RADIATION THERAPY SERVICES HOLDINGS, INC. – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties, such as statements about our plans, objectives, expectations and intentions. We use words such as "expect", "anticipate", "plan", "believe", "seek", "estimate", "intend", "future" and similar expressions to identify forward-looking statements. In particular, statements that we make in this section relating to the sufficiency of anticipated sources of capital to meet our cash requirements are forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including as a result of some of the factors described below and in the section titled "Risk Factors". You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.  

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 along with other services. We believe we are the largest company in the United States focused principally on providing radiation therapy and most advanced organization in terms of integrating related oncology physicians. We opened our first radiation treatment center in 1983 and, as of December 31, 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. 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, breast and surgical oncology, medical 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 December 31, 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                                         69 

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  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 December 31, 2012 was 9.2%. In connection with the 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:

º •

º The number of relative value units (RVU) (a measure of value used in

          the United States Medicare reimbursement formula for physician           services) delivered per day in our freestanding centers;          º •

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

         º •         º The number of treatments delivered per day in our freestanding           centers;          º •         º The average revenue per treatment in our freestanding centers;          º •         º The ratio of funded debt to pro-forma adjusted earnings before           interest, taxes, depreciation and amortization (leverage ratio); and          º •         º 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 and by providing value added services to other healthcare and provider organizations. 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.                                         70

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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 three fiscal years.                                                    Year Ended December 31,            Payer (Domestic U.S.)                 2010        2011      2012            Medicare                                 44.6 %     44.9 %    42.6 %            Commercial                               50.9       50.9      53.6            Medicaid                                  3.0        2.8       2.7            Self pay                                  1.5        1.4       1.1             Total net patient service revenue       100.0 %    100.0 %   100.0 %    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 2.7% of our net patient service revenue for the year ended December 31, 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                                         71

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  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.      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, then through the end of 2012 under the Middle Class Tax Relief and Job Creation Act of 2012, and yet again through the end of 2013 under the American Taxpayer Relief Act. If future reductions are not suspended, and if a permanent "doc fix" is not signed into law, the currently scheduled SGR reimbursement decrease (estimated at approximately 25%) will take effect on January 1, 2014.      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. On January 2, 2013, the President signed the American Taxpayer Relief Act, which extended the sequestration order required under the Budget Control Act until March 1, 2013. On March 1, 2013, President Obama issued the required sequestration order and, pursuant to 2 U.S.C. 906, the 2 percent Medicare sequester is scheduled to take effect for payments starting on April 1, 2013.  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. 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                                         72

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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:

         º •         º Patient volume and census;          º •

º Continued advances in technology and the related capital requirements;

º •

º Continued affiliation with physician specialties other than radiation

          oncology;          º •         º Our ability to develop and conduct business with hospitals and other           large healthcare organizations in a manner that adequately and           attractively compensates us for our services;          º •         º Changes in accounting for business combinations requiring that all           acquisition-related costs be expensed as incurred;          º •         º Our ability to achieve identified cost savings and operational           efficiencies;          º •         º Increased costs associated with development and optimization of our           internal infrastructure; and          º •         º Healthcare reform.  Results of Operations      The following summary results of operations data are qualified in their entirety by reference to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes and our audited consolidated financial statements and the accompanying notes, included in this Annual Report on Form 10-K, and other financial information included in this Annual Report on Form 10-K.  

Years Ended December 31, 2010, 2011 and 2012

      For the year ended December 31, 2012, our total revenues grew by approximately 7.6%, over the prior year, while our total revenues for the year ended December 31, 2011 grew by approximately 18.5% over the prior year. For the years ended December 31, 2012, 2011 and 2010, we had total revenues of $694.0 million, $644.7 million and $544.0 million, respectively.      For the years ended December 31, 2012, 2011 and 2010, net patient service revenue comprised 98.9%, 99.1% and 98.5%, respectively, of our total revenues. In states where we employ radiation oncologists, we derive our net patient service revenue through fees earned from the provision of the professional and technical component fees of radiation therapy services. In states where we do not employ radiation oncologists, we derive our administrative services fees principally from administrative services agreements with professional corporations. As of December 31, 2012, we employed the physicians in 88 of our treatment centers and operated pursuant to administrative services agreements in 38 of our treatment centers. In accordance with ASC 810, we consolidate the operating results of certain of the professional corporations for which we provide administrative services into our own operating results. In 2012, 2011 and 2010, 19.4%, 18.0% and 22.1%, respectively, of our net patient service revenue was generated by professional corporations with which we have administrative services agreements.                                         73

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      In our net patient service revenue for the years ended December 31, 2012, 2011, and 2010, revenue from the professional-only component of radiation therapy and revenue from our ICC physician practices, comprised approximately 28.7%, 25.8%, and 26.4%, respectively, of our total revenues.  

For the years ended December 31, 2012, 2011 and 2010, other revenue comprised approximately 1.1%, 0.9% and 1.5%, 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.

