ONCURE HOLDINGS INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes for the years ended December 31, 2011, 2010 and 2009, included elsewhere in this annual report. This section of the annual report contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those anticipated for many reasons, including as a result of some of the                                           27  --------------------------------------------------------------------------------

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    factors described below and in the section entitled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this annual report. You are cautioned not to place undue reliance on these forward-looking statements, which apply on and as of the date of this annual report. You should read the following discussion together with the section entitled "Risk Factors," "Selected Consolidated Financial Data" and the audited consolidated financial statements, including the related notes, appearing elsewhere in this annual report.    Overview    We operate radiation oncology treatment centers for cancer patients. We contract with radiation oncology medical groups and, in certain cases with integrated group practices, which we refer to as our affiliated physician groups, and their radiation oncologists through long-term management services agreements, or MSAs, to offer cancer patients a comprehensive range of radiation oncology treatment options. Radiation oncology treatments are primarily performed with a linear accelerator, or linac, which uses high-energy photons or electrons to destroy a tumor. We currently provide services to a network of 11 affiliated physician groups that treat cancer patients at our 38 radiation oncology treatment centers.    For the year ended December 31, 2011, our net revenue, operating income and Adjusted EBITDA were $103.3 million, $12.0 million and $35.3 million, respectively, compared to $99.8 million, $9.2 million and $36.0 million, respectively, for the same period in 2010. The year-over-year increase in net revenue and operating income was principally due to one additional treatment day in 2011 compared to 2010, an increase in IMRT and IGRT utilization for patient treatments, an increase in CMS reimbursement rates and improved collections on third party IMRT billing for the year ended December 31, 2011.    Net Revenue.  We generate net revenue pursuant to long-term MSAs with affiliated physician groups. Pursuant to these MSAs, we provide our affiliated physician groups use of our facilities, certain clinical services of our treatment center staff and administer the non-medical business functions of our treatment centers, such as technical staff recruiting, marketing, managed care contracting, receivables management, compliance, purchasing, information systems, accounting, human resource management and physician succession planning. In return, our management services revenues include compensation by the affiliated physician groups for expenses incurred in operating our treatment centers plus a fee based on the earnings of our affiliated physician groups, with the exception of one MSA in California, under which we earn our management fee based on a fixed percentage of the affiliated physician group's net revenue.  Net revenue for the year ended December 31, 2011 was $103.3 million.    Operating Expenses.  Our operating expenses consist principally of (i) the salaries and benefits we pay to our employees, including our management, billing and collections staff, administrative staff, marketing group and the professionals and employees working at our treatment centers other than the radiation oncologists; (ii) general and administrative expenses, including maintenance, rent, bad debt expense, utilities, insurance and other expenses for our corporate and administrative offices and treatment centers; and (iii) depreciation and amortization. The operating costs of the treatment centers are our responsibility. Operating expenses for the year ended December 31, 2011 were $91.3 million.   

Acquisitions and Developments

    We expect to continue to acquire and develop treatment centers in connection with the implementation of our growth strategy. When we acquire a treatment center, the purchase price is allocated to the assets acquired and liabilities assumed based upon their respective values on the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. We believe the fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions.    On July 19, 2011, we received approval from the State of California to provide cancer patient treatment at our de novo site in Yorba Linda, California.  The de novo site, developed in cooperation with one of our local affiliated physician groups, began providing cancer consultation services during July 2011 and began cancer patient treatments during August 2011.    On May 3, 2011, the Company was notified by Northeast Florida Cancer Services, LLC, or NFCS, an affiliate of Hospital Corporation of America, of its intent to divest of its 51% ownership in Memorial Southside Cancer Center, or Memorial. The Company and Ninth City Landowners, LLP, or Ninth City, each owned a 24.5% interest in Memorial. On August 31, 2011, the Company and Ninth City jointly acquired NFCS's 51% ownership. As a result of the transaction, the Company and Ninth City each own 50% of Memorial. The assets of the cyber knife business, a component of the Memorial joint venture, were distributed to NFCS in addition to cash of approximately $0.8 million, 50% of which was paid by Oncure, representing the difference in the value of the cyber knife assets distributed and the value of the 51% NFCS ownership interest in Memorial. The Company records its ownership interest under the equity method of accounting for an investment in an unconsolidated joint venture.                                           28  --------------------------------------------------------------------------------

