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RADIATION THERAPY SERVICES HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

You are cautioned not to place undue reliance on these forward-looking statements, which apply on and as of the date of this Form 10- Q. References in this Quarterly Report on Form 10- Q to "we", "us", "our" and "the Company and Parent" are references to Radiation Therapy Services Holdings, Inc. and its subsidiaries, consolidated professional corporations and...

Edgar Online, Inc.
The following discussion and analysis should be read in conjunction with the
unaudited interim condensed consolidated financial statements and related notes
included elsewhere in this Form 10-Q.  This section of this Quarterly Report on
Form 10-Q contains forward-looking statements that involve substantial risks and
uncertainties, such as statements about our plans, objectives, expectations and
intentions. These statements may be identified by the use of forward-looking
terminology such as "anticipate", "believe", "continue", "could", "estimate",
"intend", "may", "might", "plan", "potential", "predict", "should", or "will" or
the negative thereof or other variations thereon or comparable terminology. We
have based these forward-looking statements on our current expectations,
assumptions, estimates and projections. While we believe these expectations,
assumptions, estimates and projections are reasonable, such forward-looking
statements are only predictions and involve known and unknown risks and
uncertainties, many of which are beyond our control. These and other important
factors, including those discussed in this Quarterly Report on Form 10-Q in the
section titled "Risk Factors" and in the sections titled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2011 (the "Form 10-K") may cause our actual results,
performance or achievements to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements. You are cautioned not to place undue reliance on these
forward-looking statements, which apply on and as of the date of this Form 10-Q.
References in this Quarterly Report on Form 10-Q to "we", "us", "our" and "the
Company and Parent" are references to Radiation Therapy Services Holdings, Inc.
and its subsidiaries, consolidated professional corporations and associations
and unconsolidated affiliates, unless the context requires otherwise. References
in this Quarterly Report on Form 10-Q to "our treatment centers" refer to owned,
managed and hospital based treatment centers.



                                    Overview



We own, operate and manage treatment centers focused principally on providing
comprehensive radiation treatment alternatives ranging from conventional
external beam radiation, Intensity Modulated Radiation Therapy ("IMRT"), as well
as newer, more technologically-advanced procedures. We believe we are the
largest company in the United States focused principally on providing radiation
therapy. We opened our first radiation treatment center in 1983 and, as of
September 30, 2012 we provided radiation therapy services in 126 treatment
centers. Most of our treatment centers are strategically clustered into 28 local
markets in 15 states, including Alabama, Arizona, California, Florida, Kentucky,
Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York, North Carolina,
South Carolina, Rhode Island, and West Virginia and 31 treatment centers are
operated in Latin America, Central America, Mexico and the Caribbean and one
center located in India. Of these 126 treatment centers, 38 treatment centers
were internally developed, 81 were acquired, two were transitioned from
hospital-based treatment centers to freestanding treatment centers and five
involve hospital-based treatment centers and other groups. We have continued to
expand our affiliation with physician specialties in closely related areas
including gynecological and surgical oncology and urology in a limited number of
our local markets to strengthen our clinical working relationships and to evolve
from a freestanding radiation oncology centric model to an Integrated Cancer
("ICC") model.



On October 19, 2007, our wholly owned subsidiary, RTS entered into an Agreement
and Plan of Merger (the "Merger Agreement") with RT Investments, Parent and RTS
MergerCo, Inc., a wholly-owned subsidiary of Parent, pursuant to RTS MergerCo,
Inc. was merged with and into RTS with RTS as the surviving corporation and as a
wholly-owned subsidiary of Parent (the "Merger"). Upon completion of the Merger,
each share of RTS's common stock outstanding immediately prior to the effective
time of the Merger (other than certain shares held by members of RT Investments'
management team and certain employees) was converted into $32.50 in cash without
interest. The Merger was consummated on February 21, 2008 (the "Closing").
Immediately following the Closing, Parent became the owner of all of the
outstanding common stock of RTS, which in turn, became a wholly-owned indirect
subsidiary of RT Investments, and Vestar Capital Partners, Inc. and its
affiliates became the beneficial owners of approximately 57% of the outstanding
Class A voting equity units of RT Investments and its co-investors became the
beneficial owners of approximately 26% of the outstanding Class A voting equity
units of RT Investments. At September 30, 2012, Vestar and its affiliates
controlled approximately 81% of the Class A voting equity units of RT
Investments through its ability to directly or indirectly control its
co-investors. In addition, at the Closing, the management investors, including
current and former directors and executive officers, either exchanged certain
shares of RTS's common stock or invested cash in RTS, in each case, in exchange
for Class A voting equity units and non-voting preferred equity units of RT
Investments. At the Closing, these management investors as a group became the
beneficial owners of approximately 17% of the outstanding Class A voting equity
units of RT Investments. RT Investments also adopted a management incentive
equity plan pursuant to which certain employees are eligible to receive
incentive unit awards (EMEP and MEP non-voting equity units) from an equity pool
representing up to 12% of the common equity value of RT Investments, which as of
September 30, 2012 was 9.2%. In connection with the



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Closing, Vestar, its affiliates and these management investors invested approximately $627.3 million in equity units of RT Investments.

We use a number of metrics to assist management in evaluating financial condition and operating performance, and the most important follow:

† The number of relative value units (RVU) delivered per day in our freestanding centers;



†          The percentage change in RVUs per day in our freestanding centers;



†          The number of treatments delivered per day in our freestanding
centers;



†          The average revenue per treatment in our freestanding centers;


† The ratio of funded debt to pro-forma adjusted earnings before interest, taxes, depreciation and amortization (leverage ratio); and



†          Facility gross profit



Revenue Drivers



Our revenue growth is primarily driven by expanding the number of our centers,
optimizing the utilization of advanced technologies at our existing centers and
benefiting from demographic and population trends in most of our local markets.
New centers are added or acquired based on capacity, demographics, and
competitive considerations.



The average revenue per treatment is sensitive to the mix of services used in
treating a patient's tumor. The reimbursement rates set by Medicare and
commercial payers tend to be higher for more advanced treatment technologies,
reflecting their higher complexity. A key part of our business strategy is to
make advanced technologies available once supporting economics exist. For
example, we have been utilizing Image Guided Radiation Therapy ("IGRT") and
Gamma Function, a proprietary capability to enable measurement of the actual
amount of radiation delivered during a treatment and to provide immediate
feedback for adaption of future treatments as well as for quality assurance,
where appropriate, now that reimbursement codes are in place for these services.



Operating Costs



The principal costs of operating a treatment center are (1) the salary and
benefits of the physician and technical staff, and (2) equipment and facility
costs. The capacity of each physician and technical position is limited to a
number of delivered treatments, while equipment and facility costs for a
treatment center are generally fixed. These capacity factors cause profitability
to be very sensitive to treatment volume. Profitability will tend to increase as
resources from fixed costs including equipment and facility costs are utilized.



Sources of Revenue By Payer



We receive payments for our services rendered to patients from the government
Medicare and Medicaid programs, commercial insurers, managed care organizations
and our patients directly. Generally, our revenue is determined by a number of
factors, including the payer mix, the number and nature of procedures performed
and the rate of payment for the procedures. The following table sets forth the
percentage of our net patient service revenue we earned based upon the patients'
primary insurance by category of payer in our last fiscal year and the nine
months ended September 30, 2012 and 2011.



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                                     Year Ended     Nine Months Ended
U.S. Domestic                       December 31,      September 30,
Payer                                   2011         2012        2011
Medicare                                    44.9 %     42.8 %      45.3 %
Commercial                                  50.9       53.3        50.5
Medicaid                                     2.8        2.8         2.9
Self pay                                     1.4        1.1         1.3

Total net patient service revenue 100.0 % 100.0 % 100.0 %

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Medicare and MedicaidMedicare is a major funding source for the services we provide and government
reimbursement developments can have a material effect on operating performance.
These developments include the reimbursement amount for each Current Procedural
Terminology ("CPT") service that we provide and the specific CPT services
covered by Medicare. The Centers for Medicare and Medicaid Services ("CMS"), the
government agency responsible for administering the Medicare program,
administers an annual process for considering changes in reimbursement rates and
covered services. We have played, and will continue to play, a role in that
process both directly and through the radiation oncology professional societies.



Since cancer disproportionately affects elderly people, a significant portion of
our net patient service revenue is derived from the Medicare program, as well as
related co-payments. Medicare reimbursement rates are determined by CMS and are
lower than our normal charges. Medicaid reimbursement rates are typically lower
than Medicare rates; Medicaid payments represent approximately 2.8% of our net
patient service revenue for the nine months ended September 30, 2012.



In the final Medicare 2013 Physician Fee Schedule, CMS reduced payments for
radiation oncology by 7 percent.  This reduction relates to (1) the fourth year
of the four-year transition to the utilization of new Physician Practice
Information Survey (PPIS) data, (2) a change in equipment interest rate
assumptions, (3) budget neutrality effects of a proposal to create a new
discharge care management code, (4) input changes for certain radiation therapy
procedures, and (5) certain other revised radiation oncology codes.  The largest
of these changes (accounting for 4 percent of the gross reduction) reflects the
transition of the final 25 percent of PPIS data used in the PERVU methodology.
The change in the CMS interest rate policy (accounting for 3 percent of the
gross reduction) reduces interest rate assumptions in the CMS database from 11
percent to a sliding scale of 5.5 percent to 8 percent.  CMS also is finalizing
its proposal to create a HCPCS G-code to describe transition care management
from a hospital or other institutional stay to a primary physician in the
community (accounting for 1 percent of the gross reduction).  While this policy
benefits primary care, non-primary care physicians are impacted due to the
budget-neutrality of the PFS.  The rule also makes adjustments (accounting for 1
percent of the gross reduction) due to the use of new time of care assumptions
for intensity-modulated radiation therapy (IMRT) and stereotactic body radiation
therapy (SBRT).  Although the reductions in time of care assumptions alone would
have resulted in a gross 7 percent reduction to radiation oncology as we
identified in the proposed rule, CMS in its final rule included updated cost
data submitted by the radiation oncology community for code inputs which
reversed the vast majority of the reduction resulting from the new time of care
assumptions. Total gross reductions in the final rule are offset by a 2 percent
increase due to certain other revised radiation oncology codes, which results in
a total net reduction to radiation oncology of 7 percent.



CMS will receive public comment on the 2013 final Medicare Physician Fee
Schedule through December 31, 2012. The Company, together with other affected
parties, will continue to communicate with CMS to point out the actual costs of
providing radiation therapy care in the freestanding setting.



Medicare reimbursement rates for all procedures under Medicare also are
determined by a formula which takes into account a conversion factor ("CF")
which is updated on an annual basis based on the sustainable growth rate
("SGR").  The CF was scheduled to decrease 24.9% as of January 1, 2011, but
Congress delayed the scheduled cut until the end of 2011. The final Medicare
2012 Physician Fee Schedule, released by CMS on November 1, 2011, would have
resulted in a reimbursement decrease of 27.4% as of January 1, 2012. However,
Congress again delayed the implementation of this payment cut, first through
February 29, 2012 under the Temporary Payroll Tax Cut Continuation Act of 2011,
and then through the end of 2012 under the Middle Class Tax Relief and Job
Creation Act of 2012. If future reductions are not



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suspended, and if a permanent "doc fix" is not signed into law, the currently
scheduled SGR reimbursement decrease (now estimated at 26.5%) will take effect
on January 1, 2013.



In addition, the Joint Select Committee on Deficit Reduction ("JSC") was created
under the Budget Control Act of 2011 and signed into law on August 2, 2011.
Under the law, unless the JSC could achieve $1.2 trillion in savings, an
across-the-board sequestration would occur on January 2, 2013, and each
subsequent year through 2021, to achieve $1.2 trillion in savings. On
November 21, 2011, the JSC released a statement indicating the committee would
be unable to reach agreement, thereby clearing the way for the sequestration
process. Unless Congress acts to reverse the cuts, Medicare providers would be
cut under the sequestration process by 2 percent each year relative to baseline
spending through 2021.



Commercial



Commercial sources include private health insurance as well as related payments
for co-insurance and co-payments. We enter into contracts with private health
insurance and other health benefit groups by granting discounts to such
organizations in return for the patient volume they provide.



Most of our commercial revenue is from managed care business and 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
10% of our total net patient service revenue. We receive our managed care
contracted revenue under two primary arrangements. Approximately 99% of our
managed care business is attributable to contracts where a fee schedule is
negotiated for services provided at our treatment centers. For the nine months
ended September 30, 2012 approximately 1% of our net patient service revenue is
attributable to contracts where we bear utilization risk. Although the terms and
conditions of our managed care contracts vary considerably, they are typically
for a one-year term and provide for automatic renewals. If payments by managed
care organizations and other private third-party payers decrease, then our total
revenues and net income would decrease.



Self Pay



Self pay consists of payments for treatments by patients not otherwise covered
by third-party payers, such as government or commercial sources. Because the
incidence of cancer is much higher in those over the age of 65, most of our
patients have access to Medicare or other insurance and therefore the self-pay
portion of our business is less than it would be in other circumstances.
However, we are seeing a general increase in the patient responsibility portion
of our claims and revenue.



