| ALLIANCE IMAGING INC /DE/ Item 1A Risk Factors |
| You should carefully consider the risks described below before investing in our publicly-traded securities |
| If any of these risks actually occurs, our business, financial condition or results of operations will likely suffer |
| In that event, the trading price of our common stock could decline, and you may lose all or part of your investment |
| 17 ______________________________________________________________________ Risks Related to Our Business and Our Common Stock Changes in the rates or methods of third-party reimbursements for diagnostic imaging services could result in reduced demand for our services or create downward pricing pressure, which would result in a decline in our revenues and harm to our financial position |
| We derive approximately 13prca of our revenues from direct billings to patients and third-party payors such as Medicare, Medicaid or private health insurance companies, and changes in the rates or methods of reimbursement for the services we provide could have a significant negative impact on those revenues |
| Moreover, our healthcare provider clients on whom we depend for the majority of our revenues generally rely on reimbursement from third-party payors |
| From time to time, initiatives have been proposed which, if implemented, would have had the effect of substantially decreasing reimbursement rates for diagnostic imaging services |
| For example, on February 8, 2006, the Deficit Reduction Act of 2005 (“DRA”) was signed into law by President George W Bush |
| The DRA imposes caps on Medicare payment rates for certain imaging services, including MRI and PET, furnished in physician’s offices and other non-hospital based settings |
| This change is to apply to services furnished on or after January 1, 2007 |
| The limitation is applicable to the technical component of the services only (which is the payment we receive for the services for which we bill directly under the Medicare Physician Fee Schedule) |
| If the technical component of the service established under the Physician Fee Schedule (without including geographic adjustments) exceeds the hospital outpatient payment amount for the service (also without including geographic adjustments), then the payment is to be reduced |
| In other words, in those instances where the technical component for the particular service is greater, the DRA directs that the hospital outpatient payment rate be substituted for the otherwise applicable Physician Fee Schedule payment rates |
| The implementation of this reimbursement reduction contained in the DRA will have a significant effect on our financial condition and results of operations beginning in 2007 |
| For full year 2005, approximately 4prca of our revenue was billed directly to Medicare contractors |
| Basing our calculation on our 2005 revenues, if the provisions were in effect for 2005, we estimate that the reduction in Medicare revenue due to the DRA payment rate decreases would have totaled approximately dlra6dtta0 million |
| Because a high percentage of our expenses are fixed, we expect a significant portion of this decrease in revenue to directly effect earnings |
| Our revenues may fluctuate or be unpredictable and this may harm our financial results |
| The amount and timing of revenues that we may derive from our business will fluctuate based on: · variations in the rate at which clients renew their contracts; · the extent to which our mobile shared-service clients become full-time clients; · changes in the number of days of service we can offer with respect to a given diagnostic imaging system due to equipment malfunctions or the seasonal factors discussed below; and · the mix of wholesale and retail billing for our services |
| In addition, we experience seasonality in the sale of our services |
| For example, our revenues typically decline from our third fiscal quarter to our fourth fiscal quarter |
| First quarter revenue is affected primarily by fewer calendar days and inclement weather, the results of which are fewer patient scans during the period |
| Fourth quarter revenue is affected primarily by holiday and client and patient vacation schedules and inclement weather, the results of which are fewer patient scans during the period |
| As a result, our revenues may significantly vary from quarter to quarter, and our quarterly results may be below market expectations |
| We may not be able to reduce our expenses, including our debt service obligations, quickly enough to 18 ______________________________________________________________________ respond to these declines in revenue, which would make our business difficult to operate and would harm our financial results |
| If this happens, the price of our common stock may decline |
| We may experience competition from other medical diagnostic companies and equipment manufacturers and this competition could adversely affect our revenues and our business |
| The market for diagnostic imaging services and systems is competitive |
| Our major competitors include InSight Health Services Corp, Medquest, Inc, Radiologix, Inc, Medical Resources, Inc, Shared Medical Services, Kings Medical Company Inc |
| and Otter Tail Power Company |
| In addition to direct competition from other mobile providers, we compete with independent imaging centers and referring physicians with diagnostic imaging systems in their own offices, as well as with original equipment manufacturers, or OEM’s, that aggressively sell or lease imaging systems to healthcare providers for full-time installation |
| In recent years we have seen an increase in activity by OEM’s selling systems directly to certain of our clients |
| Typically, OEM’s target our higher scan volume clients |
| This increase in activity by OEM’s has resulted in overcapacity of systems in the marketplace, especially related to medical groups adding imaging capacity within their practice setting |
| This has caused an increase in the number of our higher scan volume clients deciding not to renew their contracts |
