| You should carefully consider the following risks, as well as the other information contained in this 10-K, including our consolidated financial statements and the related notes, before investing in our common stock |
| Risks Related to Our Business We depend on payments from government Medicare and Medicaid programs for a significant amount of our revenue and our business could be materially harmed by any changes that result in reimbursement reductions |
| We estimate that approximately 55prca, 53prca and 50prca of our net patient service revenue for 2003, 2004 and 2005, respectively, consisted of payments from Medicare and Medicaid |
| These government programs generally reimburse us on a fee-for-service basis based on predetermined government reimbursement rate schedules |
| As a result of these reimbursement schedules, we are limited in the amount we can record as revenue for our services from these government programs |
| If our operating costs increase, we will not be able to recover these costs from government payors |
| Medicare reimbursement rates are determined by a formula which takes into account an industry wide conversion factor (CF) which may change on an annual basis |
| In 2003, the CF increased by 1dtta6prca; in 2004, it increased by 1dtta5prca; and in 2005, the rate increased an additional 1dtta5prca and in 2006 the CF will not change from the 2005 level |
| The net result of these changes in the conversion factor in the past several years has not had a significant impact on our business |
| There can be no assurance that increases will continue, scheduled increases will materialize or decreases will not occur in the future |
| Changes in the Medicare, Medicaid or similar government programs that limit or reduce the amounts paid to us for any of our services or specific procedures could cause our revenue and profitability to decline |
| If payments by managed care organizations and other commercial payors decrease, our revenue and profitability could be adversely affected |
| We estimate that approximately 43prca, 46prca and 47prca of our net patient service revenue for 2003, 2004 and 2005, respectively, was derived from commercial payors such as managed care organizations and private health insurance programs |
| These commercial payors generally pay us for the services rendered to an insured patient based upon predetermined rates |
| While commercial payor rates are generally higher than government program reimbursement rates, commercial payor rates are based in part on Medicare reimbursement rates and when Medicare rates are lowered, commercial rates are often lowered as well |
| If managed care organizations and other private insurers reduce their rates or we experience a significant shift in our revenue mix toward additional managed care payors or Medicare or Medicaid reimbursements, then our revenue and profitability will decline and our operating margins will be reduced |
| Any inability to maintain suitable financial arrangements with commercial payors could have a material adverse impact on our business |
| We have potential conflicts of interest relating to our related party transactions which could harm our business |
| We have potential conflicts of interest relating to existing agreements we have with certain of our directors, officers, principal shareholders, shareholders and employees |
| In 2003, 2004 and 2005 we paid an aggregate of dlra6dtta0 million, dlra8dtta1 million and dlra7dtta3 million, respectively under our related party agreements and we received dlra21dtta8 million, dlra26dtta7 million and dlra24dtta8 million, respectively pursuant to our administrative service agreements with related parties |
| Potential conflicts of interest can exist if a related party director or officer has to make a decision that has different implications for us and the related party |
| If a dispute arises in connection with any of these agreements, if not resolved satisfactorily to us, our business could be harmed |
| These agreements include our: • administrative services agreements with professional corporations that are owned by certain of our directors, officers and principal shareholders; • leases we have entered into with entities owned by certain of our directors, officers, and principal shareholders; and • medical malpractice insurance which we acquire from an entity owned by certain of our directors, officers, and principal shareholders |
| 25 ______________________________________________________________________ [46]Table of Contents In Maryland, Massachusetts, Nevada, New York and North Carolina, we have administrative services agreements with professional corporations that are owned by certain of our directors, officers and principal shareholders |
| Michael J Katin, MD, a director, is a licensed physician in the states of Nevada and North Carolina and we have administrative services agreements with his professional corporations in these states |
| In the state of New York, our Chairman, Howard M Sheridan, MD, our Chief Executive Officer and President, Daniel E Dosoretz, MD, our Medical Director, James H Rubenstein, MD and Dr |
| Katin, are licensed physicians and we have administrative services agreements with their professional corporation |
| Additionally, Dr |
| Katin, a principal shareholder, is a licensed physician in the state of Maryland and we have an administrative services agreement with his professional corporation in this state |
| While we have transition agreements in place in all states except New York that provide us with the ability to designate qualified successor physician owners of the shares held by the physician owners of these professional corporations upon the occurrence of certain events, there can be no assurance that we will be able to enforce them under the laws of the respective states or that they will not be challenged by regulatory agencies |
| Potential conflicts of interest may arise in connection with the administrative services agreements that may have materially different implications for us and the professional corporations and there can be no assurance that it will not harm us |
| For example, we are generally paid a fixed annual fee on a monthly basis by the professional corporations for our services, which are generally subject to renegotiation on an annual basis |