We grant a discount on gross charges to self pay payers not covered under other
third party payer arrangements. The discount amounts are excluded from patient
service revenue. To the extent that we realize additional losses resulting from
nonpayment of the discounted charges, such additional losses are included in the
provision for doubtful accounts.



Other Material Factors



Other material factors that we believe will also impact our future financial
performance include:



†                      Patient volume and census;



†                      Continued advances in technology and the related capital
requirements;



†                      Continued affiliation with physician specialties other
than radiation oncology;



†                      Changes in accounting for business combinations 

requiring

that all acquisition-related costs be expensed as incurred;




†                      Our ability to achieve identified cost savings and

operational efficiencies;




†                      Increased costs associated with development and

optimization of our internal infrastructure; and



†                      Healthcare reform.



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                             Results of Operations



The following table summarizes key operating statistics of our results of
operations for our domestic U.S. operations for the three and nine months ended
September 30, 2012 and 2011:



                                    Three Months Ended                       Nine Months Ended
                                       September 30,                           September 30,
Domestic U.S.                       2012         2011 *       % Change       2012         2011 *      % Change

Number of treatment days                 63             64                       191           192

Total RVU's - freestanding
centers                           2,775,821      2,885,434        (3.8 )%  

8,677,857 9,006,924 (3.7 )%


RVU's per day - freestanding
centers                              44,061         45,085        (2.3 )%     45,434        46,911        (3.1 )%

Percentage change in RVU's
per day - freestanding
centers - same practice basis          (5.0 )%        10.7 %                    (5.1 )%        9.5 %

Total treatments -
freestanding centers                119,167        113,346         5.1 %     372,488       355,176         4.9 %

Treatments per day -
freestanding centers                  1,892          1,771         6.8 %       1,950         1,850         5.4 %

Percentage change in revenue
per treatment - freestanding
centers - same practice basis          (3.0 )%        (0.1 )%               

(3.1 )% 2.8 %


Percentage change in
treatments per day -
freestanding centers - same
practice basis                          3.6 %          1.0 %                

3.3 % (0.2 )%


Number of regions at period
end (global)                              9              9

Number of local markets at
period end                               28             28

Treatment centers -
freestanding (global)                   121            112         8.0 %
Treatment centers - hospital
/ other groups (global)                   5              9       (44.4 )%

                                        126            121         4.1 %

Days sales outstanding at
quarter end                              39             44

Percentage change in
freestanding revenues - same
practice basis                         (1.1 )%         0.9 %                

(0.5 )% 3.2 %


Net patient service revenue -
professional services only
(in thousands)                   $   48,239    $    39,198                $  150,066    $  121,732



--------------------------------------------------------------------------------

* Excludes the impact of the termination of a capitated contract in Las Vegas, Nevada




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The following table summarizes key operating statistics of our results of operations for our international operations for the three and nine months ended September 30, 2012 and 2011:



                        Three Months Ended                 Nine Months Ended
                          September 30,                      September 30,
International           2012         2011      % Change     2012       2011**    % Change

Number of new cases

2-D cases                 1,153        1,358                 3,603       4,007

3-D cases                 2,262        1,748                 6,589       5,013

IMRT / IGRT cases           346          393                 1,125       1,024

Total                     3,761        3,499        7.5 %   11,317      10,044       12.7 %



--------------------------------------------------------------------------------

** includes full period operating statistics, including period prior to our acquisition on March 1, 2011



International



Medical Developers' total revenues was $20.6 million for the three months ended
September 30, 2012 which represents a $2.8 million or 15.7% increase from the
$17.8 million for the same period in 2011.  Total revenue was positively
impacted by $1.8 million of revenue from the acquisition of four radiation
treatment facilities in November 2011, the start-up of a new Center in Argentina
during the quarter, growth in treatments in Mexico and Guatemala, and from
improved treatment mix, particularly in Argentina and Mexico.  In addition, we
experienced growth in the number of new cases initiated during the quarter by
262, substantially all of which pertained to the acquired operations in
November 2011.  The trend toward more clinically-advanced cases continued during
the quarter with an increase in the number of higher-revenue 3D treatments vs.
2D treatments as compared to the same period in 2011.



Facility gross profit increased $1.0 million, or 10.0% from $10.0 million to
$11.0 million for the three months ended September 30, 2012 as compared to the
same period in 2011.  Facility-level gross profit as a percentage of total
revenues decreased from 55.9% to 53.3%.  Increases in compensation, facility
rent, and incremental depreciation expense relating to our continued growth and
investment in Latin America, as well as inflation was offset by decreases in
medical supplies and other operating costs, to include lower outsourcing of
scans as a result of recent equipment purchases.



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The following table presents summaries of our results of operations for the three months ended September 30, 2012 and 2011.



                                              Three Months Ended          Three Months Ended
                                              September 30, 2012          September 30, 2011
Revenues:
Net patient service revenue                $    165,385        98.7 %  $    154,335        98.8 %
Other revenue                                     2,131         1.3           1,931         1.2

Total revenues                                  167,516       100.0         156,266       100.0

Expenses:
Salaries and benefits                            87,190        52.0          77,714        49.7
Medical supplies                                 15,686         9.4          12,208         7.8
Facility rent expenses                           10,119         6.0           8,374         5.4
Other operating expenses                         10,001         6.0           8,990         5.8
General and administrative expenses              19,076        11.4          19,209        12.3
Depreciation and amortization                    16,697        10.0          13,629         8.7
Provision for doubtful accounts                   5,425         3.2           4,621         3.0
Interest expense, net                            20,027        12.0          15,454         9.9
Fair value adjustment of earn-out
liability                                         1,261         0.8               -           -
Impairment loss                                  69,946        41.8         237,560       152.0
Foreign currency transaction loss                   140         0.1              35           -
Loss (gain) on foreign currency
derivative contracts                                786         0.5            (232 )      (0.1 )
Total expenses                                  256,354       153.2         397,562       254.5
Loss before income taxes                        (88,838 )     (53.2 )      (241,296 )    (154.5 )
Income tax expense (benefit)                      1,705         1.0         (10,969 )      (7.0 )
Net loss                                        (90,543 )     (54.2 )      (230,327 )    (147.5 )

Net income attributable to
noncontrolling interests - redeemable
and non-redeemable                                 (842 )      (0.5 )          (702 )      (0.4 )
Net loss attributable to Radiation
Therapy Services Holdings, Inc.
shareholder                                $    (91,385 )     (54.7 )%     (231,029 )    (147.9 )%



Comparison of the Three Months Ended September 30, 2012 and 2011



Revenues



Net patient service revenue. For the three months ended September 30, 2012 and
2011, net patient service revenue comprised 98.7% and 98.8%, respectively, of
our total revenues.  In our net patient service revenue for the three months
ended September 30, 2012 and 2011, revenue from the professional-only component
of radiation therapy where we do not bill globally and revenue from the
practices of medical specialties other than radiation oncology, comprised
approximately 28.8% and 25.1%, respectively, of our total revenues.



Other revenue. For the three months ended September 30, 2012 and 2011, other
revenue comprised approximately 1.3% and 1.2%, respectively, of our total
revenues. Other revenue is primarily derived from management services provided
to hospital radiation therapy departments, technical services provided to
hospital radiation therapy departments, billing services provided to
non-affiliated physicians, gain and losses from sale/disposal of medical
equipment, equity interest in net earnings/losses of unconsolidated joint
ventures and income for equipment leased by joint venture entities.



Total revenues. Total revenues increased by $11.2 million, or 7.2%, from $156.3
million for the three months ended September 30, 2011 to $167.5 million for the
three months ended September 30, 2012. Total revenue was positively impacted by
$19.1 million due to our expansion into new practices and treatments centers in
existing local markets and new local markets during 2011 and 2012 through the
acquisition of several urology, medical oncology and surgery practices in
Florida, North Carolina, South Carolina, California and the acquisition of
physician radiation practices in California, Florida, North Carolina and the
acquisition of 4 physician practices in Latin America, the opening of two de
novo centers and two hospital professional services arrangements transitioned to
freestanding as follows:



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Date             Sites       Location              Market                  Type

                         Andalusia,          Southeastern
August 2011          1   Alabama             Alabama               De Novo

                         Redding,
August 2011          1   California          Northern California   Acquisition

                         Broward County -    Broward County -      Hospital-based /
September 2011       2   Florida             Florida               other groups

November 2011        4   Latin America       International         Acquisition

                         Goldsboro and
                         Sampson, North      Eastern North
December 2011        2   Carolina            Carolina              Acquisition

                         Asheville, North    Western North
February 2012        1   Carolina            Carolina              Acquisition

                                                                   Transition from
                         Broward County -    Broward County -      Hospital-based to
March 2012           2   Florida             Florida               freestanding

                         Lakewood Ranch -    Sarasota/Manatee
March 2012           1   Florida             Counties - Florida    Acquisition

August 2012          1   Latin America       International         De Novo




Revenue from CMS for the 2012 PQRI program decreased approximately $0.8 million
and revenues in our existing local markets and practices decreased by
approximately $7.1 million, including a $1.1 million reduction relating to
non-renewal of the capitated contracts in our Las Vegas, Nevada market.  The
decrease in revenue in our existing local markets is predominately due to the
reductions in RVUs for many of our treatment codes effective with the 2012
physician fee schedule and treatment declines for prostate cancer as a result of
the slowing rate of men diagnosed and referred to treatment regimens. In
addition, we had one less treatment day during the quarter ended September 30,
2012, which impacted revenue by approximately $2.3 million. The decrease was
partially offset by increased managed care pricing and organic growth.  We
continue to see stable patient volumes for the period and our percentage
increase in treatments per day at our freestanding centers on a same practice
basis (excluding the impact of the termination of a capitated contract in Las
Vegas, Nevada) was 3.6%.



Expenses



Salaries and benefits. Salaries and benefits increased by $9.5 million, or
12.2%, from $77.7 million for the three months ended September 30, 2011 to $87.2
million for the three months ended September 30, 2012. Salaries and benefits as
a percentage of total revenues increased from 49.7% for the three months ended
September 30, 2011 to 52.0% for the three months ended September 30, 2012.
Additional staffing of personnel and physicians due to our development and
expansion in urology, medical oncology and surgery practices in southwest
Florida, North Carolina, South Carolina and California, the acquisitions of
treatment centers in existing local markets during the latter part of 2011 and
2012, and the expansion into a new region internationally in 2011 contributed
$9.9 million to our salaries and benefits. For existing practices and centers
within our local markets, salaries and benefits decreased $0.4 million due
decreases in our compensation arrangements with certain radiation oncologists
offset by increased salaries related to our physician liaison program and the
expansion of our senior management team.



Medical supplies. Medical supplies increased by $3.5 million, or 28.5%, from
$12.2 million for the three months ended September 30, 2011 to $15.7 million for
the three months ended September 30, 2012. Medical supplies as a percentage of
total revenues increased from 7.8% for the three months ended September 30, 2011
to 9.4% for the three months ended September 30, 2012. Medical supplies consist
of patient positioning devices, radioactive seed supplies, supplies used for
other brachytherapy services, pharmaceuticals used in the delivery of radiation
therapy treatments and chemotherapy-related drugs and other medical supplies.
Approximately $2.7 million of the increase was related to our development and
expansion in urology, medical oncology and surgery practices in southwest
Florida, North Carolina, South Carolina and California, the acquisitions of
treatment centers in existing local markets during the latter part of 2011 and
2012, and the expansion into a new region internationally in 2011. In our
remaining practices and centers in existing local markets, medical supplies
increased by approximately $0.8 million as we continue to see stable patient
volumes and treatment counts in our existing local markets.  These
pharmaceuticals and chemotherapy medical supplies are principally reimbursable
by third-party payers.



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Facility rent expenses. Facility rent expenses increased by $1.7 million, or
20.8%, from $8.4 million for the three months ended September 30, 2011 to
$10.1 million for the three months ended September 30, 2012. Facility rent
expenses as a percentage of total revenues increased from 5.4% for the three
months ended September 30, 2011 to 6.0% for the three months ended September 30,
2012. Facility rent expenses consist of rent expense associated with our
treatment center locations.  Approximately $1.3 million of the increase was
related to our development and expansion in urology, medical oncology and
surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, and the expansion into a new region
internationally in 2011. Facility rent expense in our remaining practices and
centers in existing local markets increased by approximately $0.4 million.



Other operating expenses. Other operating expenses increased by $1.0 million or
11.2%, from $9.0 million for the three months ended September 30, 2011 to $10.0
million for the three months ended September 30, 2012.  Other operating expense
as a percentage of total revenues increased from 5.8% for the three months ended
September 30, 2011 to 6.0% for the three months ended September 30, 2012.  Other
operating expenses consist of repairs and maintenance of equipment, equipment
rental and contract labor.  Approximately $0.9 million of the increase was
related to our development and expansion in urology, medical oncology and
surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, the expansion into a new region
internationally in 2011, and an increase of approximately $0.1 million in our
remaining practices and centers in existing local markets.