| During 2005, our MRI revenues modestly declined compared to 2004 levels and we believe that MRI revenues will continue to modestly decline in future years |
| While we believe that we had a greater number of diagnostic imaging systems deployed at the end of 2005 than our principal competitors and also had greater revenue from diagnostic imaging services during our 2005 fiscal year than they did, some of our direct competitors which provide diagnostic imaging services may now or in the future have access to greater financial resources than we do and may have access to newer, more advanced equipment |
| In addition, some clients have in the past elected to provide imaging services to their patients directly rather than renewing their contracts with us |
| Finally, we face competition from providers of competing technologies such as ultrasound and may face competition from providers of new technologies in the future |
| If we are unable to successfully compete, our client base would decline and our business and financial condition would be harmed |
| Managed care organizations may prevent healthcare providers from using our services which would cause us to lose current and prospective clients |
| Healthcare providers participating as providers under managed care plans may be required to refer diagnostic imaging tests to specific imaging service providers depending on the plan in which each covered patient is enrolled |
| These requirements currently inhibit healthcare providers from using our diagnostic imaging services in some cases |
| The proliferation of managed care may prevent an increasing number of healthcare providers from using our services in the future which would cause our revenues to decline |
| We may be unable to effectively maintain our imaging systems or generate revenue when our systems are not working |
| Timely, effective service is essential to maintaining our reputation and high utilization rates on our imaging systems |
| Our warranties and maintenance contracts do not fully compensate us for loss of revenue when our systems are not working |
| The principal components of our operating costs include depreciation, salaries paid to technologists and drivers, annual system maintenance costs, insurance and transportation costs |
| Because the majority of these expenses are fixed, a reduction in the number of scans performed due to out-of-service equipment will result in lower revenues and margins |
| Repairs of our equipment are performed for us by the equipment manufacturers |
| These manufacturers may not be able to perform repairs or supply needed parts in a timely manner |
| Thus, if we experience greater than anticipated system malfunctions or if 19 ______________________________________________________________________ we are unable to promptly obtain the service necessary to keep our systems functioning effectively, our revenues could decline and our ability to provide services would be harmed |
| Our ability to maximize the utilization of our diagnostic imaging equipment may be adversely impacted by harsh weather conditions which may affect our ability to generate revenue |
| Harsh weather conditions can adversely impact our operations and financial condition |
| To the extent severe weather patterns affect the regions in which we operate, potential patients may find it difficult to travel to our centers and we may have difficulty moving our mobile systems along their scheduled routes |
| Our equipment utilization, scan volume or revenues could be adversely affected by similar conditions in the future |
| Technological change in our industry could reduce the demand for our services and require us to incur significant costs to upgrade our equipment |
| The development of new technologies or refinements of existing ones might make our existing systems technologically or economically obsolete, or reduce the need for our systems |
| MRI, PET and PET/CT, and other diagnostic imaging systems are currently manufactured by numerous companies |
| Competition among manufacturers for a greater share of the MRI, PET and PET/CT and other diagnostic imaging systems market has resulted in and likely will continue to result in technological advances in the speed and imaging capacity of these new systems |
| Consequently, the obsolescence of our systems may be accelerated |
| Should new technological advances occur, we may not be able to acquire the new or improved systems |
| In the future, to the extent we are unable to generate sufficient cash from our operations or obtain additional funds through bank financing or the issuance of equity or debt securities, we may be unable to maintain a competitive equipment base |
| In addition, advancing technology may enable hospitals, physicians or other diagnostic service providers to perform procedures without the assistance of diagnostic service providers such as ourselves |
| As a result, we may not be able to maintain our competitive position in our targeted regions or expand our business |
| 20 ______________________________________________________________________ Natural disasters could adversely affect our business and operations |
| Our corporate headquarters is located in California and we currently operate in 44 states, located in various geographic regions across the country, subject to varying risks for natural disaster, including but not limited to, hurricanes, blizzards, floods, earthquakes and tornados |
| Depending upon their severity, these natural disasters could damage our facilities and imaging systems or prevent potential patients from traveling to our centers |
| Damage to our equipment or any interruption in our business would adversely affect our financial condition |
| While we presently carry insurance in amounts we believe are appropriate in light of the risks, the amount of our insurance coverage may not be sufficient to cover losses from these natural disasters |
| In addition, we may discontinue insurance on some or all of our facilities or imaging systems in the future if the cost of premiums for this insurance exceeds the value of the coverage discounted for the risk of loss |
