center level operating efficiency through
consolidation, reducing administrative costs and improving the collectability of
billed charges by deploying new billing and collection software tools to
supplement our existing billing and collection software. Some of these
initiatives are being undertaken currently. For additional discussion regarding
the CMS proposal and attendant risks, please see Part II, Item 1A - "Risk
Factors" in this report.
Radiation therapy is a highly competitive business. Our treatment centers face
competition from hospitals, other practitioners and other operators of radiation
oncology treatment centers. Although we have experienced growth in many
geographic areas in our markets, certain geographic areas have seen a decline in
same-center performance due to competition. We are addressing our center level
performance in these areas; however, we cannot guarantee that our efforts will
improve performance in those markets.
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Acquisitions and Developments
We expect 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 a 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.
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 June 30, 2012.
Development activities began during the second quarter of 2011 and are expected
to conclude during the first quarter of 2013 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. These contracts 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.
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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.
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 Six Months
Ended Ended
June 30, June 30,
2012 2011 2012 2011
Third-party payors 56 % 57 % 55 % 55 %
Medicare 37 % 37 % 38 % 39 %
Medicaid 6 % 5 % 6 % 5 %
Self-pay 1 % 1 % 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
health care insurance 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. 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
health care groups. CMS recently proposed a rule that would create a 10-year
"lookback period," requiring repayment for identified overpayments within 10
years of the date the monies were received. It is uncertain if the proposed
rule will be finalized or how it could 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. For example, on July 6, 2012 CMS proposed an aggregate payment
reduction of 15% for radiation oncology. The proposed changes, if finalized,
would take effect January 1, 2013, and we expect would have a material adverse
impact on 2013 and future net revenue and results of operations.
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.
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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.
The following table presents results of operations for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
(in thousands) (in thousands)
Statement of Operations Data:
Net revenue $ 24,432 $ 25,424 $ 49,014 $ 51,184
Cost of operations:
Salaries and benefits 8,043 8,308 16,365 16,865
Depreciation and amortization 3,920 4,521 7,863 9,086
General and administrative expenses 9,856 9,301 19,180 17,943
Total operating expenses 21,819 22,130 43,408 43,894
Income from operations 2,613 3,294 5,606 7,290
Other (expense) income:
Interest expense (6,728 ) (6,715 ) (13,448 ) (13,379 )
Other (expense) income (30 ) (243 ) 42 (266 )
Total other expense (6,758 ) (6,958 ) (13,406 ) (13,645 )
Loss before income taxes (4,145 ) (3,664 ) (7,800 ) (6,355 )
Income tax benefit 1,063 1,358 2,022 2,354
Net loss (3,082 ) (2,306 ) (5,778 ) (4,001 )
Less: Net income attributable to
noncontrolling interest 46 - 99 -
Net loss attributable to OnCure
Holdings, Inc. $ (3,128 ) $ (2,306 ) $ (5,877 ) $ (4,001 )
Comparison of the Three Months Ended June 30, 2012 and 2011
Net revenue. Net revenue for the three months ended June 30, 2012 was
$24.4 million compared to $25.4 million for the same period in 2011, a decrease
of $1.0 million or 3.9%, primarily due to a 3.4% decrease in CBT treatments, a
2.6% decrease in IMRT treatments in 2012 and a 2.6% decrease in net revenue
related to a decrease in CMS reimbursement rates for the three months ended
June 30, 2012.
Salaries and benefits. Salaries and benefits for the three months ended
June 30, 2012 was $8.0 million compared to $8.3 million for the same period in
2011, a decrease of $0.3 million, or 3.6%, primarily due to a $0.2 million net
decrease of incentive and retention based compensation expense for 2012.
Depreciation and amortization. Depreciation and amortization expense for the
three months ended June 30, 2012 was $3.9 million compared to $4.5 million for
the same period in 2011, a decrease of $0.6 million, or 13.3%, primarily due to
assets that became fully depreciated.
General and administrative expenses. General and administrative expenses for
the three months ended June 30, 2012 were $9.9 million compared to $9.3 million
for the same period in 2011, an increase of $0.6 million, or 6.5%, 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 and an increase in other general and
administrative expenses of $0.4 million primarily from increased center level
operating expenses.
Interest expense. Interest expense for the three months ended June 30, 2012
remained comparable to the same period in 2011 at $6.7 million.
Income tax benefit. Income tax benefit for the three months ended June 30, 2012
was $1.1 million compared to $1.4 million for the same period in 2011, a
decrease of $0.3 million, or 21.4%, primarily due to a valuation allowance on
the deferred tax assets offset by an increase in loss before income taxes of
$0.5 million.
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Net Loss. Net loss for the three months ended June 30, 2012 was $3.1 million
compared to $2.3 million for the same period in 2011, an increase of $0.8
million, or 34.8%, primarily due to a decrease in net revenue, an increase in
general and administrative expenses and a decrease in income tax benefit, offset
by a decrease in depreciation and amortization as discussed above.
Comparison of the Six Months Ended June 30, 2012 and 2011
Net revenue. Net revenue for the six months ended June 30, 2012 was
$49.0 million compared to $51.2 million for the same period in 2011, a decrease
of $2.2 million or 4.3%, primarily due to a 5.3% decrease in CBT treatments, a
3.9% decrease in IMRT treatments in 2012 and a 2.6% decrease in net revenue
related to a decrease in CMS reimbursement rates for the six months ended
June 30, 2012.
Salaries and benefits. Salaries and benefits for the six months ended June 30,
2012 was $16.4 million compared to $16.9 million for the same period in 2011, a
decrease of $0.5 million, or 3.0%, primarily due to a $0.5 million net decrease
of incentive and retention based compensation expense for 2012.