General and administrative expenses. General and administrative expenses
decreased by $0.1 million or 0.7%, from $19.2 million for the three months ended
September 30, 2011 to $19.1 million for the three months ended September 30,
2012. General and administrative expenses principally consist of professional
service fees, office supplies and expenses, insurance and travel costs. General
and administrative expenses as a percentage of total revenues decreased from
12.3% for the three months ended September 30, 2011 to 11.4% for the three
months ended September 30, 2012.  The net decrease of $0.1 million in general
and administrative expenses was due to an increase of approximately $1.3 million
relating to our development and expansion in urology, medical oncology and
surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, and the expansion into a new region
internationally in 2011. In addition there was an increase of approximately $1.0
million in litigation settlements with certain physicians and approximately $0.3
million related to expenses for consulting services for the CMS 2013 preliminary
physician fee schedule, offset by a decrease of approximately $0.7 million in
diligence costs relating to acquisitions and potential acquisitions of physician
practices and a decrease of approximately $2.0 million in our remaining
practices and treatments centers in our existing local markets.



Depreciation and amortization. Depreciation and amortization increased by
$3.1 million, or 22.5%, from $13.6 million for the three months ended
September 30, 2011 to $16.7 million for the three months ended September 30,
2012. Depreciation and amortization expense as a percentage of total revenues
increased from 8.7% for the three months ended September 30, 2011 to 10.0% for
the three months ended September 30, 2012.  The increase of $3.1 million in
depreciation and amortization was due to an increase of approximately $1.3
million relating to our development and expansion in urology, medical oncology
and surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, and the expansion into a new region
internationally in 2011. An increase in capital expenditures related to our
investment in advanced radiation treatment technologies in certain local markets
increased our depreciation and amortization by approximately $0.9 million and
$0.9 million increase due to the amortization of our trade name.



Provision for doubtful accounts. The provision for doubtful accounts increased
by $0.8 million, or 17.4%, from $4.6 million for the three months ended
September 30, 2011 to $5.4 million for the three months ended September 30,
2012.  The provision for doubtful accounts as a percentage of total revenues
increased from 3.0% for the three months ended September 30, 2011 to 3.2% for
the three months ended September 30, 2012.  The increase in our provision for
doubtful accounts as a percentage of total revenue is primarily due to the
increase in revenues from our integrated cancer care practices as well as
continued increases in the patient responsibility portion of our revenues as a
result of higher co-pays and deductibles.



Interest expense, net. Interest expense, increased by $4.5 million, or 29.6%,
from $15.5 million for the three months ended September 30, 2011 to
$20.0 million for the three months ended September 30, 2012. The increase is
primarily attributable to an increase of approximately $5.0 million of interest
as a result of the senior secured second lien notes issued in May 2012 of
approximately $350.0 million and additional capital lease financing and the
additional amortization of deferred financing costs and original issue discount
costs of approximately $0.3 million related thereto, and approximately $0.2
million of interest related to international debt, offset by a decrease in our
interest rate swap expense of approximately $1.0 million.



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Fair value adjustment of earn-out liability. On March 1, 2011, we purchased the
remaining 67% interest in MDLLC from Bernardo Dosoretz as well as interests in
the subsidiaries of MDLLC from Alejandro Dosoretz and Bernardo Dosoretz,
resulting in an ownership interest of approximately 91% in the underlying
radiation oncology practices located in South America, Central America, Mexico
and the Caribbean. We also purchased an additional 61% interest in Clinica de
Radioterapia La Asuncion S.A. from Bernardo Dosoretz, resulting in an ownership
interest of 80%. The Company recorded an estimated contingent earn out payment
totaling $2.3 million at the time of the closing of these acquisitions. The earn
out payment is contingent upon certain acquired centers attaining earnings
before interest, taxes, depreciation and amortization targets, is due 18 months
subsequent to the transaction closing, and is payable through Company financing
and issuance of equity units.  At September 30, 2012, we estimated the fair
value of the contingent earn out liability and increased the liability due to
the seller to approximately $3.6 million.  We recorded the $1.3 million to
expense in the fair value adjustment caption in the condensed consolidated
statements of comprehensive loss.



Impairment loss. During the third quarter of 2012, we completed an interim
impairment test for goodwill and indefinite-lived intangible assets as a result
of our review of growth expectations and the release of the final rule issued on
the physician fee schedule for 2013 by CMS on November 1, 2012, which included
certain rate reductions on Medicare payments to freestanding radiation oncology
providers.  In performing this test, we assessed the implied fair value of our
goodwill and intangible assets. As a result, we recorded an impairment loss of
approximately $69.9 million in 2012 primarily relating to goodwill impairment in
certain of our reporting units, including Mid East United States (Northwest
Florida, North Carolina, Southeast Alabama, South Carolina), Central South East
United States (Delmarva Peninsula, Central Maryland, Central Kentucky, South New
Jersey), California, South West United States (central Arizona and Las Vegas,
Nevada), and Southwest Florida of approximately $69.8 million. In addition,
during the third quarter of 2012, an impairment loss of approximately $0.1
million, was recognized related to the impairment of certain leasehold
improvements of a planned radiation treatment facility office relocation in
Monroe, Michigan in the Northeast U.S. region.



During the third quarter of 2011, we completed an interim impairment test for
goodwill and indefinite-lived intangible assets as a result of our review of
growth expectations and the release of the final rule issued on the physician
fee schedule for 2012 by CMS on November 1, 2011, which included certain rate
reductions on Medicare payments to freestanding radiation oncology providers.
In performing this test, we assessed the implied fair value of our goodwill and
intangible assets. As a result, we incurred an impairment loss of approximately
$237.6 million in 2011 primarily relating to goodwill and trade name impairment
in certain of our reporting units, including North East United States (New York,
Rhode Island, Massachusetts and southeast Michigan), California, Southwest U.S.
(Arizona and Nevada) , the Florida east coast, Northwest Florida and Southwest
Florida of approximately $234.9 million and an impairment loss incurred of
approximately $2.7 million in 2011 related to our write-off of our 45%
investment interest in a radio-surgery center in Rhode Island due to continued
operating losses since its inception in 2008.



Loss (gain) on foreign currency derivative contracts.  We are exposed to a
significant amount of foreign exchange risk, primarily between the U.S. dollar
and the Argentine Peso.  This exposure relates to the provision of radiation
oncology services to patients at our Latin American operations and purchases of
goods and services in foreign currencies.  We maintain four foreign currency
derivative contracts which mature on a quarterly basis. For the three months
ended September 30, 2012 and 2011, the expiration of the September 28, 2012
foreign currency derivative contract and the mark to market valuation of the
remaining contracts resulted in a loss of approximately $0.8 million and a gain
of approximately $0.2 million, respectively.



Income taxes.  Our effective tax rate was (1.9)% for the three months ended
September 30, 2012 and 4.5% for the three months ended September 30, 2011. The
change in the effective rate for the three months ended September 30, 2012
compared to the same period of the year prior is primarily due to the fiscal
2011 Q3 release of state tax reserves due to settlements, the fiscal 2011 Q3 tax
benefit attributable to the redution of the deferred tax liability for the
goodwill and trade name impairment, and the relative mix of earnings and tax
rates across jurisdictions and the application of ASC 740-270 to exclude certain
jurisdictions for which the Company is unable to benefit from losses.  As a
result on an absolute dollar basis, the expense for income taxes changed by
$12.7 million from the income tax benefit of $11.0 million for the three months
ended September 30, 2011 to an income tax expense of $1.7 million for the three
months ended September 30, 2012.



Our future effective tax rates could be affected by changes in the relative mix
of taxable income and taxable loss jurisdictions, changes in the valuation of
deferred tax assets or liabilities, or changes in tax laws or interpretations
thereof.  We monitor the assumptions used in estimating the annual effective tax
rate and make adjustments, if required, throughout the year.  If actual results
differ from the assumptions used in estimating our annual effective tax rates,
future income tax expense (benefit) could be materially affected.



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In addition, we are periodically under audit by federal, state, or local
authorities in the areas of income taxes and other taxes. These audits include
questioning the timing and amount of deductions and compliance with federal,
state, and local tax laws. We regularly assess the likelihood of adverse
outcomes from these audits to determine the adequacy of our provision for income
taxes.  To the extent we prevail in matters for which accruals have been
established or is required to pay amounts in excess of such accruals, the
effective tax rate could be materially affected.



Net loss. Net loss decreased by $139.8 million, from $230.3 million in net loss
for the three months ended September 30, 2011 to $90.5 million net loss for the
three months ended September 30, 2012.  Net loss represents 147.5% of total
revenues for the three months ended September 30, 2011 and 54.2% of total
revenues for the three months ended September 30, 2012.



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The following table presents summaries of our results of operations for the nine months ended September 30, 2012 and 2011.



                                               Nine Months Ended           Nine Months Ended
                                              September 30, 2012           September 30, 2011
Revenues:
Net patient service revenue                $     519,432        98.9 %  $    470,305        99.0 %
Other revenue                                      5,783         1.1           4,754         1.0

Total revenues                                   525,215       100.0         475,059       100.0

Expenses:
Salaries and benefits                            276,199        52.6         238,727        50.3
Medical supplies                                  47,785         9.1          37,863         8.0
Facility rent expenses                            29,634         5.6          24,508         5.2
Other operating expenses                          28,663         5.5          24,828         5.2
General and administrative expenses               60,059        11.4          58,514        12.3
Depreciation and amortization                     48,140         9.2          39,082         8.2
Provision for doubtful accounts                   15,286         2.9          12,143         2.6
Interest expense, net                             57,182        10.9          45,261         9.5
Early extinguishment of debt                       4,473         0.9               -           -
Fair value adjustment of earn-out
liability                                          1,261         0.2               -           -
Impairment loss                                   69,946        13.3         237,560        50.0
Gain on fair value adjustment of
previously held equity investment                      -           -            (234 )         -
Foreign currency transaction loss                    234           -              34           -
Loss on foreign currency derivative
contracts                                          1,006         0.2             167           -
Total expenses                                   639,868       121.8         718,453       151.3
Loss before income taxes                        (114,653 )     (21.8 )      (243,394 )     (51.3 )
Income tax expense                                 3,254         0.6          (5,208 )      (1.1 )
Net loss                                        (117,907 )     (22.4 )      (238,186 )     (50.2 )

Net income attributable to
noncontrolling interests - redeemable
and non-redeemable                                (3,231 )      (0.6 )        (3,209 )      (0.7 )
Net loss attributable to Radiation
Therapy Services Holdings, Inc.
shareholder                                $    (121,138 )     (23.0 )%     (241,395 )     (50.9 )%



Comparison of the Nine Months Ended September 30, 2012 and 2011



Revenues



Net patient service revenue. For the nine months ended September 30, 2012 and
2011, net patient service revenue comprised 98.9% and 99.0%, respectively, of
our total revenues.  In our net patient service revenue for the nine months
ended September 30, 2012 and 2011, revenue from the professional-only component
of radiation therapy where we do not bill globally and revenue from the
practices of medical specialties other than radiation oncology, comprised
approximately 28.6% and 25.6%, respectively, of our total revenues.



Other revenue. For the nine months ended September 30, 2012 and 2011, other revenue comprised approximately 1.1% and 1.0%, respectively, of our total revenues. Other revenue is primarily derived from management services provided to hospital radiation therapy departments, technical services provided to hospital radiation therapy departments, billing services provided to non-affiliated physicians, gain and losses from sale/disposal of medical equipment, equity interest in net earnings/losses of unconsolidated joint ventures and income for equipment leased by joint venture entities.




Total revenues. Total revenues increased by $50.1 million, or 10.6%, from $475.1
million for the nine months ended September 30, 2011 to $525.2 million for the
nine months ended September 30, 2012. Total revenue was positively impacted by
$65.3 million due to our expansion into new practices and treatments centers in
existing local markets and new local markets during 2011 and 2012 through the
acquisition of several urology, medical oncology and surgery practices in
Florida, North Carolina, South Carolina, California and the acquisition of
physician radiation practices in



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California, Florida, North Carolina and the acquisition of 30 physician
practices in Latin America, Central America and the Caribbean, the opening of
two de novo centers and an outpatient radiation therapy management services
agreement with a medical group to manage its radiation oncology treatment site
and two hospital professional services arrangements transitioned to freestanding
as follows:



Date             Sites       Location              Market                  Type

                         Latin America,
                         Central America,
                         Mexico and the
March 2011          26   Caribbean           International         Acquisition

                                                                   Hospital-based /
June 2011            1   London, Kentucky    Central Kentucky      other groups

                         Andalusia,          Southeastern
August 2011          1   Alabama             Alabama               De Novo

                         Redding,
August 2011          1   California          Northern California   Acquisition

                         Broward County -    Broward County -      Hospital-based /
September 2011       2   Florida             Florida               other groups

November 2011        4   Latin America       International         Acquisition

                         Goldsboro and
                         Sampson, North      Eastern North
December 2011        2   Carolina            Carolina              Acquisition

                         Asheville, North    Western North
February 2012        1   Carolina            Carolina              Acquisition

                                                                   Transition from
                         Broward County -    Broward County -      Hospital-based to
March 2012           2   Florida             Florida               freestanding

                         Lakewood Ranch -    Sarasota/Manatee
March 2012           1   Florida             Counties - Florida    Acquisition

August 2012          1   Latin America       International         De Novo




Revenue decreased in our existing local markets and practices by approximately
$15.2 million, including a $4.3 million reduction relating to non-renewal of the
capitated contracts in our Las Vegas, Nevada market.  The decrease in revenue in
our existing local markets is predominately due to the reductions in RVUs for
many of our treatment codes effective with the 2012 physician fee schedule and
treatment declines for prostate cancer as a result of the slowing rate of men
diagnosed and referred to treatment regimens. In addition, we had one less
treatment day during the nine months ended September 30, 2012, which impacted
revenue by approximately $2.3 million. The decrease was partially offset by
increased managed care pricing and organic growth.  We continue to see stable
patient volumes for the period and our percentage increase in treatments per day
at our freestanding centers on a same practice basis (excluding the impact of
the termination of a capitated contract in Las Vegas, Nevada) was 3.3%.