| We may be unable to renegotiate acceptable fees, in which event many of the administrative services agreements provide for binding arbitration |
| If we are unsuccessful in renegotiations or arbitration this could negatively impact our operating margins or result in the termination of our administrative services agreements |
| Additionally, we lease 13 of our properties from ownership groups that consist of certain of our directors, officers, principal shareholders, shareholders and employees |
| Our lease for the Broadway office in Fort Myers, Florida is on a month-to-month basis and there can be no assurance that it will continue in the future |
| We may be unable to renegotiate these leases when they come up for renewal on terms acceptable to us, if at all |
| In October 2003, we replaced our existing third-party medical malpractice insurance coverage with coverage we obtained from a newly-formed insurance entity, which is owned by physicians including Drs |
| We renewed this coverage in October 2004 and in October 2005 which was approved by the audit committee |
| We may be unable to renegotiate this coverage at acceptable rates and comparable coverage may not be available from third-party insurance companies |
| If we are unsuccessful in renewing our malpractice insurance coverage, we may not be able to continue to operate without being exposed to substantial risks of claims being made against us for damage awards we are unable to pay |
| All transactions between us and any related party after our June 2004 initial public offering are subject to approval by the audit committee and disputes will be handled by the audit committee |
| There can be no assurance that the above or any future conflicts of interest will be resolved in our favor |
| If not resolved, such conflicts could harm our business |
| In certain states we depend on administrative services agreements with professional corporations, including related party professional corporations, and if we are unable to continue to enter into them or they are terminated, we could be materially harmed |
| Certain states, including Alabama, California, Maryland, Massachusetts, Nevada, New York and North Carolina, have laws prohibiting business corporations from employing physicians |
| Our treatment centers in Alabama, Massachusetts, Nevada, New York and North Carolina, operate through administrative services agreements with professional corporations that employ the radiation oncologists who provide professional services at the treatment centers in those states |
| In 2003, 2004 and 2005, dlra35dtta1 million, dlra45dtta8 million and dlra62dtta2 million, respectively, of our net patient service revenue was derived from administrative services agreements, as opposed to dlra96dtta0 million, dlra117dtta9 million and dlra155dtta4 million from all of our other centers |
| The professional corporations in these states are currently owned by certain of our directors, officers and principal shareholders, who are licensed to practice medicine in those states |
| As we enter into new states that will require an administrative services agreement, there can be no assurance that a related party professional corporation, or any professional corporation, will be willing or able to enter into an administrative services agreement |
| Furthermore, if we enter into an administrative services agreement with an unrelated party there could be an increased risk of differences arising or future termination |
| We cannot assure you that a professional corporation will not seek to terminate an agreement with us on the basis that it violates the applicable state laws prohibiting the corporate practice of medicine or any other basis nor can we assure you that governmental authorities in those states will not seek termination of these arrangements on the same basis |
| While we have not been subject to such proceedings in the past, nor are we currently aware of any other corporations that are subject to such proceedings, we could be materially harmed if any state governmental authorities or the professional corporations with which we have an administrative services agreement were to succeed in such a termination |
| 26 ______________________________________________________________________ [47]Table of Contents We depend on recruiting and retaining radiation oncologists and other qualified healthcare professionals for our success and our ability to enforce the non-competition covenants with radiation oncologists |
| Our success is dependent upon our continuing ability to recruit, train and retain or affiliate with radiation oncologists, physicists, dosimetrists, radiation therapists and medical technicians |
| While there is currently a national shortage of these healthcare professionals, we have not experienced significant problems attracting and retaining key personnel and professionals in the recent past |
| We face competition for such personnel from other healthcare providers, research and academic institutions, government entities and other organizations |
| In the event we are unable to recruit and retain these professionals, such shortages could have a material adverse effect on our ability to grow |
| Additionally, many of our senior radiation oncologists, due to their reputations and experience, are very important in the recruitment and education of radiation oncologists |
| All of our radiation oncologists except eight are employed under employment agreements which, among other provisions, provide that the radiation oncologists will not compete with us (or the professional corporations contracting with us) for a period of time after employment terminates |
| Such covenants not to compete are enforced to varying degrees from state to state |
| In most states, a covenant not to compete will be enforced only to the extent that it is necessary to protect the legitimate business interest of the party seeking enforcement, that it does not unreasonably restrain the party against whom enforcement is sought and that it is not contrary to the public interest |
| This determination is made based upon all the facts and circumstances of the specific case at the time enforcement is sought |