Depreciation and amortization. Depreciation and amortization expense for the
six months ended June 30, 2012 was $7.9 million compared to $9.1 million for the
same period in 2011, a decrease of $1.2 million, or 13.2%, primarily due to
assets that became fully depreciated.
General and administrative expenses. General and administrative expenses for
the six months ended June 30, 2012 were $19.2 million compared to $17.9 million
for the same period in 2011, an increase of $1.3 million, or 7.3%, primarily due
to an increase of $0.3 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 $0.2 million related to re-organizing physician groups in Florida
into a consolidated billing entity, and an increase in other general and
administrative expenses of $0.6 million primarily from increased center level
operating expenses.
Interest expense. Interest expense for the six months ended June 30, 2012
remained comparable to the same period in 2011 at $13.4 million.
Income tax benefit. Income tax benefit for the six months ended June 30, 2012
was $2.0 million compared to $2.4 million for the same period in 2011, a
decrease of $0.4 million, or 16.7%, primarily due to a valuation allowance on
the deferred tax assets offset by an increase in loss before income taxes of
$1.4 million.
Net Loss. Net loss for the six months ended June 30, 2012 was $5.9 million
compared to $4.0 million for the same period in 2011, an increase of $1.9
million, or 47.5%, primarily due to a decrease in net revenue, an increase in
general and administrative expenses and a decrease in income tax benefit, offset
by a decrease in depreciation and amortization as discussed above.
Liquidity and Capital Resources
As of June 30, 2012, we had total cash and cash equivalents of $7.3 million,
$207.2 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. To
date, we have not repurchased any of the Senior Notes, although we may, under
appropriate market conditions, do so in the future through cash purchases or
exchange offers, in open market, privately negotiated or other transactions. We
will evaluate any such transactions in light of then-existing market conditions,
taking into account contractual restrictions, our current liquidity and
prospects for future access to capital. The amounts involved may be material.
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
June 30, 2012 and expires in May 2015.
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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 a 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, assuming that our treatment centers continue
to generate positive operating cash flow at or above those for the first six
months of 2012 and that ongoing maintenance capital expenditures will be readily
funded from the treatment centers' annual operating cash flow, 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. We are currently accruing, but not paying, the annual management fee
that Genstar receives under its advisory services agreement with us. Such
accrued amounts are due and could become payable at any time at the request of
Genstar. 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.
On July 6, 2012 CMS proposed an aggregate payment reduction of 15% for radiation
oncology. The proposed changes, if finalized, would take effect January 1,
2013, and have a material adverse impact on net revenue and cash generated from
operations. We plan to mitigate some of the adverse impact on 2013 and future
net revenue and cash generated from operations by improving center level
operating efficiency through consolidation, reducing administrative costs and
improving the collectability of billed charges by deploying new billing and
collection software tools to supplement our existing billing and collection
software. Some of these initiatives are being undertaken currently. For
additional discussion regarding the CMS proposal and attendant risks, please see
Part II, Item 1A - "Risk Factors" in this report.
Radiation therapy is a highly competitive business and our treatment centers
face competition from hospitals, other practitioners and other operators of
radiation oncology treatment centers. Although we have experienced growth in
many geographic areas in our markets, certain geographic areas have seen a
decline in cash generated from operations as a result of a decline in
same-center performance due to competition. We are addressing our center level
performance in these areas, however, we cannot guarantee that our efforts will
improve cash generated from operations in those markets or that we will have
sufficient cash resources to execute on our mitigation strategies.
Cash Flows Provided By Operating Activities
Net cash provided by operating activities increased $0.6 million to $3.5 million
for the six months ended June 30, 2012 compared to $2.9 million in 2011. The
increase was primarily a result of an increase in cash provided by collections
which reduced accounts receivable balances by $3.4 million offset by an increase
in net loss of $1.8 million.
Cash Flows Used In Investing Activities
Net cash used in investing activities decreased by $0.4 million to $2.2 million
for the six months ended June 30, 2012 compared to $2.6 million in 2011. The
decrease was primarily due to a decrease in capital expenditures of
approximately $1.4 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 $0.2 million to $0.9 million
for the six months ended June 30, 2012 compared to $1.1 million in 2011. The
decrease was primarily due to a decrease of $0.2 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 Six Months Ended
June 30, June 30,
2012 2011 2012 2011
(in thousands)
Net loss $ (3,128 ) $ (2,306 ) $ (5,877 ) $ (4,001 )
Depreciation and amortization 3,920 4,521 7,863 9,086
Interest expense 6,728 6,715 13,448 13,379
Interest and other income, net 72 328 112 429
Income tax benefit (1,063 ) (1,358 ) (2,022 ) (2,354 )
EBITDA 6,529 7,900 13,524 16,539
Plus:
Management fees (a) 375 375 750 750
Stock-based compensation expense 133 95 264 190
MSA legal expenses (b) 96 195 161 195
Acquisition related expenses (c) - 11 103 21
Center closure costs (d) - - - 100
Other expenses (e) 389 136 832 471
Adjusted EBITDA $ 7,522 $ 8,712 $ 15,634 $ 18,266
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(a) Represents Genstar management fees.
(b) Represents professional fees related to the ICON MSA
renewal.
(c) Includes expenses for acquisition related activities.
(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
each of the six months ended June 30, 2012 and 2011; costs related to
re-organizing physician groups in Florida into a consolidated billing entity of
$0.4 million and $0.2 million for the six months ended June 30, 2012 and 2011,
respectively; $0.2 million conditional management retention expense for the six
months ended June 30, 2012; $0.1 million related to a nonrecurring services
adjustment for the six months ended June 2012; and $0.1 million of professional
fees associated with registration of Senior Notes under the Securities Act of
1933 for the six months ended June 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.
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