Expenses



Salaries and benefits. Salaries and benefits increased by $37.5 million, or
15.7%, from $238.7 million for the nine months ended September 30, 2011 to
$276.2 million for the nine months ended September 30, 2012. Salaries and
benefits as a percentage of total revenues increased from 50.3% for the nine
months ended September 30, 2011 to 52.6% for the nine months ended September 30,
2012.  Additional staffing of personnel and physicians due to our development
and expansion in urology, medical oncology and surgery practices in southwest
Florida, North Carolina, South Carolina and California, the acquisitions of
treatment centers in existing local markets during the latter part of 2011 and
2012, and the expansion into a new region internationally in 2011 contributed
$35.4 million to our salaries and benefits.  In June 2012, we implemented a new
equity-incentive plan, which increased stock compensation by approximately $2.0
million. For existing practices and centers within our local markets, salaries
and benefits increased $0.1 million due to increased salaries related to our
physician liaison program and the expansion of our senior management team offset
by decreases in our compensation arrangements with certain radiation
oncologists.



Medical supplies. Medical supplies increased by $9.9 million, or 26.2%, from
$37.9 million for the nine months ended September 30, 2011 to $47.8 million for
the nine months ended September 30, 2012. Medical supplies as a percentage of
total revenues increased from 8.0% for the nine months ended September 30, 2011
to 9.1% for the nine months ended September 30, 2012. Medical supplies consist
of patient positioning devices, radioactive seed supplies, supplies used for
other brachytherapy services, pharmaceuticals used in the delivery of radiation
therapy treatments and



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chemotherapy-related drugs and other medical supplies. Approximately
$6.6 million of the increase was related to our development and expansion in
urology, medical oncology and surgery practices in southwest Florida, North
Carolina, South Carolina and California, the acquisitions of treatment centers
in existing local markets during the latter part of 2011 and 2012, and the
expansion into a new region internationally in 2011. In our remaining practices
and centers in existing local markets, medical supplies increased by
approximately $3.3 million as we continue to see stable patient volumes and
treatment counts in our existing local markets.  These pharmaceuticals and
chemotherapy medical supplies are principally reimbursable by third-party
payers.



Facility rent expenses. Facility rent expenses increased by $5.1 million, or
20.9%, from $24.5 million for the nine months ended September 30, 2011 to
$29.6 million for the nine months ended September 30, 2012. Facility rent
expenses as a percentage of total revenues increased from 5.2% for the nine
months ended September 30, 2011 to 5.6% for the nine months ended September 30,
2012. Facility rent expenses consist of rent expense associated with our
treatment center locations.  Approximately $4.4 million of the increase was
related to our development and expansion in urology, medical oncology and
surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, and the expansion into a new region
internationally in 2011. In March 2012 we paid approximately $0.4 million to
terminate a lease for our Beverly Hills, California office we closed in
March 2011. Facility rent expense in our remaining practices and centers in
existing local markets increased by approximately $0.3 million.



Other operating expenses. Other operating expenses increased by $3.9 million or
15.4%, from $24.8 million for the nine months ended September 30, 2011 to $28.7
million for the nine months ended September 30, 2012.  Other operating expense
as a percentage of total revenues increased from 5.2% for the nine months ended
September 30, 2011 to 5.5% for the nine months ended September 30, 2012.  Other
operating expenses consist of repairs and maintenance of equipment, equipment
rental and contract labor.  Approximately $4.1 million of the increase was
related to our development and expansion in urology, medical oncology and
surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, and the expansion into a new region
internationally in 2011, offset by a decrease of approximately $0.2 million in
our remaining practices and centers in existing local markets, primarily as a
result of a decrease in operating leases on certain of our medical equipment and
contract labor for radiation therapists.



General and administrative expenses. General and administrative expenses
increased by $1.6 million or 2.6%, from $58.5 million for the nine months ended
September 30, 2011 to $60.1 million for the nine months ended September 30,
2012. General and administrative expenses principally consist of professional
service fees, office supplies and expenses, insurance and travel costs. General
and administrative expenses as a percentage of total revenues decreased from
12.3% for the nine months ended September 30, 2011 to 11.4% for the nine months
ended September 30, 2012. The increase of $1.6 million in general and
administrative expenses was due to an increase of approximately $5.1 million
relating to our development and expansion in urology, medical oncology and
surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, and the expansion into a new region
internationally in 2011. In addition there was an increase of approximately $1.1
million in litigation settlements with certain physicians and approximately $0.3
million related to expenses for consulting services for the CMS 2013 preliminary
physician fee schedule, offset by a decrease of approximately $1.9 million in
diligence costs relating to acquisitions and potential acquisitions of physician
practices and a decrease of approximately $3.0 million in our remaining
practices and treatments centers in our existing local markets.



Depreciation and amortization. Depreciation and amortization increased by
$9.0 million, or 23.2%, from $39.1 million for the nine months ended
September 30, 2011 to $48.1 million for the nine months ended September 30,
2012. Depreciation and amortization expense as a percentage of total revenues
increased from 8.2% for the nine months ended September 30, 2011 to 9.2% for the
nine months ended September 30, 2012.  The increase of $9.0 million in
depreciation and amortization was due to an increase of approximately $3.9
million relating to our development and expansion in urology, medical oncology
and surgery practices in southwest Florida, North Carolina, South Carolina and
California, the acquisitions of treatment centers in existing local markets
during the latter part of 2011 and 2012, and the expansion into a new region
internationally in 2011. An increase in capital expenditures related to our
investment in advanced radiation treatment technologies in certain local markets
increased our depreciation and amortization by approximately $2.5 million and
$2.8 million increase due to the amortization of our trade name offset by a
decrease of approximately $0.2 million predominately due to the expiration of
certain non-compete agreements.



Provision for doubtful accounts. The provision for doubtful accounts increased
by $3.2 million, or 25.9%, from $12.1 million for the nine months ended
September 30, 2011 to $15.3 million for the nine months ended September 30,
2012.  The provision for doubtful accounts as a percentage of total revenues
increased from 2.6% for the nine months ended September 30, 2011 to 2.9% for the
nine months ended September 30, 2012.  The increase in our provision for
doubtful accounts as a percentage of total revenue is primarily due to the
increase in revenues from our integrated cancer



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care practices as well as continued increases in the patient responsibility portion of our revenues as a result of higher co-pays and deductibles.




Interest expense, net. Interest expense, increased by $11.9 million, or 26.3%,
from $45.3 million for the nine months ended September 30, 2011 to $57.2 million
for the nine months ended September 30, 2012. The increase is primarily
attributable to an increase of approximately $10.3 million of interest as a
result the additional senior subordinated notes issued in March 2011 of
approximately $50.0 million, the issuance of the senior secured second lien
notes issued in May 2012 of approximately $350.0 million and additional capital
lease financing and the additional amortization of deferred financing costs and
original issue discount costs of approximately $0.9 million related thereto, the
write-off of loan costs of approximately $0.5 million and approximately $0.6
million of interest related to international debt, offset by a decrease in our
interest rate swap expense of approximately $0.4 million.



Early extinguishment of debt.  We incurred approximately $4.5 million from the
early extinguishment of debt as a result of the prepayment of the $265.4 million
in senior secured credit facility - Term Loan B and prepayment of $63.0 million
in senior secured credit facility - Revolving credit portion, which included the
write-offs of $3.7 million in deferred financing costs and $0.8 million in
original issue discount costs.



Fair value adjustment of earn-out liability. On March 1, 2011, we purchased the
remaining 67% interest in MDLLC from Bernardo Dosoretz as well as interests in
the subsidiaries of MDLLC from Alejandro Dosoretz and Bernardo Dosoretz,
resulting in an ownership interest of approximately 91% in the underlying
radiation oncology practices located in South America, Central America, Mexico
and the Caribbean. We also purchased an additional 61% interest in Clinica de
Radioterapia La Asuncion S.A. from Bernardo Dosoretz, resulting in an ownership
interest of 80%. The Company recorded an estimated contingent earn out payment
totaling $2.3 million at the time of the closing of these acquisitions. The earn
out payment is contingent upon certain acquired centers attaining earnings
before interest, taxes, depreciation and amortization targets, is due 18 months
subsequent to the transaction closing, and is payable through Company financing
and issuance of equity units.  At September 30, 2012, we estimated the fair
value of the contingent earn out liability and increased the liability due to
the seller to approximately $3.6 million.  We recorded the $1.3 million to
expense in the fair value adjustment caption in the condensed consolidated
statements of comprehensive loss.



Impairment loss.  During the third quarter of 2012, we completed an interim
impairment test for goodwill and indefinite-lived intangible assets as a result
of our review of growth expectations and the release of the final rule issued on
the physician fee schedule for 2013 by CMS on November 1, 2012, which included
certain rate reductions on Medicare payments to freestanding radiation oncology
providers.  In performing this test, we assessed the implied fair value of our
goodwill and intangible assets. As a result, we recorded an impairment loss of
approximately $69.9 million in 2012 primarily relating to goodwill impairment in
certain of our reporting units, including Mid East United States (Northwest
Florida, North Carolina, Southeast Alabama, South Carolina), Central South East
United States (Delmarva Peninsula, Central Maryland, Central Kentucky, South New
Jersey), California, South West United States (central Arizona and Las Vegas,
Nevada), and Southwest Florida of approximately $69.8 million. In addition,
during the third quarter of 2012, an impairment loss of approximately $0.1
million, was recognized related to the impairment of certain leasehold
improvements of a planned radiation treatment facility office relocation in
Monroe, Michigan in the Northeast U.S. region.



During the third quarter of 2011, we completed an interim impairment test for
goodwill and indefinite-lived intangible assets as a result of our review of
growth expectations and the release of the final rule issued on the physician
fee schedule for 2012 by CMS on November 1, 2011, which included certain rate
reductions on Medicare payments to freestanding radiation oncology providers.
In performing this test, we assessed the implied fair value of our goodwill and
intangible assets. As a result, we incurred an impairment loss of approximately
$237.6 million in 2011 primarily relating to goodwill and trade name impairment
in certain of our reporting units, including North East United States (New York,
Rhode Island, Massachusetts and southeast Michigan), California, Southwest U.S.
(Arizona and Nevada) , the Florida east coast, Northwest Florida and Southwest
Florida of approximately $234.9 million and an impairment loss incurred of
approximately $2.7 million in 2011 related to our write-off of our 45%
investment interest in a radio-surgery center in Rhode Island due to continued
operating losses since its inception in 2008.



Gain on fair value adjustment of previously held equity investment. As result of
the acquisition of MDLLC, in which we acquired an effective ownership interest
of approximately 91.0% on March 1, 2011, we recorded a gain of approximately
$0.2 million to adjust our initial investment in the joint venture to fair
value.



Loss on foreign currency derivative contracts.  We are exposed to a significant
amount of foreign exchange risk, primarily between the U.S. dollar and the
Argentine Peso.  This exposure relates to the provision of radiation oncology
services to patients at our Latin American operations and purchases of goods and
services in foreign currencies.  We maintain four foreign currency derivative
contracts which mature on a quarterly basis. For the nine months ended



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September 30, 2012 and 2011, the expiration of the September 28, 2012 foreign
currency derivative contract and the mark to market valuation of the remaining
contracts resulted in a loss of approximately $1.0 million and $0.2 million,
respectively.



Income taxes.   Our effective tax rate was (2.8)% for the nine months ended
September 30, 2012 and 2.1% for the nine months ended September 30, 2011. The
change in the effective rate for the nine months ended September 30, 2012
compared to the same period of the year prior is primarily the result of the
reduction of the deferred tax liability on the amount of goodwill and trade name
impaired in the third quarter of 2011, the 2012 benefit related to the
termination of the interest rate swap, the 2012 accrual of US Federal penalties
and interest proposed by the IRS related to the 2007-2008 examination, the 2011
benefit for the release of certain state reserves, the Company's application of
ASC 740-270 to exclude certain jurisdictions (U.S. and certain states) for which
the Company is unable to benefit from losses that are not more likely than not
to be realized and the mix of earnings and tax rates across various tax
jurisdictions.  As a result, on an absolute dollar basis, the expense for income
taxes changed by $8.5 million from the income tax benefit of $5.2 million for
the nine months ended September 30, 2011 to an income tax expense of $3.3
million for the nine months ended September 30, 2012.