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    In January 2006, we formed the Vidalia Regional Cancer Center, LLC as a joint venture with Meadows Regional Medical Center, Inc., or Meadows, to develop and operate a new cancer treatment center in Vidalia, Georgia. Both the Company and Meadows committed to fund the initial capital requirements upon issuance of a certificate of need, or CON, by the Georgia Department of Community. The CON was issued to Meadows in 2010 and will be contributed to the joint venture as Meadows' initial capital contribution. During 2011, Vidalia Regional Cancer Center, LLC was renamed Meadows Regional Cancer Center, LLC and the operating agreement was changed to include a 40% equity interest for the Company and Meadows and a 20% equity interest for Florida Radiation Oncology Group, LLC. On May 3, 2011, the Operating Agreement was executed by the parties named above. We have committed to provide $1.0 million of initial capital to Meadows Regional Cancer Center, LLC which includes operating lease guarantees, purchases of furniture and fixtures and initial funding of operating working capital. We have not contributed any money to the development as of December 31, 2011. Development activities began during the second quarter of 2011 and are expected to conclude during the third quarter 2012 with the commencement of patient treatment. The Company records its ownership interest under the equity method of accounting for an investment in an unconsolidated joint venture.    On December 1, 2011, the Company contributed all of the existing assets, operations and liabilities of its Simi Valley Cancer Center to a newly formed California limited liability company, Simi Valley Cancer Center Management, LLC. Simi Valley Hospital & Health Care Services, Simi, a nonprofit hospital, purchased a 50% interest in the LLC for $2.0 million. The LLC will provide technical clinical and management services to one of our affiliated physician groups.    Third-Party Contracting    Our affiliated physician groups receive payments for their services and treatments rendered to patients covered by third-party payors and government programs. Most of our affiliated physician groups' revenue from third-party payors is from managed care organizations and is attributable to contracts we have negotiated with them. We believe that the scale of our treatment center network improves our ability to negotiate more attractive agreements with these payors. These agreements specify fixed fees for services provided at our treatment centers, and give the managed care organization the ability to market access to our affiliated physician groups and physicians to their members. This is a benefit to the managed care organization, and also gives our affiliated physician groups access to a larger pool of potential patients.    Receivables Management    Our affiliated physician groups provide radiation therapy services under a significant number of different professional and technical codes, which determine reimbursement. Our affiliated physician groups rely on us to provide the complex coding, billing and collections services necessary for payment. Fees billed to contracted third-party payors and government sponsored programs are automatically adjusted to the allowable payment amount at the time of billing. For third-party payors with whom we do not have contracts and self-pay patients, the amount we expect will be paid for services is estimated and recorded at the time of billing. We revise these estimates at the time billings are collected for any actual differences in the amount received and the net billings due.    As part of the MSA, and in consideration of the management services we provide to them, the affiliated physician groups assign their accounts receivable to us.  Accounts receivable and the related cash flows upon collection of these accounts receivable are reported net of estimated allowances for doubtful accounts and contractual adjustments.    

Sources of our Affiliated Physician Groups' Net Revenue By Payor

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

                            Year Ended                         December 31,                      2011   2010   2009 Third-party payors     54 %   55 %   55 % Medicare               39 %   38 %   39 % Medicaid                6 %    6 %    5 % Self-pay                1 %    1 %    1 %     Our affiliated physician groups receive payments for their services and treatments rendered to patients covered by Medicare, Medicaid, third-party payors and self-pay. Generally, our affiliated physician groups' net revenue is impacted by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures.    Third-Party Payors.  Third-party payors include private health insurance as well as related payments for co-insurance and co-payments. Most of our affiliated physician groups' third-party payor revenue is attributable to contracts where a set fee is negotiated                                           29 

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relative to services provided by our treatment centers. We do not have any contracts that individually represent over 5% of our affiliated physician groups' net revenue. Although the terms and conditions of our managed care contracts vary, they are typically for terms of less than five years and provide for automatic renewals. If payments by managed care organizations and other third-party payors decrease then our net revenue and net income could decrease.