| It is unclear whether our interests under our administrative services agreements will be viewed by courts as the type of protected business interest that would permit us or the professional corporations to enforce a non-competition covenant against the radiation oncologists |
| Since our success depends in substantial part on our ability to preserve the business of our radiation oncologists, a determination that these provisions will not be enforced could have a material adverse effect on us |
| We depend on our senior management and we may be materially harmed if we lose any member of our senior management |
| We are dependent upon the services of our senior management, especially Dr |
| Dosoretz, our Chief Executive Officer and President, and Dr |
| Rubenstein, our Medical Director |
| We have entered into executive employment agreements with Drs |
| The initial term of the employment agreements is three years and they renew automatically for successive two year terms unless 120 days prior notice is given by either party |
| Because these members of our senior management team have been with us for over 15 years and have contributed greatly to our growth, their services would be very difficult, time consuming and costly to replace |
| We carry key-man life insurance on these individuals |
| The loss of key management personnel or our inability to attract and retain qualified management personnel could have a material adverse effect on us |
| A decision by any of these individuals to leave our employ, to compete with us or to reduce his involvement on our behalf or as to any professional corporation they have an interest in and to which we provide administrative services, would have a material adverse effect on our business |
| A significant number of our treatment centers are concentrated in certain states, particularly Florida, which makes us particularly sensitive to regulatory, economic and other conditions in those states |
| Our Florida treatment centers accounted for approximately 68prca, 64prca and 57prca of our total revenues during 2003, 2004 and 2005, respectively |
| Our treatment centers are also concentrated in the states of Nevada, New York and North Carolina, none of which individually currently account for more than 15prca of our total revenues, but in the aggregate accounted for approximately 26prca, 23prca and 23prca of our total revenues in 2003, 2004 and 2005, respectively |
| If our treatment centers in these states are adversely affected by changes in regulatory, economic and other conditions, our revenue and profitability may decline |
| In particular, we employ radiation oncologists and other physicians at our Florida treatment centers and if we are restricted or prohibited from doing so in the future it could significantly harm our business |
| Our growth strategy depends in part on our ability to acquire and develop additional treatment centers on favorable terms |
| If we are unable to do so, our future growth could be limited and our operating results could be adversely affected |
| We may be unable to identify, negotiate and complete suitable acquisition and development opportunities on reasonable terms |
| We expect to continue to add additional treatment centers in our existing and new local markets |
| Our growth, however, will depend on several factors, including: • our ability to obtain desirable locations for treatment centers in suitable markets; • our ability to identify, recruit and retain or affiliate with a sufficient number of radiation oncologists and other healthcare professionals; 27 ______________________________________________________________________ [48]Table of Contents • our ability to obtain adequate financing to fund our growth strategy; and • our ability to successfully operate under applicable government regulations |
| If our growth strategy does not succeed, our business could be harmed |
| We may not be able to grow our business effectively or successfully implement our growth plans if we are unable to recruit additional management and other personnel |
| Our ability to continue to grow our business effectively and successfully implement our growth strategy is highly dependent upon our ability to attract and retain qualified management employees and other key employees |
| As such, there can be no assurance that we will be able to identify and retain the key personnel that may be necessary to grow our business effectively or successfully implement our growth strategy |
| If we are unable to attract and retain talented personnel it could limit our ability to grow our business |
| We may encounter numerous business risks in acquiring and developing additional treatment centers, and may have difficulty operating and integrating those treatment centers |
| If we acquire or develop additional treatment centers, we may: • be unable to successfully operate the treatment centers; • have difficulty integrating their operations and personnel; • be unable to retain radiation oncologists or key management personnel; • be unable to collect the accounts receivable of an acquired treatment center; • acquire treatment centers with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations; • be unable to contract with third-party payors or attract patients to our treatment centers; or • experience losses and lower gross revenues and operating margins during the initial periods of operating our newly-developed treatment centers |
| Furthermore, integrating a new treatment center could be expensive and time consuming, and could disrupt our ongoing business and distract our management and other key personnel |
| We currently plan to develop new treatment centers in existing and new local markets |
| We may not be able to structure economically beneficial arrangements in new states as a result of these respective healthcare laws or otherwise |
| If these plans change for any reason or the anticipated schedules for opening and costs of development are revised by us, we may be negatively impacted |
| We may not be able to integrate and staff these new treatment centers |
| There can be no assurance that these planned treatment centers will be completed or that, if developed, will achieve sufficient patient volume to generate positive operating margins |