Our future effective tax rates could be affected by changes in the relative mix
of taxable income and taxable loss jurisdictions, changes in the valuation of
deferred tax assets or liabilities, or changes in tax laws or interpretations
thereof.  We monitor the assumptions used in estimating the annual effective tax
rate and make adjustments, if required, throughout the year.  If actual results
differ from the assumptions used in estimating our annual effective tax rates,
future income tax expense (benefit) could be materially affected.



In addition, we are periodically under audit by federal, state, or local
authorities in the areas of income taxes and other taxes. These audits include
questioning the timing and amount of deductions and compliance with federal,
state, and local tax laws. We regularly assess the likelihood of adverse
outcomes from these audits to determine the adequacy of our provision for income
taxes.  To the extent we prevail in matters for which accruals have been
established or is required to pay amounts in excess of such accruals, the
effective tax rate could be materially affected.



Net loss. Net loss decreased by $120.3 million, from $238.2 million in net loss
for the nine months ended September 30, 2011 to $117.9 million net loss for the
nine months ended September 30, 2012.  Net loss represents 50.2% of total
revenues for the nine months ended September 30, 2011 and 22.4% of total
revenues for the nine months ended September 30, 2012.



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                     Seasonality and Quarterly Fluctuations



Our results of operations historically have fluctuated on a quarterly basis and
can be expected to continue to fluctuate. Many 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, volume is typically lower in the summer months due to traditional
vacation periods.  30 of our 126 radiation treatment centers are located in
Florida.



                        Liquidity and Capital Resources



Our principal capital requirements are for working capital, acquisitions,
medical equipment replacement and expansion and de novo treatment center
development. Working capital and medical equipment are funded through cash from
operations, supplemented, as needed, by five-year fixed rate lease lines of
credit. Borrowings under these lease lines of credit are recorded on our balance
sheets. The construction of de novo treatment centers is funded directly by
third parties and then leased to us. We finance our operations, capital
expenditures and acquisitions through a combination of borrowings and cash
generated from operations.



Cash Flows From Operating Activities

Net cash provided by operating activities for the nine month periods ended September 30, 2011 and 2012 was $40.5 million and $23.1 million, respectively.




Net cash provided by operating activities decreased by $17.4 million from $40.5
million in the nine month period ended September 30, 2011 to $23.1 million for
the nine month period ended September 30, 2012 predominately due to increased
interest costs. In March 2011, we issued $50.0 million in senior subordinated
notes due 2017 and $16.25 million senior subordinated notes due to the seller in
the MDLLC transaction. For the nine months ended September 30, 2012 and 2011, we
wrote-off approximately $69.9 million and $237.6 million, respectively in
goodwill, trade name and other investments as a result of our interim testing of
our goodwill and indefinite-lived intangible assets. We continue to see
improvements in our cash collections from our accounts receivable with our days
sales outstanding improving from 44 days to 39 days.



Cash at September 30, 2012 held by our foreign subsidiaries was $4.1 million.
We consider these cash flows to be permanently invested in our foreign
subsidiaries and therefore do not anticipate repatriating any excess cash flows
to the U.S.  We anticipate we can adequately fund our domestic operations from
cash flows generated solely from our U.S. business. We believe that the
magnitude of our growth opportunities outside of the U.S. will cause us to
continuously reinvest foreign earnings. We do not require access to the earnings
and cash flow of our international subsidiaries to fund our U.S. operations.



Cash Flows From Investing Activities

Net cash used in investing activities for the nine month periods ended September 30, 2011 and 2012 was $82.7 million and $47.2 million, respectively.




Net cash used in investing activities decreased by $35.5 million from $82.7
million for the nine month period ended September 30, 2011 to $47.2 million for
the nine month period ended September 30, 2012.  In 2012, net cash used in
investing activities was impacted by approximately $0.9 million in cash paid for
the assets of a radiation oncology practice and a medical oncology group located
in Asheville, North Carolina in February 2012 and approximately $21.9 million in
cash paid for the assets of a radiation oncology practice and two urology groups
located in Sarasota/Manatee counties in Southwest Florida in March 2012 and the
purchase of affiliated integrated cancer care physician practices of
approximately $0.9 million. During 2012, we entered into foreign exchange option
contracts expiring on September 2013 to convert a significant portion of our
forecasted foreign currency denominated net income into U.S. dollars to limit
the adverse impact of a weakening Argentine Peso against the U.S. dollar. The
cost of the option contracts, were approximately $0.5 million. In 2011, net cash
used in investing activities was impacted by approximately $42.1 million (net of
acquired cash of approximately $5.4 million) related to the purchase of the
remaining (i) 67% interest in a joint venture that holds a majority equity
interest in and manages 25 radiation therapy treatment centers in South America,
Central America and the



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Caribbean (including the purchase of equity units in the underlying operating
subsidiaries) and (ii) a 61% interest in a joint venture that operates a
treatment center in Guatemala, on March 1, 2011, the purchase of a radiation
therapy treatment center and a physician group practice in Northern California
for approximately $9.6 million and the purchase of affiliated integrated cancer
care physician practices of approximately $0.2 million. During 2011, we entered
into foreign exchange option contracts expiring at the end of the four
consecutive quarterly periods to convert a significant portion of our forecasted
foreign currency denominated net income into U.S. dollars to limit the adverse
impact of a weakening Argentine Peso against the U.S. dollar. The cost of the
option contracts, were approximately $1.1 million.  Purchases of property and
equipment decreased $6.9 million as we continue to manage our capital
expenditures.



Cash Flows From Financing Activities

Net cash provided by financing activities for the nine month periods ended September 30, 2011 and 2012 was $36.3 million and $41.9 million, respectively.

Net proceeds from revolving credit facility during the first quarter of 2012 was predominately used for the purchase of the assets of a radiation oncology practice and two urology groups located in Sarasota/Manatee counties in Southwest Florida in March 2012.




On May 10, 2012, we completed an offering of $350.0 million in aggregate
principal amount of 8 7/8% Senior Secured Second Lien Notes due 2017, with an
original issue discount of $1.7 million.  The proceeds of $348.3 million was
used to prepay and cancel $265.4 million in senior secured credit facility -
Term Loan B, prepayment of $63.0 million in senior secured credit facility -
revolving credit portion and payment of accrued interest and fees of
approximately $0.8 million.  In addition, we paid approximately $14.4 million of
loan costs relating to transaction fees and expenses incurred in connection with
the issuance of the 87/8% Senior Secured Second Lien Notes and a new revolving
credit facility. The remaining net proceeds were used for general corporate
purposes.



On March 1, 2011, we issued $50 million of 97/8% Senior Subordinated Notes due
2017 pursuant to a Commitment Letter from DDJ Capital Management, LLC.  The
proceeds of $48.5 million were used (i) to fund the MDLLC acquisition and
(ii) to fund transaction costs associated with the MDLLC Acquisition.  We
incurred approximately $1.6 million in transaction fees and expenses, including
legal, accounting and other fees and expenses in connection with the new notes,
and an initial purchasers' discount of $0.6 million. On April 1, 2011 we
received approximately $6.7 million in capital lease financing from a financial
institution to fund previously purchased medical equipment. The terms of the
capital lease financing are for five years at an average interest rate of
approximately 8%. We also had partnership distributions from non-controlling
interests of approximately $3.4 million and $3.2 million in 2011 and 2012,
respectively.



On September 29, 2011, we amended our senior secured credit facility. Under the
terms of the amendment, the definition of applicable margin was modified, along
with financial covenant levels and several modification to the permitted
investment baskets and permitted indebtedness. As a result of the amendment, we
paid down approximately $18.0 million in our Revolver loans and incurred
approximately $1.3 million in transaction fees and expenses, including legal,
accounting and other fees and expenses in connection with the amendment.



On September 30, 2011, we entered into an incremental amendment with a financial
institution which agreed to lend an aggregate amount up to $50 million, which
was used for general corporate purposes.  As a result of the incremental
amendment, we incurred approximately $1.5 million in transaction fees and
expenses, including legal, accounting and other fees and expenses in connection
with the incremental amendment.



Senior Secured Credit Facilities and Senior Subordinated Notes




On April 20, 2010, we consummated a debt offering in an aggregate principal
amount of $310.0 million of 97/8% senior subordinated notes due 2017, and repaid
our existing $175.0 million in aggregate principal amount 13.5% senior
subordinated notes due 2015, including accrued and unpaid interest of
approximately $6.4 million and the call premium of approximately $5.3 million.
The remaining proceeds from the Offering were used to pay down $74.8 million of
the Term Loan B and $10.0 million of our revolving credit facility.  A portion
of the proceeds was placed in a restricted account pending application to
finance certain acquisitions, including the acquisitions of a radiation
treatment center and physician practices in South Carolina, which were
consummated on May 3, 2010.  We incurred approximately $11.9 million in
transaction fees and expenses, including legal, accounting and other fees and
expenses in connection with the Offering, including the initial purchasers'
discount of $1.9 million.



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In April 2010, we incurred approximately $10.9 million in early extinguishment
of debt as a result of the prepayment of the $175.0 million in senior
subordinated notes, which included the call premium payment of approximately
$5.3 million, the write-offs of $2.5 million in deferred financing costs and
$3.1 million in original issue discount costs.



On April 22, 2010, affiliates of certain of the initial purchasers of the $310.0
million in aggregate principal amount 97/8% senior subordinated notes due 2017,
as lenders under our senior secured revolving credit facility, provided an
additional $15.0 million of commitments to the revolving credit portion of our
senior secured credit facility increasing the available commitment from $60.0
million to $75.0 million.  We paid $2.0 million to Vestar Capital Partners V,
L.P. for additional transaction advisory services in respect to the incremental
amendments to our existing senior secured revolving credit facility, the
additional $15.0 million of commitments to the revolver portion, and the
complete refinancing of the senior subordinated notes.



On March 1, 2011, we issued $50 million of 97/8% Senior Subordinated Notes due
2017 pursuant to a Commitment Letter from DDJ Capital Management, LLC. The
proceeds of $48.5 million were used (i) to fund the MDLLC Acquisition and
(ii) to fund transaction costs associated with the MDLLC Acquisition.  We
incurred approximately $1.6 million in transaction fees and expenses, including
legal, accounting and other fees and expenses in connection with the new notes,
and an initial purchasers' discount of $0.6 million.



In August 2011, we entered into a lease line of credit with a financial
institution for the purpose of obtaining financing for medical equipment
purchases in the commitment amount of $12.5 million.  The commitment, subject to
various restrictions, is scheduled to be available through November 2011.  We
had utilized approximately $8.7 million under the lease line of credit.



Senior Secured Second Lien Notes

On May 10, 2012, we issued $350.0 million in aggregate principal amount of 8 7/8% Senior Secured Second Lien Notes due 2017 (the "Notes").




The Notes were issued pursuant to an indenture, dated May 10, 2012 (the
"Indenture"), the Company, the guarantors signatory thereto and Wilmington
Trust, National Association, governing the Notes. The Notes are senior secured
second lien obligations of the Company and are guaranteed on a senior secured
second lien basis by the Company, and each of our domestic subsidiaries to the
extent such guarantor is a guarantor of the Company's obligations under the
Revolving Credit Facility (as defined below).



Interest is payable on the Notes on each May 15 and November 15, commencing
November 15, 2012. We may redeem some or all of the Notes at any time prior to
May 15, 2014 at a price equal to 100% of the principal amount of the Notes
redeemed plus accrued and unpaid interest, if any, and an applicable make-whole
premium. On or after May 15, 2014, we may redeem some or all of the Notes at
redemption prices set forth in the Indenture. In addition, at any time prior to
May 15, 2014, we may redeem up to 35% of the aggregate principal amount of the
Notes, at a specified redemption price with the net cash proceeds of certain
equity offerings.



The Indenture contains covenants that, among other things, restrict the ability
for us, and certain of our subsidiaries to incur, assume or guarantee additional
indebtedness; pay dividends or redeem or repurchase capital stock; make other
restricted payments; incur liens; redeem debt that is junior in right of payment
to the Notes; sell or otherwise dispose of assets, including capital stock of
subsidiaries; enter into mergers or consolidations; and enter into transactions
with affiliates. These covenants are subject to a number of important exceptions
and qualifications. In addition, in certain circumstances, if the Company sells
assets or experiences certain changes of control, it must offer to purchase the
Notes.



We used the proceeds to repay our existing senior secured revolving credit
facility and the Term Loan B portion of our senior secured credit facilities,
which were prepaid in their entirety, cancelled and replaced with the new
Revolving Credit Facility described below, and to pay related fees and expenses.
Any remaining net proceeds will be used for general corporate purposes.



Credit Agreement



On May 10, 2012, we also entered into the Credit Agreement (the "Credit
Agreement") among Wells Fargo Bank, National Association, as administrative
agent (in such capacity, the "Administrative Agent"), collateral agent, issuing
bank and as swingline lender, the other agents party thereto and the lenders
party thereto.


The credit facilities provided under the Credit Agreement consist of a revolving credit facility providing for up to $140 million of revolving extensions of credit outstanding at any time (including revolving loans, swingline loans and




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letters of credit) (the "Revolving Credit Facility"). We may increase the aggregate amount of revolving loans by an amount not to exceed $10 million in the aggregate. The Revolving Credit Facility matures October 15, 2016.