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The following table summarizes key operating statistics of our results of operations for the periods presented:

                                    Year Ended                                 Year Ended                                   December 31,                               December 31, Domestic U.S.                2010*           2011*        % Change       2011*           2012         % Change Number of treatment days                               254             255                         255            255 Total RVU's-freestanding centers                     10,613,973      11,986,768         12.9 %  

11,986,768     11,483,600          (4.2 )% RVU's per day-freestanding centers                         41,787          47,007         12.5 %       47,007         45,034          (4.2 )% Percentage change in RVU's per day-freestanding centers-same practice basis                             (0.4 )%         10.5 %                      10.5 %         (6.3 )% Total treatments-freestanding centers                        457,845         473,400          3.4 %      473,400        493,330           4.2 % Treatments per day-freestanding centers                          1,803           1,856          3.0 %        1,856          1,935           4.2 % Percentage change in revenue per treatment-freestanding centers-same practice basis                             (5.6 )%          2.8 %                       2.8 %         (3.9 )% Percentage change in treatments per day-freestanding centers-same practice basis                              1.4 %           1.0 %                       1.0 %          2.0 % Number of regions at period end (global)                  8               9                           9              9  Number of local markets at period end                       28              28                          28             28  Treatment centers-freestanding (global)                            89             118         32.6 %          118            121           2.5 % Treatment centers-hospital / other groups (global)                6               9         50.0 %            9              5         (44.4 )%                                      95             127         33.7 %          127            126          (0.8 )%  Days sales outstanding at quarter end                      41              39                          39             34 Percentage change in freestanding revenues-same practice basis                             (4.6 )%          4.2 %                       4.2 %         (2.1 )% Net patient service revenue-professional services only (in thousands)                $    143,487    $    166,090                $    166,090   $    199,097  

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   º *    º Excludes the impact of the termination of a capitated contract in Las      Vegas, Nevada                                         75 

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The following table summarizes key operating statistics of our results of operations for our international operations for the periods presented:

                               Years Ended                       Years Ended                              December 31,                      December 31,     International          2010*      2011*     % Change     2011*       2012      % Change     Number of new cases     2-D cases                5,646      5,411                  5,411      4,857     3-D cases                6,010      6,888                  6,888      8,901     IMRT / IGRT cases        1,047      1,478                  1,478      1,471      Total                   12,703     13,777         8.5 %   13,777     15,229         10.5 %   

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º *

º includes full period operating statistics, including period prior to our

acquisition on March 1, 2011

International

      Medical Developers' total service revenues was $20.8 million for the three months ended December 31, 2012 which represents a $0.5 million or 2.5% increase from the $20.3 million for the same period in 2011. Total revenue was positively impacted by $1.0 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 third quarter, growth in treatments and an improvement in treatment mix in Costa Rica, Mexico and Guatemala, mitigated by a reduction in IMRT treatments in Argentina compared to the same period in 2011 and decreased activity in December due to timing of holidays in many countries where we operate. In addition, we experienced growth in the number of new cases initiated during the quarter by 180, 54% 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 decreased $0.7 million, or 6.1% from $10.9 million to $10.2 million for the three months ended December 31, 2012 as compared to the same period in 2011. Facility-level gross profit as a percentage of total revenues decreased from 53.7% to 49.2%. Lower IMRT cases in Argentina, increases in compensation, facility rent, and incremental depreciation expense relating to our continued growth and investment in Latin America, as well as local inflation was offset by decreases in medical supplies and other operating costs, including lower outsourcing of scans as a result of recent equipment purchases.      MDLLC's net patient service revenue increased $2.6 million, or 14.7%, from $17.7 million to $20.3 million for the three months ended December 31, 2011 as compared to the three months ended September 30, 2011. Total revenue was positively impacted by $1.0 million of revenue from the acquisition of four radiation treatment facilities in November 2011, and the opening of new treatment centers in San Juan, Argentina and San Salvador, El Salvador in February and March 2011, respectively. The continued ramp-up in operations at our Centro de Radiaciones de La Costa and Centro de Radioterapia Siglo XXI subsidiaries in Argentina which opened in May and July 2010, respectively also favorably impacted revenue growth. In addition, we experienced growth in the number of new cases initiated during the quarter by 233 versus the September quarter and 448 versus the prior year's quarter, of which 250 pertained to the acquired operations in November 2011. The trend toward more clinically-advanced treatments continued during the quarter with an increase in the number of higher-revenue 3D and IMRT treatments.                                         76

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      Facility gross profit increased $0.9 million, or 9.0% from $10.0 million to $10.9 million for the three months ended December 31, 2011 as compared to the three months ended September 30, 2011. Facility-level gross profit as a percentage of net patient service revenue decreased to 53.7% from 56.5%, primarily due to an increase in physician compensation, incremental depreciation expense relating to our continued growth and investment in Latin America, facility rent expense, and expenses from the outsourcing of scans.  

The following table presents summaries of results of operations for the years ended December 31, 2010, 2011 and 2012 (dollars in thousands). This information has been derived from the consolidated statements of income and comprehensive income included elsewhere in this Annual Report on Form 10-K.

                                                 Years Ended December 31, (in thousands):                   2010                    2011                     2012 Revenues: Net patient service revenue                   $  535,913      98.5 %  $   638,690      99.1 %  $  686,216      98.9 % Other revenue                  8,050       1.5          6,027       0.9         7,735       1.1  Total revenues               543,963     100.0        644,717     100.0       693,951     100.0 Salaries and benefits        282,302      51.9        326,782      50.7       372,656      53.7 Medical supplies              43,027       7.9         51,838       8.0        61,589       8.9 Facility rent expenses        27,885       5.1         33,375       5.2        39,802       5.7 Other operating expenses                      27,103       5.0         33,992       5.3        38,988       5.6 General and administrative expenses       65,798      12.1         81,688      12.7        82,236      11.9 Depreciation and amortization                  46,346       8.5         54,084       8.4        64,893       9.4 Provision for doubtful accounts                       8,831       1.6         16,117       2.5        16,916       2.4 Interest expense, net         58,505      10.8         60,656       9.4        77,494      11.2 Electronic health records incentive income                             -         -              -         -        (2,256 )    (0.3 ) Loss on sale of assets of a radiation treatment center               1,903       0.3              -         -             -         - Early extinguishment of debt                          10,947       2.0              -         -         4,473       0.6 Fair value adjustment of earn-out liability and noncontrolling interests-redeemable               -         -              -         -         1,219       0.2 Impairment loss               97,916      18.0        360,639      55.9        81,021      11.7 Loss on investments                -         -            250         -             -         - Gain on fair value adjustment of previously held equity investment                         -         -           (234 )       -             -         - Loss on foreign currency transactions              -         -            106         -           339         - Loss on foreign currency derivative contracts                          -         -            672       0.1         1,165       0.2  Total expenses               670,563     123.2      1,019,965     158.2       840,535     121.2 Loss before income taxes                       (126,600 )   (23.2 )     (375,248 )   (58.2 )    (146,584 )   (21.2 ) Income tax expense (benefit)                    (12,810 )    (2.4 )      (25,365 )    (3.9 )       4,545       0.7  Net loss                    (113,790 )   (20.8 )     (349,883 )   (54.3 )    (151,129 )   (21.9 ) Net income attributable to non-controlling interest                      (1,698 )    (0.3 )       (3,558 )    (0.6 )      (3,079 )    (0.4 )  Net loss attributable to Radiation Therapy Services Holdings, Inc. shareholder               $ (115,488 )   (21.1 )% $  (353,441 )   (54.9 )% $ (154,208 )   (22.3 )%                                           77 