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

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

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

Comparison of the Years Ended December 31, 2011 and 2010

    Net revenue.  Net revenue for the year ended December 31, 2011 was $103.3 million compared to $99.8 million for the same period in 2010, an increase of $3.5 million or 3.5%, primarily due to a 7% increase in IMRT treatments and a 37% increase in IGRT treatments in 2011, both of which are compensated at a higher rate than CBT, an increase in CMS and third party IMRT reimbursement rates for the year ended December 31, 2011 and one additional treatment day in 2011 compared to 2010, partially offset by lower CBT census compared to the same period in 2010.    Salaries and benefits.  Salaries and benefits for the year ended December 31, 2011 was $32.2 million compared to $34.7 million for the same period in 2010, a decrease of $2.5 million, or 7.2%, primarily due to $0.8 million in 2010 of non-recurring severance expense related to the departure of our former CEO and $0.5 million in 2010 of non-recurring conditional management retention expense, a decrease of $0.5 million of other compensation payments in 2011, a decrease in stock option expense of $0.2 million and a reduction in personnel and related salary and employee benefit costs during the period.    Depreciation and amortization.  Depreciation and amortization expense for the year ended December 31, 2011 was $17.4 million compared to $18.4 million for the same period of 2010, a decrease of $1.0 million, or 5.4%, primarily due to assets which became fully depreciated.    General and administrative expenses.  General and administrative expenses for the year ended December 31, 2011 was $41.6 million, compared to $37.5 million for the year ended December 31, 2010, an increase of $4.1 million, or 10.9%, primarily due to an increase of $0.8 million in operating lease expense from the addition of three linacs during the second half of 2010 and one linac during the second half of 2011, an increase of $1.4 million in equipment related repairs and maintenance expense at the treatment centers, $0.6 million in professional fees related to an MSA renewal, $1.6 million related to re-organizing physician groups in Florida into a consolidated billing entity, and an increase in other general and administrative expenses of $2.2 million primarily from increased center level operating expenses, increased bad debt expense, and increased property and sales and use taxes, offset by non-recurring costs of $2.7 million incurred in 2010 associated with operating a temporary vault while replacing a linac at a single-linac treatment center and legal costs related to a lease settlement and a $0.6 million decrease in costs related to public filings.    Interest expense.  Interest expense for the year ended December 31, 2011 was $26.8 million compared to $22.9 million for the same period in 2010, an increase of $3.9 million, or 17.0%, primarily due to the refinancing of debt in May 2010 and the issuance of $210.0 million of Senior Notes which bear interest at higher rates than the retired debt and were outstanding for the full 2011 fiscal year.    Income tax (expense) benefit.  Income tax benefit for the year ended December 31, 2011 was $4.6 million compared to $7.0 million for the same period in 2010, a decrease of $2.4 million, or 34.3%, primarily due to a $14.9 million loss before tax for the year                                           30 

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    ended December 31, 2011 compared to a $17.4 million loss before tax for the same period in 2010 and tax expense related to the sale of a 50% interest in Simi Valley Cancer Center Management, LLC in 2011.    