| If we are unable to timely and efficiently integrate an acquired or newly-developed treatment center, our business could suffer |
| We may be subject to actions for false claims if we do not comply with government coding and billing rules which could harm our business |
| If we fail to comply with federal and state documentation, coding and billing rules, we could be subject to criminal and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, which could harm us |
| We estimate that approximately 55prca, 53prca and 50prca of our net patient service revenue for 2003, 2004 and 2005, respectively, consisted of payments from Medicare and Medicaid programs |
| In billing for our services to third-party payors, we must follow complex documentation, coding and billing rules |
| These rules are based on federal and state laws, rules and regulations, various government pronouncements, and on industry practice |
| Failure to follow these rules could result in potential criminal or civil liability under the federal False Claims Act, under which extensive financial penalties can be imposed |
| It could further result in criminal liability under various federal and state criminal statutes |
| We submit thousands of claims for Medicare and other payments and there can be no assurance that there have been no errors |
| While we carefully and regularly review our documentation, coding and billing practices as part of our compliance program, the rules are frequently vague and confusing and we cannot assure that governmental investigators, private insurers or private whistleblowers will not challenge our practices |
| 28 ______________________________________________________________________ [49]Table of Contents State law limitations and prohibitions on the corporate practice of medicine may materially harm our business and limit how we can operate |
| State governmental authorities regulate the medical industry and medical practices extensively |
| Many states have corporate practice of medicine laws which prohibit us from: • employing physicians; • practicing medicine, which, in some states, includes managing or operating a radiation treatment center; • certain types of fee arrangements with physicians; • owning or controlling equipment used in a medical practice; • setting fees charged for physician services; • maintaining a physician’s patient records; or • controlling the content of physician advertisements |
| In addition, many states impose limits on the tasks a physician may delegate to other staff members |
| We have administrative services agreements in states that prohibit the corporate practice of medicine such as Alabama, California, Maryland, Massachusetts, Nevada, New York and North Carolina |
| Corporate practice of medicine laws and their interpretation vary from state to state, and regulatory authorities enforce them with broad discretion |
| If we are in violation of these laws, we could be required to restructure our agreements which could materially harm our business and limit how we operate |
| In the event the corporate practice of medicine laws of other states would adversely limit our ability to operate, it could prevent us from expanding into the particular state and impact our growth strategy |
| If we fail to comply with the laws and regulations applicable to our treatment center operations, we could suffer penalties or be required to make significant changes to our operations |
| Our treatment center operations are subject to many laws and regulations at the federal, state and local government levels |
| These laws and regulations require that our treatment centers meet various licensing, certification and other requirements, including those relating to: • qualification of medical and support persons; • pricing of services by healthcare providers; • the adequacy of medical care, equipment, personnel, operating policies and procedures; • clinic licensure and certificates of need; • maintenance and protection of records; or • environmental protection, health and safety |
| While we attempt to comply with all applicable laws and regulations some of which can be complex and subject to interpretation, our treatment centers may fail to comply with all applicable laws and regulations |
| If we fail or have failed to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including becoming the subject of cease and desist orders, rejection of the payment of our claims, the loss of our licenses to operate and our ability to participate in government or private healthcare programs |
| 29 ______________________________________________________________________ [50]Table of Contents If we fail to comply with the federal anti-kickback statute, we could be subject to criminal and civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, which could materially harm us |
| A provision of the Social Security Act, commonly referred to as the federal anti-kickback statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid or any other federally funded healthcare program |
| The federal anti-kickback statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations |
| All of our financial relationships with healthcare providers are potentially implicated by this statute to the extent Medicare or Medicaid referrals are implicated |
| Financial relationships covered by this statute can include any relationship where remuneration is provided for referrals including payments not commensurate with fair market value, whether in the form of space, equipment leases, professional or technical services or anything else of value |
| Violations of the federal anti-kickback statute may result in substantial civil or criminal penalties, including criminal fines of up to dlra25cmam000, imprisonment of up to five years, civil penalties under the Civil Monetary Penalties Law of up to dlra50cmam000 for each violation, plus three times the remuneration involved, civil penalties under the False Claims Act of up to dlra11cmam000 for each claim submitted, plus three times the amounts paid for such claims and exclusion from participation in the Medicare and Medicaid programs |