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Comparison of the Years Ended December 31, 2011 and 2012

Revenues

      Total revenues.  Total revenues increased by $49.3 million, or 7.6%, from $644.7 million in 2011 to $694.0 million in 2012. Total revenue was positively impacted by $80.2 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 Arizona, California, Florida, North Carolina, South Carolina, and the acquisition of physician radiation practices in 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 March 2011            26   Latin America,        International        Acquisition                            Central America,                            Mexico and the                            Caribbean June 2011              1   London, Kentucky      Central Kentucky     Hospital-based /                                                                       other groups August 2011            1   Andalusia, Alabama    Southeastern         De Novo                                                  Alabama August 2011            1   Redding, California   Northern             Acquisition                                                  California September 2011         2   Broward               Broward              Hospital-based /                            County-Florida        County-Florida       other groups November 2011          4   Latin America         International        Acquisition December 2011          2   Goldsboro and         Eastern North        Acquisition                            Sampson, North        Carolina                            Carolina February 2012          1   Asheville, North      Western North        Acquisition                            Carolina              Carolina March 2012             2   Broward               Broward              Transition from                            County-Florida        County-Florida       Hospital-based to                                                                       freestanding March 2012             1   Lakewood              Sarasota/Manatee     Acquisition                            Ranch-Florida         Counties-Florida August 2012            1   Latin America         International        De Novo                                                  (Argentina)       Revenue from CMS for the 2012 PQRI program decreased approximately $1.3 million and revenues in our existing local markets and practices decreased by approximately $29.6 million, including a $5.2 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, as a result of the Preventative Services Task Force report issued in May 2012 recommending against routine PSA screenings for healthy men, as well as suggested changes in treatment pattern for low risk prostate cancer away from definitive treatment. 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 2.0%.  

Expenses

      Salaries and benefits.  Salaries and benefits increased by $45.9 million, or 14.0%, from $326.8 million in 2011 to $372.7 million in 2012. Salaries and benefits as a percentage of total revenues increased from 50.7% in 2011 to 53.7% in 2012. Additional staffing of personnel and physicians due to our development and expansion in urology, medical oncology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, 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 $44.3 million to our salaries and benefits. In June 2012, we implemented a new equity-incentive plan, which increased stock compensation by approximately                                         78

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$1.8 million. For existing practices and centers within our local markets, salaries and benefits decreased $0.2 million due to 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 $9.8 million, or 18.8%, from $51.8 million in 2011 to $61.6 million in 2012. Medical supplies as a percentage of total revenues increased from 8.0% in 2011 to 8.9% in 2012. Medical supplies consist of chemotherapy-related drugs and other medical supplies, patient positioning devices, radioactive seed supplies, supplies used for other brachytherapy services, pharmaceuticals used in the delivery of radiation therapy treatments. Approximately $8.0 million of the increase was related to our development and expansion in urology, medical oncology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, 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 $1.8 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.      Facility rent expenses.  Facility rent expenses increased by $6.4 million, or 19.3%, from $33.4 million in 2011 to $39.8 million in 2012. Facility rent expenses as a percentage of total revenues increased from 5.2% in 2011 to 5.7% in 2012. Facility rent expenses consist of rent expense associated with our treatment center locations. Approximately $5.7 million of the increase was related to our development and expansion in urology, medical oncology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, 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 $5.0 million or 14.7%, from $34.0 million in 2011 to $39.0 million in 2012. Other operating expense as a percentage of total revenues increased from 5.3% in 2011 to 5.6% in 2012. Other operating expenses consist of repairs and maintenance of equipment, equipment rental and contract labor. Approximately $4.7 million of the increase was related to our development and expansion in urology, medical oncology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, 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, and an increase of approximately $0.3 million in our remaining practices and centers in existing local markets.      General and administrative expenses.  General and administrative expenses increased by $0.5 million or 0.7%, from $81.7 million in 2011 to $82.2 million in 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 12.7% in 2011 to 11.9% in 2012. The increase of $0.5 million in general and administrative expenses was due to an increase of approximately $6.3 million relating to our development and expansion in urology, medical oncology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, 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 $0.8 million related to expenses for consulting services for the CMS 2013 preliminary physician fee schedule, an increase of approximately $0.9 million in litigation settlements with certain physicians, offset by a decrease of approximately $2.4 million in diligence costs relating to acquisitions and potential acquisitions of physician practices, a decrease of approximately $0.3 million associated                                         79

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with improvements in our income tax provision process and a decrease of approximately $4.8 million in our remaining practices and treatments centers in our existing local markets.