Comparison of the Years Ended December 31, 2010 and 2009

    Net revenue.  Net revenue for the year ended December 31, 2010 was $99.8 million compared to $106.8 million for the same period in 2009, a decrease of $7.0 million or 6.6%. The year-over-year decline in net revenue was principally due to (1) a $2.2 million decrease resulting from the permanent closure of one center in June 2009 due to the expiration of a contract to operate the center and the resulting loss of revenue from patient treatments performed at that center, (2) a $1.1 million decrease due to the replacement of linacs at two single-linac treatment centers, which caused a temporary closure of one treatment center and reduced IMRT utilization at the second treatment center and (3) a 6% decrease in patient treatments as a result of broad economic factors.    Salaries and benefits.  Salaries and benefits for the year ended December 31, 2010 decreased 2.8% to $34.7 million from $35.7 million for the same period in 2009. The decrease was primarily due to a reduction in personnel and related salary and employee benefit costs during the period as a result of a decrease in patient treatments, offset by a management retention payment of $0.5 million, $0.8 million of non-recurring severance expense related to the departure of our former CEO and $0.5 million of other compensation payments approved by the Compensation Committee of the Board of Directors.    Depreciation and amortization.  Depreciation and amortization expense for the year ended December 31, 2010 decreased slightly to $18.4 million compared to $18.7 million for the same period of 2009.    General and administrative expenses.  General and administrative expenses for the year ended December 31, 2010 increased $5.4 million to $37.5 million, or 16.8%, from $32.1 million for the year ended December 31, 2009. The increase was due to $1.7 million in costs associated with the operation of a temporary vault while replacing a linac at a single-linac treatment center, and $0.9 million in costs related to initial public filings, offset by a decrease of $2.1 million in center and corporate overhead costs. Reimbursement of legal expenses and proceeds related to the settlement of litigation of $4.3 million offset general and administrative expenses incurred during the year ended December 31, 2009.    Interest expense.  Interest expense increased $6.2 million to $22.9 million or 37.1% for the year ended December 31, 2010 compared to $16.7 million for the same period in 2009. The increase in interest expense was principally due to the refinancing of debt and the issuance of $210.0 million of Senior Secured Notes which bear interest at higher rates than the retired debt.    

Debt extinguishment cost. The Company recognized $2.9 million of debt extinguishment cost in the second quarter of 2010 in connection with the refinancing.

    Income tax (expense) benefit.  Income tax benefit increased $8.7 million to $7.0 million for the year ended December 31, 2010 compared to income tax expense of $1.7 million during the same period in 2009. The increase was due to a $17.4 million loss from continuing operations before income taxes for the year ended December 31, 2010 compared to income from continuing operations before income taxes of $3.0 million for the year ended December 31, 2009.    

Liquidity and Capital Resources

    As of December 31, 2011, we had total cash and cash equivalents of $7.0 million, $207.0 million of outstanding long-term indebtedness, net of discount, and availability under our revolving credit facility of up to $40.0 million, which may be increased pursuant to the terms of the indenture governing the notes and the agreement governing our Revolving Credit Facility.    On May 13, 2010, we concluded an offering for $210.0 million of Senior Notes. Proceeds from the sale of the Senior Notes were used primarily to repay our then existing senior credit facility and subordinated debt. Concurrently with the closing of the offering, our direct wholly-owned subsidiary, Oncure Medical Corp., and each of its direct and indirect subsidiaries entered into a new Revolving Credit Facility with GE Capital Markets, Inc., as sole lead arranger and book manager, General Electric Capital Corporation, as administrative agent and collateral agent, and the other lenders from time to time party thereto.    The Revolving Credit Facility provides for aggregate commitments of up to $40.0 million, including a letter of credit sub-facility of $2.0 million and a swing line sub-facility of $2.0 million, and provides for the increase, at our option, of aggregate commitments by $10.0 million, subject to certain conditions. The Revolving Credit Facility is undrawn as of December 31, 2011 and expires in May 2015.    Our primary ongoing liquidity requirements are expected to be for working capital, debt service, capital expenditures and acquisitions. We may finance these liquidity requirements through a combination of cash on hand, cash flows from operating activities and the incurrence of additional indebtedness, including borrowings under our Revolving Credit Facility.                                           31  --------------------------------------------------------------------------------

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

Cash Flows Provided By Operating Activities

Net cash provided by operating activities for the years ended December 31, 2011, 2010 and 2009 was $5.3 million, $10.1 million and $16.9 million, respectively.