| If we experience a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged facilities or imaging systems as well as the anticipated future cash flows from those facilities or imaging systems |
| Continued high fuel costs would harm our operations |
| Fuel costs constitute a significant portion of our mobile operating expenses |
| Historically, fuel costs have been subject to wide price fluctuations based on geopolitical issues and supply and demand |
| Fuel availability is also affected by demand for home heating oil, diesel, gasoline and other petroleum products |
| Because of the effect of these events on the price and availability of fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty |
| In the event of a fuel supply shortage or further increases in fuel prices, a curtailment of scheduled mobile service could result |
| There have been significant increases in fuel costs and continued high fuel costs or further increases would harm our financial condition and results of operations |
| We may be unable to renew or maintain our client contracts which would harm our business and financial results |
| Upon expiration of our clients’ contracts, we are subject to the risk that clients will cease using our imaging services and purchase or lease their own imaging systems or use our competitors’ imaging systems |
| During the year ended December 31, 2005, we continued to experience a high rate of contract terminations primarily due to stepped up marketing, sales and attractive financing alternatives being offered by original equipment manufacturers to our clients |
| A portion of our clients can execute their early termination clause and discontinue service prior to maturity |
| As a result, our 2005 MRI revenues declined compared to 2004 levels and we believe that MRI revenues from our shared service operations will continue to decline in future periods |
| If these contracts are not renewed, it could result in a significant negative impact on our business |
| It is not always possible to immediately obtain replacement clients, and historically many replacement clients have been smaller facilities which have a lower number of scans than lost clients |
| Because a high percentage of our operating expenses are fixed, a relatively small decrease in revenues could have a significant negative impact on our financial results |
| A high percentage of our expenses are fixed, meaning they do not vary significantly with the increase or decrease in revenues |
| Such expenses include, but are not limited to, debt service and capital lease payments, rent and operating lease payments, salaries, maintenance, insurance and vehicle operation costs |
| As a result, a relatively small reduction in the prices we charge for our services or procedure volume could have a disproportionate negative effect on our financial results |
| 21 ______________________________________________________________________ We may be subject to professional liability risks which could be costly and negatively impact our business and financial results |
| We may be subject to professional liability claims |
| Although there currently are no known hazards associated with MRI or our other scanning technologies when used properly, hazards may be discovered in the future |
| Furthermore, there is a risk of harm to a patient during an MRI if the patient has certain types of metal implants or cardiac pacemakers within his or her body |
| Patients are carefully screened to safeguard against this risk, but screening may nevertheless fail to identify the hazard |
| To protect against possible professional liability, we maintain professional liability insurance with coverage that we believe is consistent with industry practice and appropriate in light of the risks attendant to our business |
| However, if we are unable to maintain insurance in the future at an acceptable cost or at all or if our insurance does not fully cover us, and a successful claim was made against us, we could be exposed |
| Any claim made against us not fully covered by insurance could be costly to defend against, result in a substantial damage award against us and divert the attention of our management from our operations, which could have an adverse effect on our financial performance |
| Loss of key executives and failure to attract qualified managers and sales persons could limit our growth and negatively impact our operations |
| We depend upon our management team to a substantial extent |
| In particular, we depend upon Mr |
| Viviano, our Chief Executive Officer and the Chairman of our Board of Directors and Mr |
| Hayek, our President and Chief Operating Officer, for their skills, experience, and knowledge of the company and industry contacts |
| Effective May 9, 2005 Mr |
| Viviano and Mr |
| Hayek entered into employment agreements which end on the second anniversary of the effective date |
| The terms of these agreements are subject to automatic extensions on a quarterly basis after the initial term has been completed |
| Hayek can prevent a quarterly extension by giving notice of a desire to modify or terminate their agreements at least thirty days prior to the quarterly extension date |
| In addition, we do not have key employee insurance policies covering any of our management team |
| Viviano or Mr |
| Hayek, or other members of our management team, could have a material adverse effect on our business, results of operations or financial condition |
| As we grow, we will increasingly require field managers and sales persons with experience in our industry to operate our diagnostic equipment |
| It is impossible to predict the availability of qualified field managers and sales persons or the compensation levels that will be required to hire them |
| The loss of the services of any member of our senior management or our inability to hire qualified field managers and sales persons at economically reasonable compensation levels could adversely affect our ability to operate and grow our business |