    Depreciation and amortization.  Depreciation and amortization increased by $10.8 million, or 20.0%, from $54.1 million in 2011 to $64.9 million in 2012. Depreciation and amortization expense as a percentage of total revenues increased from 8.4% in 2011 to 9.4% in 2012. The increase of $10.8 million in depreciation and amortization was due to an increase of approximately $4.9 million relating to our development and expansion in urology, medical oncology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, 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 increased our depreciation and amortization by approximately $3.3 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 $0.8 million, or 5.0%, from $16.1 million in 2011 to $16.9 million in 2012. The provision for doubtful accounts as a percentage of total revenues decreased from 2.5% in 2011 to 2.4% in 2012. In 2012 we reduced our provision for doubtful accounts as we made progress in improving the overall collection process, including centralization of the prior authorization process, with standardization process supporting peer to peer justification of medical necessity, improvements in payment posting timeliness, electronic submission of documentation to Medicare carriers, Medicaid eligibility retro scrubbing of self pay patients, automated insurance rebilling, focused escalation process for claims in Medical Review with insurers, collector productivity and quality tracking and monitoring, and improved processes at the treatment centers to collect co-pay amounts at the time of service. These actions have resulted in improved collections and lower bad debt expense as a percentage of total revenues in 2012.      Interest expense, net.  Interest expense, increased by $16.8 million, or 27.8%, from $60.7 million in 2011 to $77.5 million in 2012. The increase is primarily attributable to an increase of approximately $14.7 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 $1.1 million of interest related to international debt, offset by a decrease in our interest rate swap expense of approximately $0.4 million.      Electronic health records incentive income.  The American Recovery and Reinvestment Act (Recovery Act) of 2009 provides for incentive payments for Medicare eligible professionals who are meaningful users of certified EHR technology. We account for EHR incentive payments utilizing the grant accounting model. Pursuant to the grant accounting model, we recognize EHR incentive payments when it is reasonably assured that we have complied with Medicare's meaningful use requirements and the EHR incentives will be received. For the year ended December 31, 2012 we recognized approximately $2.3 million of EHR revenues.      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 and noncontrolling interests-redeemable. On March 1, 2011, we purchased the remaining 67% interest in MDLLC from Bernardo Dosoretz as well as interests in

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  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 December 31, 2012, we estimated the fair value of the contingent earn out liability and increased the liability due to the seller to approximately $3.4 million. We recorded the $1.1 million to expense in the fair value adjustment caption in the consolidated statements of comprehensive loss.      On November 4, 2011, we 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. In November 2012, we exercised our purchase option to purchase the remaining interest for approximately $1.4 million and recorded the adjustment of $0.2 million to the purchase option as an expense in the fair value adjustment of the noncontrolling interests-redeemable in the 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 as well as the changes in treatment patterns and volumes in prostate cancer as a result of the slowing rate of men diagnosed and referred to treatment regimens, as a result of the Preventative Services Task Force report issued in May 2012 recommending against routine PSA screenings for healthy men, as well as suggested changes in treatment pattern for low risk prostate cancer away from definitive treatment. 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 during the third quarter of 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 fourth quarter of 2012, we completed our annual 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. As a result, we recorded an impairment loss of approximately $11.1 million during the fourth quarter of 2012 primarily relating to goodwill impairment in certain of our reporting units, including Central South East United States (Delmarva Peninsula, Central Maryland, Central Kentucky, South New Jersey), and Southwest Florida of approximately $10.8 million. In addition, during the fourth quarter of 2012, an impairment loss of approximately $0.1 million was recognized related to the impairment of certain leasehold improvements in the Delmarva Peninsula local market and approximately $0.2 million related to a consolidated joint venture in the Central Maryland local market.      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                                         81

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  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.      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 related to goodwill in certain of our reporting units, including North East United States (New York, Rhode Island, Massachusetts and southeast Michigan), California and 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.      Loss on investments.  During the fourth quarter of 2011, we incurred a loss on our 50% investment in an unconsolidated joint venture in a freestanding radiation facility in West Palm Beach, Florida of approximately $0.5 million. The loss on our investment in the joint venture was offset by a gain on the sale of an investment in a primary care physician practice of approximately $0.3 million. Proceeds from the sale of the investment was approximately $1.0 million.      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. In 2012 and 2011, the expiration of the December 28, 2012 foreign currency derivative contract and the mark to market valuation of the remaining contracts resulted in a loss of approximately $1.2 million and <money>$0.7 million, respectively.      Income taxes.  Our effective tax rate was (3.1)% in fiscal 2012 and 6.8% in fiscal 2011. The change in the effective rate in 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, our application of ASC 740-270 to exclude certain jurisdictions (U.S. and certain states) for which we are 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 $29.9 million from the income tax benefit of $25.4 million in 2011 to an income tax expense of $4.5 million in 2012.                                         82 

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      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 are required to pay amounts in excess of such accruals, the effective tax rate could be materially affected.      Net loss.  Net loss decreased by $198.8 million, from $349.9 million in net loss in 2011 to $151.1 million net loss in 2012. Net loss represents 54.3% of total revenues in 2011 and 21.9% of total revenues in 2012.  