    Net cash provided by operating activities decreased $4.8 million to $5.3 million for the year ended December 31, 2011 compared to $10.1 million in 2010. The decrease was primarily a result of a decrease in cash provided by an increase in accounts receivable of $5.6 million and a decrease in cash provided by payments of accounts payable and accrued expenses of $3.0 million primarily due to payment of accrued interest, offset by a decrease in net loss of $0.4 million and a decrease in cash utilized for other liabilities of $2.7 million primarily due to settlement of our interest swap agreement in 2010.    Net cash provided by operating activities decreased $6.8 million to $10.1 million for the year ended December 31, 2010 compared to $16.9 million in 2009. The decrease was primarily a result of a decrease in net income in 2010 of $12.1 million, a decrease in deferred income tax expense of $8.3 million and an increase in cash utilized by other liabilities of $2.6 million primarily due to settlement of our interest swap agreement, offset by an increase in cash provided by accrued expenses of $5.0 million primarily due to accrued interest, non-cash write-off of debt extinguishment costs of $2.9 million, an increase in cash provided by accounts receivable of $4.1 million and a decrease in cash utilized for prepaid expenses and other assets of $3.2 million.    

Cash Flows Used In Investing Activities

Net cash used in investing activities for the years ended December 31, 2011, 2010 and 2009 was $5.2 million, $7.3 million and $6.0 million, respectively.

    Net cash used in investing activities decreased by $2.1 million to $5.2 million for the year ended December 31, 2011 from $7.3 million for the year ended December 31, 2010. The decrease was primarily due to a decrease in capital expenditures of $2.9 million offset by an investment in unconsolidated joint venture of $0.4 million and a decrease in distributions from unconsolidated joint ventures.    

Net cash used in investing activities increased by $1.3 million to $7.3 million for the year ended December 31, 2010 from $6.0 million for the year ended December 31, 2009. The increase was primarily due to an increase in capital expenditures of $0.9 million and a decrease in distributions received from unconsolidated joint ventures of $0.5 million.

Cash Used In Financing Activities

Net cash used in financing activities for the years ended December 31, 2011, 2010 and 2009 was $0.1 million, $1.1 million and $14.9 million, respectively.

    Net cash used in financing activities decreased by $1.0 million to $0.1 million for the year ended December 31, 2011 from $1.1 million for the year ended December 31, 2010. The decrease was primarily due to a decrease of $0.5 million of cash provided by issuance of Senior Notes in 2010 of $206.3 million net of $205.8 million in debt repayments and related loan costs offset by cash provided by proceeds from sale of a noncontrolling interest of $2.0 million.    Net cash used in financing activities decreased by $13.8 million to $1.1 million for the year ended December 31, 2010 from $14.9 million for the year ended December 31, 2009. The decrease was primarily due to $206.3 million of proceeds from the issuance of Senior Notes in May 2010, offset by $198.5 million in debt repayments and related loan costs of $9.0 million and a decrease in net payments on the line of credit of $12.0 million for the year ended December 31, 2009.                                           32 