Loans under the Revolving Credit Facility are subject to the following interest
rates:



(a)      for loans which are Eurodollar loans, for any interest period, at a
rate per annum equal to a percentage equal to (i) the rate per annum determined
on the basis of the rate for deposits in dollars for a period equal to such
interest period commencing on the first day of such interest period appearing on
Reuters Screen LIBOR01 Page as of 11:00 A.M., London time, two business days
prior to the beginning of such interest period divided by (ii) 1.0 minus the
then stated maximum rate of all reserve requirements applicable to any member
bank of the Federal Reserve System in respect of eurocurrency funding or
liabilities as defined in Regulation D (or any successor category of liabilities
under Regulation D), plus (ii) an applicable margin based upon a total leverage
pricing grid; and



(b)      for loans which are base rate loans, (i) the greatest of (A) the
Administrative Agent's prime lending rate at such time, (B) the overnight
federal funds rate at such time plus ½ of 1%, and (C) the Eurodollar Rate for a
Eurodollar Loan with a one-month interest period commencing on such day plus
1.00%, plus (ii) an applicable margin based upon a total leverage pricing grid.



We will pay certain recurring fees with respect to the Revolving Credit Facility, including (i) fees on the unused commitments of the lenders under the Revolving Credit Facility, (ii) letter of credit fees on the aggregate face amounts of outstanding letters of credit and (iii) administration fees.




The Credit Agreement contains customary representations and warranties, subject
to limitations and exceptions, and customary covenants restricting the ability
(subject to various exceptions) for us and certain of our subsidiaries to:
incur additional indebtedness (including guarantee obligations); incur liens;
engage in mergers or other fundamental changes; sell certain property or assets;
pay dividends of other distributions; consummate acquisitions; make investments,
loans and advances; prepay certain indebtedness, including the Notes; change the
nature of their business; engage in certain transactions with affiliates; and
incur restrictions on the ability of our subsidiaries to make distributions,
advances and asset transfers.  In addition, under the Revolving Credit Facility,
we will be required to comply with a specific first lien leverage ratio not to
exceed 1.25 to 1.00.



The Revolving Credit Facility contains customary events of default, including
with respect to nonpayment of principal, interest, fees or other amounts;
material inaccuracy of a representation or warranty when made; failure to
perform or observe covenants; cross-default to other material indebtedness;
bankruptcy and insolvency events; inability to pay debts; monetary judgment
defaults; actual or asserted invalidity or impairment of any definitive loan
documentation and a change of control.



The obligations under the Revolving Credit Facility are guaranteed by us and each direct and indirect, domestic subsidiary.




The Revolving Credit Facility and any interest rate protection and other hedging
arrangements provided by any lender party to the Revolving Credit Facility or
any affiliate of such a lender are secured on a first priority basis by a
perfected security interest in substantially all of the Company's and each
guarantor's tangible and intangible assets (subject to certain exceptions).



The Revolving Credit Facility requires that we comply with certain financial
covenants, including:



                                              Requirement at
                                              September 30,    Level at September
                                                   2012             30, 2012

Maximum permitted first lien leverage ratio <1.25 to 1.00 0.04 to 1.00





The Revolving Credit Facility also requires that we comply with various other
covenants, including, but not limited to, restrictions on new indebtedness,
asset sales, capital expenditures, acquisitions and dividends, with which we
were in compliance as of September 30, 2012.



We believe available borrowings under our credit facilities, together with our
cash flows from operations, will be sufficient to fund our currently anticipated
operating requirements. To the extent available borrowings and cash flows from
operations are insufficient to fund future requirements, we may be required to
seek additional financing through additional increases in our senior secured
credit facilities, negotiate additional 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



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that we will be able to extend or increase our senior secured credit facilities,
secure additional bank borrowings or lease line of credit or complete additional
debt or equity financings on terms favorable to us or at all. Our ability to
meet our funding needs could be adversely affected if we experience a decline in
our results of operations, or if we violate the covenants and other restrictions
to which we are subject under our senior secured credit facilities.



Finance Obligation



We lease certain of our treatment centers (each, a "facility" and, collectively,
the "facilities") and other properties from partnerships that are majority-owned
by related parties (each, a "related party lessor" and, collectively, the
"related party lessors"). See "Certain Relationships and Related Party
Transactions." The related party lessors construct the facilities in accordance
with our plans and specifications and subsequently lease these facilities to us.
Due to the related party relationship, we are considered the owner of these
facilities during the construction period pursuant to the provisions of
Accounting Standards Codification ("ASC") 840-40, "Sale-Leaseback Transactions"
("ASC 840-40"). In accordance with ASC 840-40, we record a construction in
progress asset for these facilities with a corresponding finance obligation
during the construction period. These related parties guarantee the debt of the
related party lessors, which is considered to be "continuing involvement"
pursuant to ASC 840-40. Accordingly, these leases did not qualify as a normal
sale-leaseback at the time that construction was completed and these facilities
were leased to us. As a result, the costs to construct the facilities and the
related finance obligation are recorded on our consolidated balance sheets after
construction was completed. The construction costs are included in "Real Estate
Subject to Finance Obligation" in the condensed consolidated balance sheets and
the accompanying notes, included in this Annual Report on Form 10-K. The finance
obligation is amortized over the lease during the construction period term based
on the payments designated in the lease agreements.



As of March 31, 2010, the related party lessors completed the refinancing of
certain of their respective mortgages to remove the personal guarantees of the
debt related thereto. As a result, we derecognized approximately $64.8 million
in real estate subject to finance obligation, $67.7 million in finance
obligation and recorded approximately $2.9 million of deferred gains that will
be amortized as a reduction of rent expense over 15 years. In addition, we
entered into a new master lease arrangement with the landlord on 28 properties.
The initial term of the master lease is 15 years with four 5 year renewal
options. Annual payments, including executory costs, total approximately
$13.4 million pursuant to the master lease. The lease payments are scheduled to
increase annually based on increases in the consumer price index. During 2011
the related party lessors completed construction of 2 properties. Upon
completion we entered into a new master lease arrangement with the related party
lessors for these 2 properties as well as an existing property. The initial term
of the new master lease arrangement is 15 years with four 5 year renewal
options.  Annual payments, including executory costs, total approximately
$0.7 million pursuant to the master lease. The lease payments are scheduled to
increase annually based on increases in the consumer price index. The amount of
finance obligations related to properties that have not been derecognized as
well as two properties under development as of September 30, 2012 and
December 31, 2011 was $16.3 million and $14.3 million, respectively.



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                            Billing and Collections



Our billing system in the U.S. utilizes a fee schedule for billing patients,
third-party payers and government sponsored programs, including Medicare and
Medicaid. Fees billed to government sponsored programs, including Medicare and
Medicaid, and fees billed to contracted payers and self pay patients (not
covered under other third party payer arrangements) are automatically adjusted
to the allowable payment amount at time of billing. In 2009, we updated our
billing system to include fee schedules on approximately 85% of all payers and
developed a blended rate allowable amount on the remaining payers. As a result
of this change in 2009, fees billed to all payers are automatically adjusted to
the allowable payment at time of billing.



Insurance information is requested from all patients either at the time the
first appointment is scheduled or at the time of service. A copy of the
insurance card is scanned into our system at the time of service so that it is
readily available to staff during the collection process. Patient demographic
information is collected for both our clinical and billing systems.



It is our policy to collect co-payments from the patient at the time of service.
Insurance benefit information is obtained and the patient is informed of their
deductible and co-payment responsibility prior to the commencement of treatment.



Charges are posted to the billing system by coders in our offices or in our
central billing office. After charges are posted, edits are performed, any
necessary corrections are made and billing forms are generated, then sent
electronically to our clearinghouse whenever electronic submission is possible.
Any bills not able to be processed through the clearinghouse are printed and
mailed from our print mail service. Statements are automatically generated from
our billing system and mailed to the patient on a regular basis for any amounts
still outstanding from the patient. Daily, weekly and monthly accounts
receivable analysis reports are utilized by staff and management to prioritize
accounts for collection purposes, as well as to identify trends and issues.
Strategies to respond proactively to these issues are developed at weekly and
monthly team meetings. Our write-off process requires manual review and our
process for collecting accounts receivable is dependent on the type of payer as
set forth below.


Medicare, Medicaid and Commercial Payer Balances




Our central billing office staff expedites the payment process from insurance
companies and other payers via electronic inquiries, phone calls and automated
letters to ensure timely payment. Our billing system generates standard aging
reports by date of billing in increments of 30 day intervals. The collection
team utilizes these reports to assess and determine the payers requiring
additional focus and collection efforts. Our accounts receivable exposure on
Medicare, Medicaid and commercial payer balances are largely limited to denials
and other unusual adjustments. Our exposure to bad debts on balances relating to
these types of payers over the years has been insignificant.



In the event of denial of payment, we follow the payer's standard appeals
process, both to secure payment and to lobby the payers, as appropriate, to
modify their medical policies to expand coverage for the newer and more advanced
treatment services that we provide which, in many cases, is the payer's reason
for denial of payment. If all reasonable collection efforts with these payers
have been exhausted by our central billing office staff, the account receivable
is written-off.



Self-Pay Balances



We administer self-pay account balances through our central billing office and
our policy is to first attempt to collect these balances although after initial
attempts we often send outstanding self-pay patient claims to collection
agencies at designated points in the collection process. In some cases monthly
payment arrangements are made with patients for the account balance remaining
after insurance payments have been applied. These accounts are reviewed monthly
to ensure payments continue to be made in a timely manner. Once it has been
determined by our staff that the patient is not responding to our collection
attempts, a final notice is mailed. This generally occurs more than 120 days
after the date of the original bill. If there is no response to our final
notice, after 30 days the account is assigned to a collection agency and, as
appropriate, recorded as a bad debt and written off. We also have payment
arrangements with patients for the self-pay portion due in which monthly
payments are made by the patient on a predetermined schedule. Balances under $50
are written off but not sent to the collection agency. All accounts are
specifically identified for write-offs and accounts are written off prior to
being submitted to the collection agency.



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                         Acquisitions and Developments


The following table summarizes our growth in treatment centers and the local markets in which we operate for the periods indicated:



                                                              Nine Months
                                              Year Ended         Ended
                                             December 31,    September 30,
                                             2010     2011       2012
Treatment centers at beginning of period        97      95             127
Internally developed                             2       1               1
Transitioned to freestanding                     -       -               2
Internally (consolidated / closed / sold)       (5 )    (5 )            (2 )
Acquired                                         2      33               2
Hospital-based / other groups                   (1 )     3              (2 )
Hospital-based (ended / transitioned)            -       -              (2 )

Treatment centers at period end                 95     127             126

Number of regions at period end                  8       9               9

Number of local markets at period end           28      28              28




In 2010, we internally developed two new radiation centers, sold one radiation center, closed four radiation centers, acquired two radiation centers, consolidated a hospital-based radiation center and acquired the assets of several physician practices as follows:




In March 2010, we contributed approximately $3.0 million in tangible assets for
a 77.3% interest in a joint venture with a group of physicians to open a
radiation treatment center in El Segundo, California. The radiation treatment
center expands our presence into the California market.



On April 30, 2010, we sold certain assets of the Gettysburg facility to one of
Gettysburg Radiation, LLC's minority equityholders for approximately $925,000.
Due to the poor local economy, as well as the opening of a radiation therapy
center by a nearby hospital, the performance of the Gettysburg facility
deteriorated significantly.



In April 2010, we entered into definitive agreements with Carolina Regional
Cancer Center, P.A. for the acquisition of a radiation treatment center in
Myrtle Beach, South Carolina that holds three certificate of need licenses, and
Atlantic Urology Clinics, LLC, Adult & Pediatric Urology Center of the Carolina,
P.A., Coastal Urology Center, P.A. and Grand Strand Urology, LLP with respect to
the acquisition of the assets of these Myrtle Beach-based physician practices.
On May 3, 2010, we consummated these acquisitions for a combined purchase price
of approximately $34.5 million in cash. The acquisition of the Myrtle Beach
facility expands our presence into a new local market within an existing
regional division.



In May 2010, we opened our Pembroke Pines, Florida treatment center.

During the fourth quarter of 2010, we closed and consolidated two radiation centers in Michigan and two radiation centers in Nevada and consolidated a hospital-based radiation center in Utica, New York.




In December 2010, we acquired the assets of a radiation treatment center located
in Princeton, West Virginia for approximately $8.0 million. The center purchased
in West Virginia further expands our presence into the West Virginia market.



During 2010, we acquired the assets of several integrated cancer care physician practices in Florida and Arizona for approximately $860,000. The physician practices provide synergistic clinical services to our patients in the respective markets in which we treat.