Comparison of the Years Ended December 31, 2010 and 2011

      Total revenues.  Total revenues increased by $100.7 million, or 18.5%, from $544.0 million in 2010 to $644.7 million in 2011. Total revenue was positively impacted by $98.7 million due to our expansion into new practices and treatments centers in existing local markets and new local markets during 2010 and 2011 through the acquisition of several urology, medical oncology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina and the acquisition of physician radiation practices in California, North Carolina, South Carolina and West Virginia and the acquisition of 30 physician practices in South America, Central America, Mexico and the Caribbean, the opening of three 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 as follows:  Date              Sites          Location               Market               Type March 2010             1   El Segundo,             Los Angeles,       De Novo                            California              California May 2010               1   Pembroke Pines,         Broward            De Novo                            Florida                 County-Florida May 2010               1   Myrtle Beach, South     South Carolina     Acquisition                            Carolina December 2010          1   Princeton West          Central Maryland   Acquisition                            Virginia March 2011            26   South America,          International      Acquisition                            Central America,                            Mexico and the                            Caribbean June 2011              1   London, Kentucky        Central Kentucky   Hospital-based /                                                                       other groups August 2011            1   Andalusia, Alabama      Southeastern       De Novo                                                    Alabama August 2011            1   Redding, California     Northern           Acquisition                                                    California September 2011         2   Broward                 Broward            Hospital-based /                            County-Florida          County-Florida     other groups November 2011          4   South America           International      Acquisition December 2011          2   Goldsboro and           Eastern North      Acquisition                            Sampson, North          Carolina                            Carolina  

Revenue from CMS for the 2011 PQRI program decreased approximately $2.5 million offset by an increase in our existing local markets and practices by approximately $4.5 million, net of a $1.6 million reduction relating to non-renewal of the capitated contracts in our Las Vegas, Nevada market.

Expenses

      Salaries and benefits.  Salaries and benefits increased by $44.5 million, or 15.8%, from $282.3 million in 2010 to $326.8 million in 2011. Salaries and benefits as a percentage of total revenues decreased from 51.9% in 2010 to 50.7% in 2011. Additional staffing of personnel and physicians due to                                         83

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  our expansion in urology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, the acquisitions of treatment centers in existing and new local markets during the latter part of 2010 and the expansion into a new region internationally in 2011 contributed $46.8 million to our salaries and benefits. Stock compensation expense included in our salaries and benefits increased $0.4 million as a result of a repurchase of vested units from an executive for use in future reissuance to other executives. For existing practices and centers within our local markets, salaries and benefits decreased $3.6 million, predominately related to our cost reduction program implemented during the third quarter of 2011 offset by additional staffing in our research and development group developing software for our medical equipment of approximately $0.9 million.      Medical supplies.  Medical supplies increased by $8.8 million, or 20.5%, from $43.0 million in 2010 to $51.8 million in 2011. Medical supplies as a percentage of total revenues increased from 7.9% in 2010 to 8.0% in 2011. 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 and other medical supplies. Approximately $4.9 million of the increase was related to our expansion in urology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, the acquisitions of treatment centers in existing and new local markets during the latter part of 2010 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 $3.9 million as we continue to see stable and improving 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 $5.5 million, or 19.7%, from $27.9 million in 2010 to $33.4 million in 2011. Facility rent expenses as a percentage of total revenues increased from 5.1% in 2010 to 5.2% in 2011. Facility rent expenses consist of rent expense associated with our treatment center locations. Approximately $3.5 million of the increase was related to our expansion in urology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, the acquisitions of treatment centers in existing and new local markets during the latter part of 2010 and the expansion into a new region internationally in 2011. On 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 of the refinancing of the landlords' mortgages on these respective properties, we derecognized approximately $64.8 million in real estate subject to finance obligation. As a result of the derecognition, our facility rent expense increased by approximately $2.0 million in 2011.      Other operating expenses.  Other operating expenses increased by $6.9 million or 25.4%, from $27.1 million in 2010 to $34.0 million in 2011. Other operating expense as a percentage of total revenues increased from 5.0% in 2010 to 5.3% in 2011. Other operating expenses consist of repairs and maintenance of equipment, equipment rental and contract labor. Approximately $8.4 million of the increase was related to our expansion in urology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, the acquisitions of treatment centers in existing and new local markets during the latter part of 2010 and the expansion into a new region internationally in 2011, offset by a decrease of approximately $1.5 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 $15.9 million or 24.1%, from $65.8 million in 2010 to $81.7 million in 2011. 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 increased from 12.1% in 2010 to 12.7% in 2011. The increase of $15.9 million in general and administrative expenses                                         84 