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    On May 13, 2010, we concluded an offering for $210.0 million of Senior Notes which will mature on May 15, 2017. The offering of the Senior Notes closed on May 13, 2010 with generated net proceeds to us of $206.3 million which were utilized to repay the outstanding balances of our senior term loan and subordinated debt along with $9.0 million of expenses of the offering. The Senior Notes are secured by the assets of the Company and our subsidiaries and are guaranteed by our subsidiaries. Prior to May 15, 2013, up to 35% of the Senior Notes are redeemable at the option of the Company with proceeds from an equity offering at a redemption price of 111.75%.    Concurrently with the closing of the offering of the Senior Notes, our direct wholly-owned subsidiary, Oncure Medical Corp. and each of its direct and indirect subsidiaries entered into a new senior secured revolving credit facility, or Revolving Credit Facility, with GE Capital Markets, Inc., as sole lead arranger and book manager, General Electric Capital Corporation, as administrative agent and collateral agent, and the other lenders from time to time party thereto. The new Revolving Credit Facility provided for aggregate commitments of up to $40.0 million, including a letter of credit sub-facility of $2.0 million and a swing line sub-facility of $2.0 million, and will provide for the increase, at our option, of aggregate commitments by $10.0 million, subject to certain conditions. The Revolving Credit Facility bears interest at a rate of Prime plus 3.5% (6.75% at December 31, 2011) or LIBOR plus 4.5% (4.77% at December 31, 2011) at the election of the Company. The revolving line of credit is subject to an unused line fee of 0.75% to be paid quarterly.  The Revolving Credit Facility is undrawn as of December 31, 2011 and expires in May 2015.    On October 26, 2011, Oncure Medical Corp., and each of its direct and indirect subsidiaries, entered into an amendment, or the Amendment, to the Revolving Credit Facility.  The Amendment provides that the quarterly Consolidated Fixed Charge Coverage Ratio compliance test set forth in the Revolving Credit Facility is now only required to the extent that there is an outstanding balance under the Revolving Credit Facility.  In addition, among other things, the Amendment provides that subsequently, if (i) one or more Permitted Acquisitions have occurred with a combined EBITDA (as defined in the Revolving Credit Facility) of at least $4 million and (ii) the Consolidated EBITDA (as defined in the Revolving Credit Facility) of Oncure Medical Corp. is $38 million or more, the Consolidated Fixed Charge Coverage Ratio will no longer be a maintenance test, but rather will be tested only upon a draw or issuance of a letter of credit under the Revolving Credit Facility.    

Discussion of Non-GAAP Information

    Adjusted EBITDA consists of net income as adjusted for depreciation and amortization, interest expense, interest and other income, income taxes, income from discontinued operations, non-cash equity based compensation expense, impairment loss, loss on interest rate swap, the management fee that we pay to Genstar and for certain other items that we believe are appropriate to manage the business and for the understanding of the reader, as detailed below. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis.    We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance and believe this measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industries with similar capital structures. We believe issuers of "high yield" securities also present Adjusted EBITDA because investors, analysts and rating agencies consider it useful in measuring the ability of those issuers to meet debt service obligations. We believe that Adjusted EBITDA is an appropriate supplemental measure of debt service capacity, because cash expenditures for interest are, by definition, available to pay interest, and income tax expense is inversely correlated to interest expense because income tax expense goes down as deductible interest expense goes up and depreciation and amortization are non-cash charges.    

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

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

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

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

    †    does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt, including the notes;    †    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;    

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

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

    †    we include certain adjustments that may be recurring in nature and may not meet the GAAP definition of infrequent or unusual items, but we believe these items are appropriate to manage the business and for the understanding of the reader.    Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.    In calculating Adjusted EBITDA, we make certain adjustments that are based on assumptions and estimates. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses, or realize benefits, similar to those adjusted in this presentation. We calculate Adjusted EBITDA in accordance with the debt covenants of our revolving credit agreement and certain adjustments are subject to debt administrator concurrence.    Adjusted EBITDA is a supplemental measure of our performance and our ability to service debt that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as measures of our liquidity. In addition, our measurements of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.    The following table reconciles net income to Adjusted EBITDA for the periods presented:                                                       Year Ended December 31,                                                2011          2010          2009                                                         (in thousands) Net income (loss)                           $  (10,312 )  $  (10,696 )  $    1,355 Depreciation and amortization                   17,445        18,365        

18,718

 Interest expense                                26,816        22,908        

16,726

 Interest and other income, net                     491           920           250 Income tax (benefit) expense                    (4,637 )      (6,969 )       1,654 EBITDA                                          29,803        24,528        38,703 Plus: Physicians assistance expense(a)                 1,814           249             - Management fees(b)                               1,500         1,500         1,500 MSA legal expenses (c)                             602             -             - Stock-based compensation expense                   381           588        

944

 Acquisition audits and related expenses(d)                                        239           329        

713

 Center closure costs(e)                            213         2,885        

-

 Impairment loss due to valuation(f)                160             -             - Severance costs(g)                                  36           810           187 Debt extinguishment cost                             -         2,932             - Impairment loss resulting from discontinued operations                              -           275        

-

 Loss on interest rate swap(h)                        -           267        

916

 Legal expenses and settlements(i)                    -             -        (4,268 ) Other expenses(j)                                  580         1,649           825 Adjusted EBITDA                             $   35,328    $   36,012    $   39,520    

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(a) Costs related to re-organizing physician groups in Florida into a consolidated billing entity.