On March 1, 2011, we purchased the remaining 67% interest in MDLLC from Bernardo
Dosoretz as well as interests in the subsidiaries of MDLLC from Alejandro
Dosoretz and Bernardo Dosoretz, resulting in an ownership interest of
approximately 91% in the underlying radiation oncology practices located in
South America, Central America, Mexico and the Caribbean. The Company also
purchased an additional 61% interest in Clinica de Radioterapia La Asuncion S.A.
from Bernardo Dosoretz, resulting in an ownership interest of 80%. The Company
consummated these acquisitions for a



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combined purchase price of approximately $82.7 million, comprised of
$47.5 million in cash, 25 common units of Parent immediately exchanged for
13,660 units of RT Investments' non-voting preferred equity units and 258,955
units of RT Investments' class A equity units totaling approximately
$16.25 million, and issuance of a 97/8% note payable, due 2017 totaling
approximately $16.05 million to the seller and an estimated contingent earn out
payment totaling $2.3 million, and issuance of real estate located in Costa Rica
totaling $0.6 million. The earn out payment is contingent upon certain acquired
centers attaining earnings before interest, taxes, depreciation and amortization
targets, is due 18 months subsequent to the transaction closing, and is payable
through Company financing and issuance of equity units.



In June 2011, we entered into an outpatient radiation therapy management services agreement with a medical group to manage its radiation oncology treatment site in London, Kentucky.




In July 2011, we entered into a revised facility management services agreement
with an existing provider in Michigan. The provider will become a subsidiary of
a larger medical practice group, in which we will continue the management of the
radiation oncology practices in Michigan. This arrangement became effective
during the fourth quarter of 2011.



In August 2011, we completed a replacement de novo radiation treatment facility
in Alabama. This facility replaces an existing radiation treatment facility in
which we are now providing consult services.



On August 29, 2011, we acquired the assets of a radiation treatment center located in Redding, California, for approximately $9.6 million. The acquisition of the Redding facility further expands our presence into the Northern California market.




In September 2011, we entered into a professional services agreement with a
hospital district in Broward County, Florida to provide professional services at
two sites within the hospital district. In March 2012, we entered into a license
agreement with the North Broward Hospital District to license the space and
equipment and assume responsibility for the operation of the two radiation
therapy departments at Broward General Medical Center and North Broward Medical
Center as part of our value added services offering.  The license agreement runs
for an initial term of ten years, with three separate five year renewal
options.  We recorded approximately $4.3 million in capital lease obligations
relating the portion of the license agreement for the use of the equipment.



On November 4, 2011, the Company purchased an 80% interest in an operating
entity, which operates 1 radiation treatment center in Argentina; an 80%
interest in another operating entity, which operates 3 radiation treatment
centers in Argentina; and a 96% interest in an operating entity, which operates
1 radiation treatment center in Argentina. The combined purchase price of the
ownership interests totals approximately $7.4 million, comprised of $2.1 million
in cash, seller financing totaling approximately $4.0 million payable over
24 monthly installments, commencing January 2012, and a purchase option totaling
approximately $1.3 million. The acquisition of these operating treatment centers
expands our presence in the international markets.



On December 22, 2011, the Company acquired the interest in an operating entity
which operates two radiation treatment centers in located in North Carolina, for
approximately $6.3 million, including an earn-out provision of approximately
$0.4 million contingent upon maintaining a certain level of patient volume. On
April 16, 2012 we acquired certain additional assets utilized in one of the
radiation oncology centers for approximately $0.4 million.  The acquisition of
the two radiation treatment centers further expands our presence into the
eastern North Carolina market.



During 2011, the Company acquired the assets of several physician practices in
Florida and the non-professional practice assets of several North Carolina
physician practices for approximately $0.4 million. The physician practices
provide synergistic clinical services to our patients in the respective markets
in which we provide radiation therapy treatment services.



On February 6, 2012, we acquired the assets of a radiation oncology practice and
a medical oncology group located in Asheville, North Carolina for approximately
$0.9 million.  The acquisition of the radiation oncology practice and the
medical oncology group, further expands our presence in the Western North
Carolina market and builds on the our integrated cancer care model.



In March 2012, we entered into a license agreement with the North Broward
Hospital District to license the space and equipment and assume responsibility
for the operation of the two radiation therapy departments at Broward General
Medical Center and North Broward Medical Center as part of our value added
services offering.  The license agreement runs for an initial term of ten years,
with three separate five year renewal options.  We recorded approximately $4.3
million in capital lease obligations relating the portion of the license
agreement for the use of the equipment.



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On March 30, 2012, we acquired the assets of a radiation oncology practice for
$26.0 million and two urology groups located in Sarasota/Manatee counties in
Southwest Florida for approximately $1.6 million, for a total purchase price of
approximately $27.6 million, comprised of $21.9 million in cash and assumed
capital lease obligation of approximately $5.7 million.  The acquisition of the
radiation oncology practice and the two urology groups, further expands our
presence in the Sarasota/Manatee counties and builds on our integrated cancer
care model.


On August 22, 2012, we opened a de novo radiation treatment center in Argentina. The development of this radiation treatment center further expands our presence in the Latin America market.




During 2012, we acquired the assets of several integrated cancer care physician
practices in Florida for approximately $0.9 million. The physician practices
provide synergistic clinical services and an integrated cancer care service to
our patients in the respective markets in which we provide radiation therapy
treatment services.



The operations of the foregoing acquisitions have been included in the
accompanying condensed consolidated statements of comprehensive loss from the
respective dates of each acquisition. When we acquire a treatment center, the
purchase price is allocated to the assets acquired and liabilities assumed based
upon their respective fair values.



During the first quarter of 2011, we closed two treatment facilities in
California, one in Beverly Hills and the other facility in Corona. In addition
we are no longer treating at our Gilbert Arizona facility and we are using the
center for our other specialty practices for office visits and consults.



In July 2011, we closed a radiation treatment facility in Las Vegas, Nevada.

In January 2012 we ceased provision of professional services at our Lee County - Florida hospital based treatment center.

In February 2012 we closed a radiation treatment facility in Owings Mills, Maryland.

In March 2012 we terminated our arrangement to provide professional services at a hospital in Seaford, Delaware.




In July 2012 we closed a radiation treatment facility in Monroe, Michigan, and
we are currently in the process of constructing a replacement de novo radiation
treatment center in Troy, Michigan scheduled to open during the first quarter of
2013.



As of September 30, 2012, we have one replacement de novo radiation treatment
center project in process in Michigan and four additional de novo radiation
treatment centers located in New York, Argentina, Bolivia and Dominican
Republic. The internal development of radiation treatment centers is subject to
a number of risks including but not limited to risks related to negotiating and
finalizing agreements, construction delays, unexpected costs, obtaining required
regulatory permits, licenses and approvals and the availability of qualified
healthcare and administrative professionals and personnel. As such, we cannot
assure you that we will be able to successfully develop radiation treatment
centers in accordance with our current plans and any failure or material delay
in successfully completing planned internally developed treatment centers could
harm our business and impair our future growth.



We have been selected by a consortium of leading New York academic medical
centers (including Memorial Sloan-Kettering Cancer Center, Beth Israel Medical
Center/Continuum Health System, NYU Langone Medical Center, Mt. Sinai Medical
Center, and Montefiore Medical Center) to serve as the developer and manager of
a proton beam therapy center to be constructed in Manhattan. The project is in
the final stages of certificate of need approval. We expect to invest
approximately $10,000,000 in the project and will have an approximate 28.5%
ownership interest. We will also receive a management fee of 5% of collected
revenues. In connection with our role as manager, we have accounted for our
interest in the center as an equity method investment. The center is expected to
commence operations in mid-2016.



                          Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. We continuously evaluate our critical accounting policies and
estimates. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates under different
assumptions or conditions.



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We believe the following critical accounting policies are important to the
portrayal of our financial condition and results of operations and require our
management's subjective or complex judgment because of the sensitivity of the
methods, assumptions and estimates used in the preparation of our consolidated
financial statements.



Variable Interest Entities



We evaluate certain of our radiation oncology practices in order to determine if
they are variable interest entities ("VIE"). This evaluation resulted in
determining that certain of our radiation oncology practices were potential
variable interests. For each of these practices, we have determined (1) the
sufficiency of the fair value of the entities' equity investments at risk to
absorb losses, (2) that, as a group, the holders of the equity investments at
risk have (a) the direct or indirect ability through voting rights to make
decisions about the entities' significant activities, (b) the obligation to
absorb the expected losses of the entity and their obligations are not protected
directly or indirectly, and (c) the right to receive the expected residual
return of the entity, and (3) substantially all of the entities' activities do
not involve or are not conducted on behalf of an investor that has
disproportionately fewer voting rights in terms of its obligation to absorb the
expected losses or its right to receive expected residual returns of the entity,
or both. ASC 810, "Consolidation" ("ASC 810"), requires a company to consolidate
VIEs if the company is the primary beneficiary of the activities of those
entities. Certain of our radiation oncology practices are variable interest
entities and we have a variable interest in certain of these practices through
our administrative services agreements. Pursuant to ASC 810, through our
variable interests in these practices, we have the power to direct the
activities of these practices that most significantly impact the entity's
economic performance and we would absorb a majority of the expected losses of
these practices should they occur. Based on these determinations, we have
included these radiation oncology practices in our condensed consolidated
financial statements for all periods presented. All significant intercompany
accounts and transactions have been eliminated.



We adopted updated accounting guidance beginning with the first quarter of 2010,
by providing an ongoing qualitative rather than quantitative assessment of our
ability to direct the activities of a variable interest entity that most
significantly impact the entity's economic performance and our rights or
obligations to receive benefits or absorb losses, in order to determine whether
those entities will be required to be consolidated in our consolidated financial
statements. The adoption of the new guidance had no material impact to our
financial position and results of operations.



Net Patient Service Revenue and Allowances for Contractual Discounts




We have agreements with third-party payers that provide us payments at amounts
different from our established rates. Net patient service revenue is reported at
the estimated net realizable amounts due from patients, third-party payers and
others for services rendered. Net patient service revenue is recognized as
services are provided. Medicare and other governmental programs reimburse
physicians based on fee schedules, which are determined by the related
government agency. We also have agreements with managed care organizations to
provide physician services based on negotiated fee schedules. Accordingly, the
revenues reported in our consolidated financial statements are recorded at the
amount that is expected to be received.



We derive a significant portion of our revenues from Medicare, Medicaid and
other payers that receive discounts from our standard charges. We must estimate
the total amount of these discounts to prepare our 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. We estimate the allowance for contractual
discounts on a payer class basis given our interpretation of the applicable
regulations or contract terms. These interpretations sometimes result in
payments that differ from our estimates. Additionally, updated regulations and
contract renegotiations occur frequently necessitating regular review and
assessment of the estimation process. Changes in estimates related to the
allowance for contractual discounts affect revenues reported in our consolidated
statements of operations and comprehensive (loss) income.  If our overall
estimated allowance for contractual discounts on our revenues for the year ended
December 31, 2011 were changed by 1%, our after-tax loss from continuing
operations would change by approximately $0.1 million. This is only one example
of reasonably possible sensitivity scenarios. A significant increase in our
estimate of contractual discounts for all payers would lower our earnings. This
would adversely affect our results of operations, financial condition, liquidity
and future access to capital.



During the nine months ended September 30, 2012 and 2011, approximately 46% and
48%, respectively, of net patient service revenue related to services rendered
under the Medicare and Medicaid programs. In the ordinary course of business, we
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.



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Accounts Receivable and Allowances for Doubtful Accounts




Accounts receivable are reported net of estimated allowances for doubtful
accounts and contractual adjustments. Accounts receivable are uncollateralized
and primarily consist of amounts due from third-party payers and patients. To
provide for accounts receivable that could become uncollectible in the future,
we establish an allowance for doubtful accounts to reduce the carrying amount of
such receivables to their estimated net realizable value. The credit risk for
other concentrations (other than Medicare) of receivables is limited due to the
large number of insurance companies and other payers that provide payments for
our services. We do not believe that there are any other significant
concentrations of receivables from any particular payer that would subject us to
any significant credit risk in the collection of our accounts receivable.



The amount of the provision for doubtful accounts is based upon our assessment
of historical and expected net collections, business and economic conditions,
trends in Federal and state governmental healthcare coverage and other
collection indicators. The primary tool used in our assessment is an annual,
detailed review of historical collections and write-offs of accounts receivable
as they relate to aged accounts receivable balances. The results of our detailed
review of historical collections and write-offs, adjusted for changes in trends
and conditions, are used to evaluate the allowance amount for the current
period.  If the actual bad debt allowance percentage applied to the applicable
aging categories would change by 1% from our estimated bad debt allowance
percentage for the year ended December 31, 2011, our after-tax loss from
continuing operations would change by approximately $0.7 million and our net
accounts receivable would change by approximately $1.1 million at December 31,
2011. The resulting change in this analytical tool is considered to be a
reasonably likely change that would affect our overall assessment of this
critical accounting estimate.  Accounts receivable are written-off after
collection efforts have been followed in accordance with our policies.