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  was due to an increase of approximately $9.6 million relating to our expansion in urology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, the acquisitions of treatment centers in existing and new local markets during the latter part of 2010 and the expansion into a new region internationally in 2011. An increase of approximately $4.8 million in our remaining practices and treatments centers in our existing local markets, an increase of approximately $1.3 million in diligence costs relating to acquisitions and potential acquisitions of physician practices, an increase in costs of $0.7 million associated with improvements in our income tax provision process offset by a decrease of approximately $0.5 million in litigation settlements with certain physicians.      Depreciation and amortization.  Depreciation and amortization increased by $7.7 million, or 16.7%, from $46.3 million in 2010 to $54.1 million in 2011. Depreciation and amortization expense as a percentage of total revenues decreased from 8.5% in 2010 to 8.4% in 2011. The increase of $7.7 million in depreciation and amortization was primarily due to an increase of approximately $4.4 million relating to our expansion in urology and surgery practices in Arizona, California, Florida, North Carolina and South Carolina, the acquisitions of treatment centers in existing and new local markets during the latter part of 2010 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 $4.3 million, $0.9 million increase due to the amortization of our trade name offset by a decrease of approximately $1.5 million predominately due to the expiration of certain non-compete agreements. On March 31, 2010, we derecognized approximately $64.8 million in real estate subject to finance obligation. As a result of the derecognition, our depreciation and amortization expense decreased by approximately $0.4 million.      Provision for doubtful accounts.  The provision for doubtful accounts increased by $7.3 million, or 82.5%, from $8.8 million in 2010 to $16.1 million in 2011. The provision for doubtful accounts as a percentage of total revenues increased from 1.6% in 2010 to 2.5% in 2011. In 2010 we reduced our provision for doubtful accounts as we made efforts to improve the overall collection process, including a replacement of our claims clearinghouse agent, to provide more efficient and timely claims processing, upgraded certain billing processes, including the electronic transmission of secondary claims and improved processes at the treatment centers to collect co-pay amounts at the time of service. These actions have resulted in improved collections and lower bad debt expense in 2010.      Interest expense, net.  Interest expense, increased by $2.2 million, or 3.7%, from $58.5 million in 2010 to $60.7 million in 2011. The increase is primarily attributable to an increase of approximately $7.2 million of interest and fees as a result of the additional senior subordinated notes issued in April 2010 and March 2011 and the additional amortization of deferred financing costs and original issue discount cost of approximately $1.2 million related thereto, and approximately $0.2 million of interest related to international debt, offset by the decrease of approximately $2.1 million in interest expense in 2010 associated with the pro-rata write-off of our deferred financing costs and original issue discount costs resulting from our prepayment of $74.8 million in our Term Loan B in April 2010, the derecognition of approximately $64.8 million in real estate subject to finance obligation on March 31, 2010. As a result of the derecognition, our interest expense relating to the finance obligation decreased by approximately $1.4 million. In addition, our interest rate swap payments decreased by approximately $2.9 million.      Loss on sale of assets of a radiation treatment center.  In January 2007, we acquired a 67.5% interest in Gettysburg Radiation,  LLC ("GR"), which at that time was in the final stages of developing a free-standing radiation therapy treatment center in Gettysburg, Pennsylvania. Approximately a year later, GR expanded its operations to a second location in Littlestown, Pennsylvania. Due to the poor local economy, as well as the opening of a radiation therapy center by a nearby hospital, the performance of both the Gettysburg and Littlestown facilities deteriorated significantly. During the                                         85

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  fourth quarter of 2009, the Littlestown facility was closed. On April 30, 2010, we sold certain assets of the Gettysburg facility to one of GR's minority equity-holders for approximately $925,000 and incurred a loss on the sale of approximately $1.9 million.  

Early extinguishment of debt. In 2010 we incurred approximately $10.9 million from the 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.

      Impairment loss.  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. During the third quarter of 2011 we incurred an impairment loss of approximately $237.6 million 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 radiosurgery center in Rhode Island due to continued operating losses since its inception in 2008.      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 related to goodwill in certain of our reporting units, including North East United States (New York, Rhode Island, Massachusetts and southeast Michigan), California and 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.      Loss on investments.  During the fourth quarter of 2011, we incurred a loss on our 50% investment in an unconsolidated joint venture in a freestanding radiation facility in West Palm Beach Florida of approximately $0.5 million. The loss on our investment in the joint venture was offset by a gain on the sale of an investment in a primary care physician practice of approximately $0.3 million. Proceeds from the sale of the investment was approximately $1.0 million.      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 forward currency derivative contracts which mature on a quarterly basis. In 2011, the expiration of four forward currency derivative contracts and the mark to market valuation of the remaining contracts resulted in a loss of approximately $0.7 million.                                         86

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    Income taxes.  Our effective tax rate was 6.8% in fiscal 2011 and 10.1% in fiscal 2010. The decrease in the benefit reflected in the effective tax rate in the 2011 calendar year is primarily the result of goodwill impairment recognized in the 2011 calendar year which is not deductible for tax purposes, the increase in the valuation allowance against federal and state deferred tax assets and adjustments to deferred income tax items and unrecognized tax positions that were recorded in the 2011 calendar year. The income tax benefit of $25.4 million in 2011 compared to an income tax benefit of $12.8 million in 2010, represents an increase of $12.6 million on an absolute dollar basis.      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. We are currently undergoing a Federal income tax audit for tax years 2007 through 2008 and New York State audit for tax years 2006 through 2008. Subsequent to the end of the year, we closed the Federal audit for tax years 2005 through 2008, the Alabama audit for tax years 2009 and 2010, the Florida audit for tax years 2007 through 2009 and the New York audit for the tax years 2006 through 2008.      Net loss.  Net loss increased by $236.1 million, from $113.8 million in net loss in 2010 to $349.9 million net loss in 2011 primarily as a result of the impairment loss incurred for the write down of goodwill, trade name and other investments of approximately $360.6 million. Net loss represents 20.8% of total revenues in 2010 and 54.3% of total revenues in 2011.  

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 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 years ended December 31, 2010, 2011 and 2012 was $49.0 million, $44.8 million and $16.1 million, respectively.

      Net cash provided by operating activities decreased by $28.7 million from $44.8 million in 2011 to $16.1 million in 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. In 2012 and 2011, we wrote-off approximately $81.0 million and $360.6 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 39 days to 34 days.                                         87

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      Cash at December 31, 2012 held by our foreign operating subsidiaries was $4.6 million. We consider these cash flows to be permanently invested in our foreign operating 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. Of the $4.6 million of cash held by our foreign operating subsidiaries at December 31, 2012, $0.4 million is held in U.S. dollars, $0.4 million of which is held at banks in the United States, with the remaining held in foreign currencies in foreign banks. 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.      Net cash provided by operating activities decreased by $4.2 million from $49.0 million in 2010 to $44.8 million in 2011 predominately due to timing and amount of interest payments. In 2011 we issued an additional $66.25 million in senior subordinated notes due 2017 with interest payments due in April and October of each year. In October 2011, we paid approximately $18.6 million of interest on the $360.0 million in senior subordinated notes due 2017 including interest on the $16.25 million senior subordinated notes due to the seller in the MDLLC transaction. In 2011, we wrote-off approximately $360.6 million in goodwill, trade name, leasehold improvements and other investments as a result of our interim testing of our goodwill and indefinite-lived intangible assets and our rebranding initiatives. We continue to see improvements in our cash collections from our accounts receivable with our days sales outstanding improving from 41 days to 39 days.      Cash at December 31, 2011 held by our foreign operating subsidiaries was $5.2 million. We consider these cash flows to be permanently invested in our foreign operating 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. Of the $5.2 million of cash held by our foreign operating subsidiaries at December 31, 2011, $0.4 million is held in U.S. dollars, $0.1 million of which is held at banks in the United States, with the remaining held in foreign currencies in foreign banks.  