| Loss of, and failure to attract, qualified employees and technologists, could limit our growth and negatively impact our operations |
| Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization |
| Competition in our industry for qualified employees is intense |
| In particular, there is a very high demand for qualified technologists who are necessary to operate our systems, particularly PET and PET/CT technologists |
| We may not be able to hire and retain a sufficient number of technologists, and we expect that our costs for the salaries and benefits of technologists will continue to increase for the foreseeable future because of the industry’s competitive demand for their services |
| Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees |
| 22 ______________________________________________________________________ We are controlled by a single stockholder who will be able to exert significant influence over matters requiring stockholder approval, including change of control transactions |
| Viewer Holdings LLC, an affiliate of Kohlberg Kravis Roberts & Co (“KKR”), owns approximately 71prca of our common equity without giving effect to phantom shares held by four members of KKR’s management who are on our board of directors |
| These directors in the aggregate hold 52cmam641 phantom shares, which gives them the right to receive an equivalent number of shares of our common stock, or cash, upon their retirement or separation from the board of directors or upon the occurrence of a change of control |
| KKR 1996 GP LLC is the sole general partner of KKR Associates 1996 LP, which is the sole general partner of KKR 1996 Fund LP As of the date hereof, KKR 1996 Fund LP is the senior member of Viewer Holdings LLC Michael W Michelson and James H Greene, two of the members of our board of directors, are among the members of KKR 1996 GP LLC Mr |
| Michelson is also the Chairperson of our Compensation Committee and a member of our Executive Committee |
| James C Momtazee and Kenneth W Freeman, who are also executives of KKR and limited partners of KKR Associates 1996 LP, are also members of our board of directors |
| Momtazee is also a member of our Compensation Committee and our Executive Committee |
| We sometimes refer to KKR 1996 GP LLC, KKR Associates 1996 LP, KKR 1996 Fund LP and various affiliated entities as KKR KKR provides management, consulting and financial services to us and we paid KKR an annual fee of dlra650cmam000 in 2005 in quarterly installments in arrears at the end of each calendar quarter for those services |
| As a result of the arrangements described above, KKR controls us and has the power to elect all of our directors, appoint new management and approve any action requiring the approval of the holders of shares of our common stock, including adopting amendments to our certificate of incorporation and approving mergers, consolidations or sales of all or substantially all of our assets |
| This concentration of ownership may also delay or prevent a change of control of our company or reduce the price investors might be willing to pay for our common stock |
| The interests of KKR may conflict with the interests of other holders of our common stock |
| Our positron emission tomography and positron emission tomography/computed tomography, or PET and PET/CT services and some of our other imaging services require the use of radioactive materials, which could subject us to regulation related costs and delays and potential liabilities for injuries or violations of environmental, health and safety laws |
| Our PET and PET/CT service and some of our other imaging services require radioactive materials |
| While this radioactive material has a short half-life, meaning it quickly breaks down into inert, or non-radioactive substances, storage, use and disposal of these materials presents the risk of accidental environmental contamination and physical injury |
| We are subject to federal, state and local regulations governing storage, handling and disposal of these materials and waste products |
| Although we believe that our safety procedures for storing, handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental contamination or injury from those hazardous materials |
| We maintain professional liability insurance with coverage that we believe is consistent with industry practice and appropriate in light of the risks attendant to our business |
| However, in the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance |
| We may not be able to maintain insurance on acceptable terms, or at all |
| We could incur significant costs and the diversion of our management’s attention in order to comply with current or future environmental, health and safety laws and regulations |
| 23 ______________________________________________________________________ We may not be able to achieve the expected benefits from future acquisitions which would adversely affect our financial condition and results |
| We have historically relied on acquisitions as a method of expanding our business |
| In addition, we will consider future acquisitions as opportunities arise |
| If we do not successfully integrate acquisitions, we may not realize anticipated operating advantages and cost savings |
| The integration of companies that have previously operated separately involves a number of risks, including: · demands on management related to the increase in our size after an acquisition; · the diversion of our management’s attention from the management of daily operations to the integration of operations; · difficulties in the assimilation and retention of employees; · potential adverse effects on operating results; and · challenges in retaining clients |
| We may not be able to maintain the levels of operating efficiency acquired companies will have achieved or might achieve separately |
| Successful integration of each of their operations will depend upon our ability to manage those operations and to eliminate redundant and excess costs |