   (b)      Represents management fees paid to Genstar.    (c)      Represents professional fees related to the ICON MSA renewal.    (d)      Includes expenses for acquisition related activities.                                           34 

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

(g) Represents severance costs related to the departure of our former CEO in 2010 and other workforce reduction costs during 2011 and 2009.

(h) Loss on interest rate swap that did not qualify for hedge accounting. See Note 6 of the Notes to our Consolidated Financial Statements included elsewhere in this annual report.

(i) Represents legal expenses and proceeds received related to the settlement of litigation.

    (j)       Includes deferred rent amortization of $0.3 million for 2011, 2010 and 2009; $0.1 million and $0.9 million of professional fees associated with registration of Senior Notes under the Securities Act of 1933 for 2011 and 2010, respectively; $0.1 million and $0.5 million conditional management retention expense in 2011 and 2010, respectively; and $0.5 million of one-time lease termination costs in 2009.    Contractual Obligations   

The following table sets forth our contractual obligations and the periods in which payments are due as of December 31, 2011:

                                                                       Payments Due by Period                                                            Less Than                                     After 5

Contractual Cash Obligations (in thousands) Total 1 Year 1 - 3 Years 3 - 5 Years Years Long-term debt(1)

                             $ 345,713   $    24,675   $      49,350   $      49,350   $ 222,338 Capital lease obligations and other notes         4,184         1,875           2,309               -           - Operating leases                                 62,207        10,837          18,809          14,938      17,623 Total contractual cash obligations            $ 412,104   $    37,387   $      70,468   $      64,288   $ 239,961    

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(1) Interest payments on long-term debt are based on the fixed annual interest rate of 11.75%.

    In addition to the obligations in the table above, we have an advisory services agreement with Genstar Capital, LLC. Pursuant to this agreement, we pay Genstar an annual management fee of $1.5 million for financial and advisory services. This agreement continues from year to year unless otherwise amended or terminated.    Additionally, in January 2006, we formed the Vidalia Regional Cancer Center, LLC as a joint venture with Meadows Regional Medical Center to develop and operate a new treatment center in Vidalia, Georgia. Both we and Meadows Regional Medical Center have committed to fund an initial $1.0 million of initial capital upon the successful issuance of a Georgia CON by the Georgia Department of Community. The CON was issued and development activities began during the second quarter of 2011 and are expected to conclude during the third quarter 2012 with the commencement of patient treatments.    