Cash Flows From Investing Activities

Net cash used in investing activities for 2010, 2011, and 2012 was $92.5 million, $96.8 million, and $57.3 million, respectively.

      Net cash used in investing activities decreased by $39.5 million from $96.8 million in 2011 to $57.3 million in 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 $1.7 million. In April 2012 we acquired certain assets utilized in one of the radiation treatment centers acquired in December 2011 located in North Carolina, which operates two radiation treatment centers for approximately $0.4 million. In December 2012, we purchased the remaining 50% interest in an unconsolidated joint venture which operates a freestanding radiation treatment center in West Palm Beach, Florida for approximately $1.0 million. On November 4, 2011, we 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. In November 2012, we exercised our purchase option to purchase the remaining interest for approximately $1.4 million. During 2012, we entered into foreign exchange option contracts expiring December 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                                         88

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$0.7 million. Purchases of property and equipment decreased by $5.9 million from $36.6 million in 2011 to $30.7 million in 2012, as we continue to manage our capital expenditures.      Net cash used in investing activities increased by $4.3 million from $92.5 million in 2010 to $96.8 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, Mexico and the 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 other physician practices of approximately $0.4 million in North Carolina and Florida. Additional acquisitions during the fourth quarter of 2011 included the purchase of four radiation treatment facilities in Argentina for approximately $6.8 million including cash of approximately $2.1 million and the purchase of two radiation treatment facilities in North Carolina in December, 2011 for approximately $6.3 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, was approximately $1.5 million. In May 2010 we purchased a radiation treatment center and several physician practices in South Carolina for a combined purchase price of approximately $34.5 million.      Historically, our capital expenditures have been primarily for equipment, leasehold improvements and information technology equipment. Total capital expenditures, inclusive of amounts financed through capital lease arrangements, outstanding accounts payable relating to the acceptance and delivery of medical equipment and exclusive of the purchase of radiation treatment centers, were $43.8 million, $41.3 million and $38.0 million in 2010, 2011 and 2012, respectively. Historically, we have funded our capital expenditures with cash flows from operations, borrowings under our senior secured credit facilities and borrowings under lease lines of credit.  

Cash Flows From Financing Activities

Net cash provided by financing activities for 2010, 2011 and 2012 was $24.5 million, $48.2 million and $46.4 million, respectively.

      On May 10, 2012, we completed an offering of $350.0 million in aggregate principal amount of 87/8% 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                                         89

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partnership distributions from non-controlling interests of approximately $4.4 million and $3.9 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. The amendment also extended the revolving credit facility maturity by one year solely for the extended revolving loans, such that they will mature on February 21, 2014, whereas the non-extended revolving loans will continue to mature on February 21, 2013. 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 will be used for general corporate purposes. As a result of the incremental amendment, we incurred approximately $1.7 million in transaction fees and expenses, including legal, accounting and other fees and expenses in connection with the incremental amendment.      In November 2011, we registered approximately $16.25 million in notes and incurred approximately $0.2 million in transaction fees and expenses, including legal, accounting and other fees and expenses.      Net cash provided by financing activities in 2010 included $308.1 million of proceeds received from the issuance of $310.0 million in aggregate principal amount of senior subordinated notes due 2017. The $308.1 million in proceeds was used to repay the existing $175.0 million in senior subordinated notes due 2015, including accrued and unpaid interest and a call premium of approximately $5.3 million. The remaining proceeds from the offering were used to pay down $74.8 million of the senior secured term loan facility and $10.0 million of the senior secured revolving credit facility and to finance the acquisitions of a radiation treatment center and physician practices in South Carolina, which were consummated on May 3, 2010. In addition, we paid approximately $11.9 million of loan costs relating to transaction fees and expenses incurred in connection with the issuance of the $310.0 million senior subordinated notes. We borrowed approximately $8.5 million in December 2010 for the purchase of a radiation treatment center in Princeton West Virginia. Further, we paid approximately $0.9 million in fees and expenses related to our S-4 registration statement filing for the Existing Notes. The change in net cash provided by financing activities included cash provided by non-controlling interest holders in the El Segundo joint venture who contributed approximately $0.6 million in cash for a 22.75% interest in the joint venture. We also had partnership distributions from non-controlling interests of approximately $3.2 million in 2010.  

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$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.  

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

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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 87/8% 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                                         91

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  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 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 1/2 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.

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      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       Level at December 31,                                        December 31, 2012              2012 Maximum permitted first lien leverage ratio                              <1.25 to 1.00               0.22 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 December 31, 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 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 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                                         93

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  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 December 31, 2012 and December 31, 2011 was $17.2 million and $14.3 million, respectively.  

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                                         94

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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.  

Acquisitions and Developments

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

                                                       Year Ended December 

31,

                                                    2010        2011        

2012

        Treatment centers at beginning of period        97           95      

127

        Internally developed / reopened                  2            1      

2

        Transitioned to freestanding                     -            -      

2

        Internally (consolidated/closed/sold)           (5 )         (5 )    

(3 )

        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.                                         95 

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      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 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                                         96

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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 of tangible assets relating to the use of the medical equipment pursuant to the license agreement.      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. In November 2012, we exercised our purchase option to purchase the remaining interest for approximately $1.4 million.      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 including an earn-out provision of approximately $0.4 million contingent upon maintaining a certain level of patient volume. 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 of tangible assets relating to the use of the medical equipment pursuant to the license agreement.      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.