| Because of difficulties in combining operations, we may not be able to achieve the cost savings and other size related benefits that we hoped to achieve after these acquisitions which would harm our financial condition and operating results |
| Possible volatility in our stock price could negatively affect us and our stockholders |
| The trading price of our common stock on the New York Stock Exchange has fluctuated significantly in the past |
| During the period from January 1, 2004 though December 31, 2005, the trading price of our common stock fluctuated from a high of dlra14dtta15 per share to a low of dlra3dtta38 per share |
| In the past, we have experienced a drop in stock price following an announcement of disappointing earnings or earnings guidance |
| Any such announcement in the future could lead to a similar drop in stock price |
| The price of our common stock could also be subject to wide fluctuations in the future as a result of a number of other factors, including the following: · changes in expectations as to future financial performance or buy/sell recommendations of securities analysts; · our, or a competitor’s, announcement of new products or services, or significant acquisitions, strategic partnerships, joint ventures or capital commitments; and · the operating and stock price performance of other comparable companies |
| In addition, the US securities markets have experienced significant price and volume fluctuations |
| These fluctuations often have been unrelated to the operating performance of companies in these markets |
| Broad market and industry factors may lead to volatility in the price of our common stock, regardless of our operating performance |
| Moreover, our stock has limited trading volume, and this illiquidity may increase the volatility of our stock price |
| In the past, following periods of volatility in the market price of an individual company’s securities, securities class action litigation often has been instituted against that company |
| The institution of similar litigation against us could result in substantial costs and a diversion of our management’s attention and resources, which could negatively affect our business, results of operations or financial condition |
| 24 ______________________________________________________________________ Risks Related to Government Regulation of Our Business Complying with federal and state regulations is an expensive and time-consuming process, and any failure to comply could result in substantial penalties |
| We are directly or indirectly through our clients subject to extensive regulation by both the federal government and the states in which we conduct our business, including the federal Anti-Kickback Law and similar state anti-kickback laws, the Stark Law and similar state laws affecting physician referrals, the federal False Claims Act, the Health Insurance Portability and Accountability Act of 1996 and similar state laws addressing privacy and security, state unlawful practice of medicine and fee splitting laws, state certificate of need laws, the Medicare and Medicaid regulations, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, and requirements for handling biohazardous and radioactive materials and wastes |
| If our operations are found to be in violation of any of the laws and regulations to which we or our clients are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines and the curtailment of our operations |
| Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our ability to operate our business and our financial results |
| The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations |
| Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business |
| For a more detailed discussion of the various state and federal regulations to which we are subject see “Business—Regulation,” “Business—Reimbursement,” and “Business—Environmental, Health and Safety Laws |
| ” Federal and state anti-kickback and anti-self-referral laws may adversely affect our operations and income |
| Various federal and state laws govern financial arrangements among health care providers |
| The federal Anti-Kickback Law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of Medicare, Medicaid or other federal healthcare program patients, or in return for, or to induce, the purchase, lease or order of items or services that are covered by Medicare, Medicaid, or other federal healthcare programs |
| Many state laws also prohibit the solicitation, payment or receipt of remuneration in return for, or to induce the referral of patients in private as well as government programs |
| Violation of these laws may result in substantial civil or criminal penalties and/or exclusion from participation in federal or state healthcare programs |
| We believe that we are operating in compliance with applicable law and believe that our arrangements with providers would not be found to violate the federal and state anti-kickback laws |
| However, these laws could be interpreted in a manner inconsistent with, and that could have an adverse effect on, our operations |
| The Stark Law prohibits a physician from referring Medicare or Medicaid patients to any entity for certain designated health services (including MRI and other diagnostic imaging services) if the physician has a prohibited financial relationship with that entity, unless an exception applies |
| Although we believe that our operations do not violate the Stark Law, our activities may be challenged |
| If a challenge to our activities is successful, it could have an adverse effect on our operations |
| In addition, legislation may be enacted in the future that further addresses Medicare and Medicaid fraud and abuse or that imposes additional requirements or burdens on us |
| A number of states in which our diagnostic imaging centers are located have adopted a form of anti-kickback law and/or Stark Law |
| The scope of these laws and the interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion |
| A 25 ______________________________________________________________________ determination of liability under the laws described in this risk factor could result in fines and penalties and restrictions on our ability to operate in these jurisdictions |