Off Balance Sheet Arrangements

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

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

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   Table of Contents    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, net revenue and expenses, and related disclosures of contingent assets and liabilities. We continuously evaluate our critical accounting policies and estimates, including those related to consolidation, revenue recognition, accounts receivable valuation, evaluation of goodwill and other intangible assets for impairment and the provision for income taxes. 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.    Our accounting policies are described in Note 2 of the Notes to our Consolidated Financial Statements included elsewhere in this annual report. 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.    Net Revenue and Allowances for Contractual Discounts.  Our net revenue represents a management fee that is based on a fixed percentage of the earnings of our affiliated physician groups except for one facility where the management fee is based on a fixed percentage of the affiliated physician group's net revenue. Accordingly, the net revenue reported in our consolidated financial statements is affected by the net revenue of our affiliated physician groups. Our affiliated physician groups have agreements with third-party payors that provide for payments at amounts different from their established rates. Our affiliated physician groups' net revenue is reported at the estimated net realizable amounts due from patients, third-party payors and others for services rendered. Our affiliated physician groups' net 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. Our affiliated physician groups also have agreements with managed care organizations to provide physician services based on negotiated fee schedules.    Our affiliated physician groups derive a significant portion of their net revenue from Medicare, Medicaid and third party payors 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 payor class basis given each payors' 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 net revenue reported in our consolidated statements of operations. There was no material change in estimate in our allowances for contractual discounts for the years ended December 31, 2011, 2010 and 2009.    Accounts Receivable and Allowances for Doubtful Accounts.  Accounts receivable and the related cash flows upon collection of these accounts receivable are assigned to us by our affiliated physician groups and reported net of estimated allowances for doubtful accounts and contractual adjustments. As part of the MSA, and in consideration of the management services we provide to them, the affiliated physician groups assign their accounts receivable to us. Accounts receivable are uncollateralized and primarily consist of amounts due from third-party payors 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 payors that provide payments for our services. We do not believe that there are any other significant concentrations of receivables from any particular payor 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. Accounts receivable are written-off after collection efforts have been followed in accordance with our policies. Accounts receivable, less allowances of $2.0 million, $1.9 million and $2.7 million, were $18.8 million, $17.3 million and $21.2 million as of December 31, 2011, 2010 and 2009, respectively.    Management Services Agreements Payable.  We collect accounts receivable assigned to us by our affiliated physician groups. We remit amounts due to our affiliated physician groups based on the terms of the respective MSA. This payable is included in accrued expenses in our consolidated financial statements and was $3.0 million, $2.6 million and $2.9 million as of December 31, 2011, 2010 and 2009, respectively.                                           36 

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    Goodwill.  We perform impairment tests at least annually on all goodwill. For purposes of testing goodwill for impairment, our goodwill has been assigned to our one consolidated reporting unit and our test is performed in the fourth quarter of each year or more frequently if impairment indicators arise. Goodwill is reviewed for impairment utilizing a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if a potential impairment exists, the fair value of the reporting unit is compared to the fair value of its assets and liabilities, excluding goodwill, to estimate the implied value of the reporting unit's goodwill. If an impairment charge is deemed necessary, a charge is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value.    Considerable management judgment is necessary to estimate the fair value of our reporting unit and goodwill. We determine the fair value of our reporting unit based on the income approach, using a discounted cash flow, or DCF, analysis to value the long-term future cash flows. This DCF analysis was used solely for the purpose of evaluating our goodwill for impairment and should not be interpreted as our prediction of future performance. The assumptions used in our DCF analysis are consistent with the assumptions we believe hypothetical marketplace participants would use, including the expectation that the most likely transaction to acquire us would be to acquire our assets. With respect to our DCF analysis, the timing and amount of future cash flows requires critical management assumptions, including estimates of expected future net revenue growth rates, EBITDA contributions, expected capital expenditures and an appropriate discount rate and terminal value. The average annual revenue growth rates forecasted for the reporting unit for the first five years of our projections ranged between 1.8% and 4.5%. After 2016, revenue growth was estimated to stabilize at a more normalized level of 3.0%. The overall weighted average cost of capital was 11.0% and the terminal value was calculated using the "Gordon Growth" expression. This expression quantifies the terminal value based on the assumption of a perpetual stream of cash flow with an inherent growth rate of 3.0%. Our 2011 assessment resulted in the determination that the fair value of our reporting unit exceeded the carrying amount by 18% and thus no impairment was indicated.    Impairment 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 is recognized for the amount by which the asset's carrying value exceeds its estimated fair value.    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. There are currently no valuation allowances against deferred tax assets.    An uncertain income tax position will not be recognized if we believe it has less than a 50% likelihood of being sustained. At December 31, 2011, we had $1.0 million of unrecognized tax assets. We are subject to taxation in the United States and five state jurisdictions. We are generally subject to federal and state examination for tax years after December 31, 2006 for federal purposes and after December 31, 2005 for state purposes.    Recent Accounting Pronouncements.  From time to time, the FASB, the SEC and other regulatory bodies seek to change accounting rules, including rules applicable to our business and financial statements.  We cannot provide assurance that future changes in accounting rules would not required us to make restatements.  Information regarding new accounting pronouncements is included in Note 2 to the consolidated financial statements.