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In December 2012, we purchased the remaining 50% interest in an unconsolidated joint venture which operates a freestanding radiation treatment center in West Palm Beach, Florida for approximately $1.1 million.

      During 2012, we acquired the assets of several integrated cancer care physician practices in Arizona, California and Florida for approximately $1.7 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 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.  

In October 2012, we sold our membership interest in an unconsolidated joint venture in Mohali, India to our former partner in the joint venture for a nominal amount.

In November 2012, we reopened our East Naples, Florida radiation treatment center to support the influx of patients in our southwest Florida local market.

      As of December 31, 2012, we have one replacement de novo radiation treatment center project in process in Michigan and three additional de novo radiation treatment centers located in New York, 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 late-2016.                                         98

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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.      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 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                                         99 

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  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, 2012 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 years ended 2010, 2011 and 2012, approximately 48%, 48% and 45%, 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.  

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, 2012, our after-tax loss from continuing operations would change by approximately $0.5 million and our net accounts receivable would change by approximately $0.9 million at December 31, 2012. The resulting change in this analytical tool is considered to be a reasonably likely                                        100 

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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 as well as the changes in treatment patterns and volumes in prostate cancer as a result of the slowing rate of men diagnosed and referred to treatment regimens, as a result of the Preventative Services Task Force report issued in May 2012 recommending against routine PSA screenings for healthy men, as well as suggested changes in treatment pattern for low risk prostate cancer away from definitive treatment. During the fourth quarter of 2012 we incurred an impairment loss of approximately $11.1 million. Approximately $10.8 million relating to goodwill impairment in certain of our reporting units and approximately $0.1 million related to the impairment of certain leasehold improvements in the Delmarva Peninsula local market and approximately $0.2 million related to a consolidated joint venture in the Central Maryland local market. 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 related 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.      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 2 to 20 years) using the straight-line method. Intangible assets impairment loss was recognized for the year ended December 31, 2011 of approximately $58.2 million relating to                                        101

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our trade name and rebranding initiatives. No intangible asset impairment loss was recognized for the years ended December 31, 2012 and 2010.

      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                                        102 

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  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.      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. For the year ended 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 represents an increase of $14.2 million in valuation allowance. For the year ended December 31, 2011, we determined that the valuation allowance was approximately $45.5 million, consisting of $38.3 million against federal deferred tax assets and $7.2 million against state deferred tax assets. This represented an increase of approximately $27.9 million. For the year ended December 31, 2012, we determined that the valuation allowance was approximately $82.3 million, consisting of $70.3 million against federal deferred tax assets and $12.0 million against state deferred tax assets. The valuation allowance increased approximately $36.8 million from $45.5 million in 2011.      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                                        103

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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, 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.      During 2012, we closed a US Federal income tax examination for tax years 2007 through 2008. All issues proposed have been agreed to with the exception of interest and penalties for which an accrual of $2.2 million is recorded. We 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 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                                        104

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

Inflation

      While inflation was not a material factor in either revenue or operating expenses during the periods presented, the healthcare industry is labor- intensive. Wages and other expenses increase during periods of inflation and labor shortages, such as the nationwide shortage of dosimetrists and radiation therapists. In addition, suppliers pass along rising costs to us in the form of higher prices. We have implemented cost control measures to curb increases in operating costs and expenses. We have to date offset increases in operating costs by increasing reimbursement or expanding services. However, we cannot predict our ability to cover, or offset, future cost increases.                                        105

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Commitments

      The following table sets forth our contractual obligations as of December 31, 2012.                                                        Payments Due by Period                                              Less Than                                      After Contractual Cash Obligations      Total        1 Year      2 - 3 Years     4 - 5 Years     5 Years                                                           (in thousands) Senior secured credit agreement(1)                   $    38,389    $   8,147    $     16,293    $     13,949   $       - Senior subordinated notes(2)       543,446       37,155          74,309         431,982           - Senior secured second lien notes(3)                           487,193       31,063          62,125         394,005           - Other notes and capital leases(4)                           35,587       12,905          15,569           5,258       1,855 Operating lease obligations(5)                     413,366       38,254          72,080          66,290     236,742 Finance obligations(6)              24,432        1,745           4,230           4,068      14,389  Total contractual cash obligations                    $ 1,542,413    $ 129,269    $    244,606    $    915,552   $ 252,986   

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º (1)

º As of December 31, 2012, there was $7.5 million in aggregate principal

amount outstanding under our senior secured revolving credit facility

(excluding issued but undrawn letters of credit). Interest expense and fees

on our senior secured revolving credit facility is based on an assumed

interest rate of the one-month LIBOR rate as of December 31, 2012 plus 575

     basis points plus unused commitment fees on our $140.0 million senior      secured revolving credit facility.     º (2)    º Senior subordinated notes of $376.3 million (excluding original issue

discount of $1.8 million), due April 15, 2017. Interest expense is based on

an interest rate of 97/8%.

º (3)

º Senior secured second lien notes of $350.0 million (excluding original

issue discount of $1.4 million), due January 15, 2017. Interest expense is

     based on an interest rate of 87/8%.     º (4)    º Other notes and capital leases includes leases relating to medical      equipment.     º (5)

º Operating lease obligations includes land and buildings, and equipment.

º (6)

º Finance obligations includes real estate under the failed sale-leaseback

accounting. See "Management's Discussion and Analysis of Financial

Condition and Results of Operations-Results of Operations-Finance

Obligation."

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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