| Healthcare reform legislation could limit the prices we can charge for our services, which would reduce our revenues and harm our operating results |
| In addition to extensive existing government healthcare regulation, there have been and continue to be numerous initiatives at the federal and state levels for reforms affecting the payment for and availability of healthcare services, including proposals that would significantly limit reimbursement under the Medicare and Medicaid Programs |
| Limitations on reimbursement amounts and other cost containment pressures have in the past resulted in a decrease in the revenue we receive for each scan we perform |
| For example, the DRA, which was signed into law on February 8, 2006, contains provisions affecting Medicare payment for imaging services furnished in a number of settings |
| It is not clear at this time what proposals, if any, will be made or adopted and, if adopted, what effect these proposals would have on our business |
| Aspects of certain of these healthcare proposals, such as reductions in the Medicare and Medicaid Programs, containment of healthcare costs on an interim basis by means that could include a short-term freeze on prices charged by healthcare providers, and permitting greater state flexibility in the administration of Medicaid, could limit the demand for our services or affect the revenue per procedure that we can collect which would harm our business and results of operations |
| The application or repeal of state certificate of need regulations could harm our business and financial results |
| Some states require a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items including diagnostic imaging systems or provision of diagnostic imaging services by us or our clients |
| Seventeen of the 44 states in which we operate require a certificate of need and more states may adopt similar licensure frameworks in the future |
| In many cases, a limited number of these certificates are available in a given state |
| If we are unable to obtain the applicable certificate or approval or additional certificates or approvals necessary to expand our operations, these regulations may limit or preclude our operations in the relevant jurisdictions |
| Conversely, states in which we have obtained a certificate of need may repeal existing certificate of need regulations or liberalize exemptions from the regulations |
| For example, Pennsylvania, Nebraska, New York, Ohio and Tennessee have liberalized exemptions from certificate of need programs |
| The repeal of certificate of need regulations in states in which we have obtained a certificate of need or a certificate of need exemption would lower barriers to entry for competition in those states and could adversely affect our business |
| If we fail to comply with various licensure, certification and accreditation standards we may be subject to loss of licensure, certification or accreditation which would adversely affect our operations |
| All of the states in which we operate require that the imaging technologists that operate our computed tomography, single photon emission computed tomography, and positron emission tomography systems be licensed or certified |
| Also, each of our retail sites must continue to meet various requirements in order to receive payments from the Medicare Program |
| In addition, we are currently accredited by the Joint Commission on Accreditation of Healthcare Organizations, an independent, non-profit organization that accredits various types of healthcare providers such as hospitals, nursing homes and providers of diagnostic imaging services |
| In the healthcare industry, various types of organizations are accredited to meet certain Medicare certification requirements, expedite third-party payment, and fulfill state licensure requirements |
| Some managed care providers prefer to contract with accredited organizations |
| Any lapse in our licenses, certifications or accreditations, or those of our technologists, or the failure of any of our retail sites to satisfy the necessary requirements under Medicare could adversely affect our operations and financial results |
| 26 ______________________________________________________________________ Risks Related to Our Indebtedness We are highly leveraged and our liabilities exceed our assets by a substantial amount |
| As of December 31, 2005, we had dlra579dtta6 million of outstanding debt, excluding letters of credit and guarantees |
| Our substantial indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions |
| Our substantial indebtedness could have important consequences for our stockholders |
| For example, it could: · require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and acquisitions and for other general corporate purposes; · increase our vulnerability to economic downturns and competitive pressures in our industry; · place us at a competitive disadvantage compared to our competitors that have less debt in relation to cash flow; and · limit our flexibility in planning for, or reacting to, changes in our business and our industry |
| If there is a default under the agreements governing our material indebtedness, the value of our assets may not be sufficient to repay our creditors |
| Our property and equipment which makes up a significant portion of our tangible assets, had a net book value as of December 31, 2005 of dlra358dtta9 million |
| The book value of these assets should not be relied on as a measure of realizable value for such assets |
| The realizable value may be greater or lower than such net book value |
| The value of our assets in the event of liquidation will depend upon market and economic conditions, the availability of buyers and similar factors |
| A sale of these assets in a bankruptcy or similar proceeding would likely be made under duress, which would reduce the amounts that could be recovered |