Goodwill and Other Intangible Assets




Goodwill represents the excess purchase price over the estimated fair value of
net assets acquired by the Company in business combinations. Goodwill and
indefinite life intangible assets are not amortized but are reviewed annually
for impairment, or more frequently if impairment indicators arise. During the
third quarter of 2012 we recognized goodwill impairment of approximately $69.9
million as a result of the final rule issued on the physician fee schedule for
2013 by CMS on November 1, 2012, which included certain rate reductions on
Medicare payments to freestanding radiation oncology providers. During the third
quarter of 2011 we recognized goodwill impairment of approximately
$226.5 million and trade name impairment of approximately $8.4 million as a
result of our review of growth expectations and the release of the final
rule issued on the physician fee schedule for 2012 by CMS on November 1, 2011,
which included certain rate reductions on Medicare payments to freestanding
radiation oncology providers.  During the fourth quarter of 2011 we incurred an
impairment loss of approximately $121.6 million. Approximately $49.8 million of
the $121.6 million related to the trade name impairment as a result of our
rebranding initiative.  The remaining $71.8 million of impairment relating to
goodwill in certain of our reporting units.



The implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination. The estimated fair
value of the reporting unit is allocated to all of the assets and liabilities of
the reporting unit (including the unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the estimated
fair value of the reporting unit was the purchase price paid. Based on
(i) assessment of current and expected future economic conditions, (ii) trends,
strategies and forecasted cash flows at each reporting unit and
(iii) assumptions similar to those that market participants would make in
valuing the reporting units.



The estimated fair value measurements were developed using significant
unobservable inputs (Level 3). For goodwill, the primary valuation technique
used was an income methodology based on estimates of forecasted cash flows for
each reporting unit, with those cash flows discounted to present value using
rates commensurate with the risks of those cash flows. In addition, a market-
based valuation method involving analysis of market multiples of revenues and
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
(i) a group of comparable public companies and (ii) recent transactions, if any,
involving comparable companies. Assumptions used are similar to those that would
be used by market participants performing valuations of regional divisions.
Assumptions were based on analysis of current and expected future economic
conditions and the strategic plan for each reporting unit.



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Intangible assets consist of trade names, non-compete agreements, licenses and
hospital contractual relationships. Trade names have an indefinite life and are
tested annually for impairment. Non-compete agreements, licenses and hospital
contractual relationships are amortized over the life of the agreement (which
typically ranges from 5 to 20 years) using the straight-line method. No
intangible asset impairment loss was recognized for any period presented.



During the second quarter of 2011, certain of our regions' patient volume have
stabilized in their respective markets. Although we have had a stabilization of
patient volume, we reviewed our anticipated growth expectations in certain of
our reporting units and are considering adjusting our expectations for the
remainder of the year. If our previously projected cash flows for these
reporting units are not achieved, it may be necessary to revise these estimated
cash flows and obtain a valuation analysis and appraisal that will enable us to
determine if all or a portion of the recorded goodwill or any portion of other
long-lived assets are impaired.



During the third quarter of 2011, we completed an interim impairment test for
goodwill and indefinite-lived intangible assets. In performing this test, we
assessed the implied fair value of our goodwill and intangible assets. We
determined that the carrying value of goodwill and trade name in certain U.S.
Domestic markets, including North East United States (New York, Rhode Island,
Massachusetts and southeast Michigan), California, South West United States
(central Arizona and Las Vegas, Nevada), the Florida east coast, Northwest
Florida and Southwest Florida regions exceeded their fair value. Accordingly, we
recorded noncash impairment charges in the U.S. Domestic reporting segment
totaling $234.9 million relating to goodwill and trade name in the consolidated
statements of operations for the quarter ended September 30, 2011.



During the fourth quarter of 2011, we decided to rebrand our current trade name
of 21st Century Oncology.  As a result of the rebranding initiative and
concurrent with our annual impairment test for goodwill and indefinite-lived
intangible assets, we incurred an impairment loss of approximately $121.6
million. Approximately $49.8 million of the $121.6 million related to the trade
name impairment as a result of our rebranding initiative.  The remaining $71.8
million of impairment relating to goodwill in certain of our reporting units,
including North East United States, (New York, Rhode Island, Massachusetts and
southeast Michigan), and California, Southwest U.S. (Arizona and Nevada). The
remaining domestic U.S. trade name of approximately $4.6 million will be
amortized over its remaining useful life through December 31, 2012.  We incurred
approximately $0.9 million in amortization expense during the fourth quarter.
In addition, we impaired certain deposits on equipment of approximately $0.7
million and $0.8 million in leasehold improvements relating to a planned
radiation treatment facility office closing in Baltimore, Maryland.



Impairment of Long-Lived Assets




In accordance with ASC 360, "Accounting for the Impairment or Disposal of
Long-Lived Assets", we review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be fully recoverable. Assessment of possible impairment of a
particular asset is based on our ability to recover the carrying value of such
asset based on our estimate of its undiscounted future cash flows. If these
estimated future cash flows are less than the carrying value of such asset, an
impairment charge would be recognized for the amount by which the asset's
carrying value exceeds its estimated fair value.



Stock-Based Compensation



All share-based compensation cost is measured at the grant date, based on the
fair value of the award, and is recognized as an expense in the statement of
operations and comprehensive loss over the requisite service period.



For purposes of determining the compensation expense associated with equity
grants, we value the business enterprise using a variety of widely accepted
valuation techniques, which considered a number of factors such as the financial
performance of the Company, the values of comparable companies and the lack of
marketability of the Company's equity. The Company then uses the option pricing
method to determine the fair value of equity units at the time of grant using
the following assumptions: a term of five years, which is based on the expected
term in which the units will be realized; a risk-free interest rate of 1.96% and
0.53% for grants issued in 2010 and 2011, respectively, which is the five-year
U.S. federal treasury bond rate consistent with the term assumption; and
expected volatility of 50% and 55% for grants issued in 2010 and 2011,
respectively, which is based on the historical data of equity instruments of
comparable companies.



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For purposes of determining the compensation expense associated with the 2012
equity-based incentive plan grants, management valued the business enterprise
using a variety of widely accepted valuation techniques, which considered a
number of factors such as the financial performance of the Company, the values
of comparable companies and the lack of marketability of the Company's equity.
The Company then used the probability-weighted expected return method ("PWERM")
to determine the fair value of these units at the time of grant. Under the
PWERM, the value of the units is estimated based upon an analysis of future
values for the enterprise assuming various future outcomes (exits) as well as
the rights of each unit class. In developing assumptions for the various exit
scenarios, management considered the Company's ability to achieve certain growth
and profitability milestone in order to maximize shareholder value at the time
of potential exit.



For 2010 and 2011, the estimated fair value of the units, less an assumed
forfeiture rate of 2.7%, is recognized in expense in the Company's financial
statements on a straight-line basis over the requisite service periods of the
awards for Class B Units. For Class B Units, the requisite service period is
48 months, and for Class C Units, the requisite service period is 34 months only
if probable of being met. The assumed forfeiture rate is based on an average
historical forfeiture rate.



For 2012, the estimated fair value of the units, less an assumed forfeiture rate
of 3.9%, is recognized in expense in the Company's consolidated financial
statements on a straight-line basis over the requisite service periods of the
awards for Class MEP Units. For Class MEP Units, the requisite service period is
approximately 18 months, and for Class EMEP Units, the requisite service period
is 36 months only if probable of being met. The assumed forfeiture rate is based
on an average historical forfeiture rate.



Income Taxes



We make estimates in recording our provision for income taxes, including
determination of deferred tax assets and deferred tax liabilities and any
valuation allowances that might be required against the deferred tax assets. ASC
740, "Income Taxes" ("ASC 740") requires that a valuation allowance be
established when it is more likely than not that all or a portion of a deferred
tax asset will not be realized. In 2009, we determined that a valuation
allowance of $3.4 million was appropriate under the provisions of ASC 740. This
valuation allowance of $3.4 million was against state deferred tax assets.
Primarily because of the taxable loss as of December 31, 2010, we determined
that the valuation allowance should be $17.6 million, consisting of
$12.3 million against federal deferred tax assets and $5.3 million against state
deferred tax assets. This represented an increase of $14.2 million in valuation
allowance. Additional valuation allowance of $27.9 million has been recorded in
2011 consisting of $26.0 million against federal deferred tax assets and
$1.9 million against state deferred tax assets.



ASC 740 clarifies the accounting for uncertainty in income taxes recognized in
an entity's financial statements and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. Under ASC 740, the impact of an
uncertain tax position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition.



We are subject to taxation in the United States, approximately 22 state
jurisdictions, the Netherlands, India and throughout Latin America, namely,
Argentina, Bolivia, Costa Rica, Dominican Republic, El Salvador, Guatemala and
Mexico. However, the principal jurisdictions for which we are subject to tax are
the United States, Florida and Argentina.



Our future effective tax rates could be affected by changes in the relative mix
of taxable income and taxable loss jurisdictions, changes in the valuation of
deferred tax assets or liabilities, or changes in tax laws, interpretations
thereof. We monitor the assumptions used in estimating the annual effective tax
rate and makes adjustments, if required, throughout the year. If actual results
differ from the assumptions used in estimating our annual effective tax rates,
future income tax expense (benefit) could be materially affected.



In addition, we are routinely under audit by federal, state, or local
authorities in the areas of income taxes and other taxes. These audits include
questioning the timing and amount of deductions and compliance with federal,
state, and local tax laws. We regularly assess the likelihood of adverse
outcomes from these audits to determine the adequacy of our provision for income
taxes. To the extent we prevail in matters for which accruals have been
established or is required to pay amounts in excess of such accruals, the
effective tax rate could be materially affected.



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We are currently undergoing a US Federal income tax examination for tax years
2007 through 2008.  The IRS has proposed penalties and interest for which an
additional accrual of $1.4 has been made.  We have closed the New York State
audit for tax years 2006 through 2008 with a favorable result.



New Pronouncements



In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and International Financial Reporting Standards,(ASU 2011-04),
which amends the FASB Accounting Standards Codification to provide a consistent
definition of fair value and ensure that the fair value measurement and
disclosure requirements are similar between U.S. GAAP and International
Financial Reporting Standards. ASU 2011-04 changes certain fair value
measurement principles and enhances the disclosure requirements particularly for
level 3 fair value measurements. ASU 2011-04 is applied prospectively. The
amendments are effective for fiscal years, and interim period within those
years, beginning after December 15, 2011. We adopted ASU 2011-04 on January 1,
2012 which had no impact on the our condensed consolidated financial position,
results of operations or cash flows.



In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income, (ASU 2011-05). ASU 2011-05 amends the FASB
Accounting Standards Codification to allow an entity the option to present the
total of comprehensive income, the components of net income, and the components
of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. In both
choices, an entity is required to present each component of net income along
with the total net income, each component of other comprehensive income along
with a total for other comprehensive income, and a total amount for
comprehensive income. ASU 2011-05 eliminates the option to present the
components of other comprehensive income as part of the statement of changes in
stockholders' equity. The amendments to the Codification in the ASU do not
change the items that must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net income. In
December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220):
Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05, (ASU 2011-12). ASU 2011-12 updates ASU
2011-05 by deferring requirements to present items that are reclassified from
accumulated other comprehensive income to net income separately with their
respective components of net income and other comprehensive income. ASU 2011-05
and ASU 2011-12 should be applied retrospectively. The amendments pursuant to
both ASU 2011-05 and 2011-12 are effective for fiscal years, and interim period
within those years, beginning after December 15, 2011. We adopted ASU 2011-05
and 2011-12 in 2011.



In July 2011, the FASB issued ASU 2011-07, Health Care Entities (Topic 954):
Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts,
and the Allowance for Doubtful Accounts for Certain Health Care Entities, (ASU
2011-07). ASU 2011-07 amends the FASB Accounting Standards Codification to
require health care entities that recognize significant amounts of patient
service revenue at the time services are rendered even though they do not assess
the patient's ability to pay to present the provision for bad debts related to
patient service revenue as a deduction from patient service revenue (net of
contractual allowances and discounts) on their statement of operations.
Additionally, those health care entities are required to provide enhanced
disclosure about their policies for recognizing revenue and assessing bad debts.
The amendments also require disclosures of patient service revenue (net of
contractual allowances and discounts) as well as qualitative and quantitative
information about changes in the allowance for doubtful accounts. ASU 2011-07 is
applied retrospectively and disclosures relating to ASU 2011-07 are applied
prospectively. The amendments are effective for fiscal years, and interim period
within those years, beginning after December 15, 2011. We have evaluated ASU
2011-07 and determined that the requirements of this ASU are not applicable to
us as the ultimate collection of patient service revenue is generally
determinable at the time of service, and therefore, the ASU had no impact on the
our condensed consolidated financial position, results of operations or cash
flows.



               Reimbursement, Legislative And Regulatory Changes


Legislative and regulatory action has resulted in continuing changes in reimbursement under the Medicare and Medicaid programs that will continue to limit payments we receive under these programs.




Within the statutory framework of the Medicare and Medicaid programs, there are
substantial areas subject to legislative and regulatory changes, administrative
rulings, interpretations, and discretion which may further affect payments made
under those programs, and the federal and state governments may, in the future,
reduce the funds available under those programs or require more stringent
utilization and quality reviews of our treatment centers or require other
changes in our operations. Additionally, there may be a continued rise in
managed care programs and future restructuring



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of the financing and delivery of healthcare in the United States. These events could have an adverse effect on our future financial results.



                         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. In addition, we do not engage in
trading activities involving non-exchange traded contracts. As such, we are not
materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in these relationships.
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