| Furthermore, such a sale could occur when other companies in our industry also are distressed, which might increase the supply of similar assets and therefore reduce the amounts that could be recovered |
| Our intangible assets had a net book value as of December 31, 2005 of dlra193dtta7 million |
| These assets primarily consist of the excess of the acquisition cost over the fair market value of the net assets acquired in purchase transactions, customer contracts, and costs to obtain certificates of need |
| The value of these intangible assets will continue to depend significantly upon the success of our business as a going concern and the growth in future cash flows |
| As a result, in the event of a default under the agreements governing our material indebtedness or any bankruptcy or dissolution of our company, the realizable value of these assets will likely be substantially lower and may be insufficient to satisfy the claims of our creditors |
| The condition of our assets will likely deteriorate during any period of financial distress preceding a sale of our assets |
| In addition, much of our assets consist of illiquid assets that may have to be sold at a substantial discount in an insolvency situation |
| Accordingly, the proceeds of any such sale of our assets may not be sufficient to satisfy, and may be substantially less than, amounts due to our creditors |
| Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more indebtedness which could increase the risks described above |
| We and our subsidiaries may be able to incur substantial additional indebtedness in the future |
| The terms of the indentures that govern our 103¤8prca senior subordinated notes due 2011 and 71¤4prca senior subordinated notes due 2012 (the “notes”) permit us or our subsidiaries to incur additional indebtedness, subject to certain restrictions |
| Further, the indentures allow for the incurrence of indebtedness by our subsidiaries, all of which would be structurally senior to the notes |
| In addition, as of December 31, 2005, 27 ______________________________________________________________________ our revolving credit facility permitted additional borrowings of up to approximately dlra34dtta9 million subject to the covenants contained in the credit facility, and all of those borrowings would be senior to the notes |
| If new debt is added to our and our subsidiaries’ current debt levels, the risks discussed above could intensify |
| If we are unable to generate or borrow sufficient cash to make payments on our indebtedness or to refinance our indebtedness on acceptable terms, our financial condition would be materially harmed, our business may fail and you may lose all of your investment |
| Our ability to make scheduled payments on or to refinance our obligations with respect to our debt will depend on our financial and operating performance, which will be affected by general economic, financial, competitive, business and other factors beyond our control |
| We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our debt or to fund our other liquidity needs |
| If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our debt on or before maturity or sell certain of our assets |
| We cannot assure you that we will be able to restructure or refinance any of our debt on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity |
| Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations |
| We may not be able to finance future needs or adapt our business plan to changes because of restrictions placed on us by our credit facility, the indentures governing our notes and instruments governing our other indebtedness |
| The indentures for our notes and our credit facility contain affirmative and negative covenants which restrict, among other things, our ability to: · incur additional debt; · sell assets; · create liens or other encumbrances; · make certain payments and dividends; or · merge or consolidate |
| All of these restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise |
| A failure to comply with these covenants and restrictions would permit the relevant creditors to declare all amounts borrowed under the relevant facility, together with accrued interest and fees, to be immediately due and payable |
| If the indebtedness under the credit facility or our notes is accelerated, we may not have sufficient assets to repay amounts due under the credit facility, the notes or on other indebtedness then outstanding |
| If we are not able to refinance our debt, we could become subject to bankruptcy proceedings, and you may lose all or a portion of your investment because the claims of our creditors on our assets are prior to the claims of our stockholders |
| Rises in interest rates could adversely affect our financial condition |
| An increase in prevailing interest rates would have an immediate effect on the interest rates charged on our variable rate debt, which rise and fall upon changes in interest rates |
| At December 31, 2005, dlra262dtta3 million of our debt was at variable interest rates |
| However, during 2005, we entered into multiple interest rate collar agreements which have a total notional amount of dlra178dtta0 million, which reduces our exposure on our total variable rate to the terms of these agreements |
| Under the terms of these agreements, 28 ______________________________________________________________________ we have purchased a cap on the interest rate of 4dtta00prca and have sold a floor of 2dtta25prca |
| The collar agreements mature at various dates between January 2007 and January 2008 |
| Increases in interest rates would also impact the refinancing of our fixed rate debt |
| If interest rates are higher when our fixed debt becomes due, we may be forced to borrow at the higher rates |
| If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our debt |
| As a protection against rising interest rates, we may enter into agreements such as interest rate swaps, caps, floors and other interest rate exchange contracts |
| These agreements, however, increase our risks as to the other parties to the agreements not performing or that the agreements could be unenforceable |