| The exclusion, if applied to us or one or more of our subsidiaries or affiliate personnel, could result in significant reductions in our revenues and could have a material adverse effect on our business |
| In addition, most of the states in which we operate, including Florida, have also adopted laws, similar to the federal anti-kickback statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care |
| These statutes typically impose criminal and civil penalties as well as loss of licenses |
| If we fail to comply with the provision of the Civil Monetary Penalties Law relating to inducements provided to patients, we could be subject to civil penalties and exclusion from the Medicare and Medicaid programs, which could materially harm us |
| Under a provision of the federal Civil Monetary Penalties Law, civil monetary penalties (and exclusion) may be imposed on any person who offers or transfers remuneration to any patient who is a Medicare or Medicaid beneficiary, when the person knows or should know that the remuneration is likely to induce the patient to receive medical services from a particular provider |
| This broad provision applies to many kinds of inducements or benefits provided to patients, including complimentary items, services or transportation that are of more than a nominal value |
| We have reviewed our practices of providing services to our patients, and have structured those services in a manner that we believe complies with the Law and its interpretation by government authorities |
| We cannot provide assurances, however, that government authorities will not take a contrary view and impose civil monetary penalties and exclude us for past or present practices |
| Our business could be materially harmed by future interpretation or implementation of state laws regarding prohibitions on fee-splitting |
| Many states, including Florida where 24 of our 68 treatment centers are located, prohibit the splitting or sharing of fees between physicians and non-physicians |
| These laws vary from state to state and are enforced by courts and regulatory agencies, each with broad discretion |
| Some states have interpreted certain types of fee arrangements in practice management agreements between entities and physicians as unlawful fee-splitting |
| We believe our arrangements with physicians comply in all material respects with the fee-splitting laws of the states in which we operate |
| Nevertheless, it is possible regulatory authorities or other parties could claim we are engaged in fee-splitting |
| If such a claim were successfully asserted in any jurisdiction, we and our radiation oncologists could be subject to civil and criminal penalties and we could be required to restructure our contractual and other arrangements |
| Any restructuring of our contractual and other arrangements with physician practices could result in lower revenue from such practices and reduced influence over the business decisions of such practices |
| Alternatively, some of our existing contracts could be found to be illegal and unenforceable, which could result in the termination of those contracts and an associated loss of revenue |
| In addition, expansion of our operations to other states with certain types of fee-splitting prohibitions may require structural and organizational modification to the form of relationships that we currently have with physicians, professional corporations and hospitals |
| If our operations in New York are found not to be in compliance with New York law, we may be unable to continue or expand our operations in New York |
| We estimate that approximately 11prca, 9prca and 7prca of total revenues for 2003, 2004 and 2005, respectively, was derived from our New York operations |
| New York law prohibits a business corporation such as us from practicing medicine in the state |
| As a result, we do not employ radiation oncologists or any other physician or licensed health care provider to provide professional services in New York |
| We do provide certain management and administrative services to health care providers, including physicians |
| These services and the payments received for them are regulated by New York law |
| We believe we 30 ______________________________________________________________________ [51]Table of Contents have structured our services arrangements with health care providers to comply with these laws |
| New York also prohibits for-profit corporations from owning a licensed healthcare facility |
| We do not own any interests in any licensed New York health care facilities |
| New York additionally has regulations concerning the administration of radiation and rules governing financial and referral relationships with physicians who provide radiation therapy services |
| Although we believe our operations and relationships in New York are in material compliance with these laws, if New York regulatory authorities or a third party asserts a contrary position, our New York operations could be harmed and we may be unable to continue or expand our operations in New York |
| If a federal or state agency asserts a different position or enacts new laws or regulations regarding illegal payments under the Medicare, Medicaid or other governmental programs, we may be subject to civil and criminal penalties, experience a significant reduction in our revenue or be excluded from participation in the Medicare, Medicaid or other governmental programs |
| Any change in interpretations or enforcement of existing or new laws and regulations could subject our current business practices to allegations of impropriety or illegality, or could require us to make changes in our treatment centers, equipment, personnel, services, pricing or capital expenditure programs, which could increase our operating expenses and have a material adverse effect on our operations or reduce the demand for or profitability of our services |
| Additionally, new federal or state laws may be enacted that would cause our relationships with our radiation oncologists to become illegal or result in the imposition of penalties against us or our treatment centers |
| If any of our business arrangements with our radiation oncologists or other physicians in a position to make referrals of radiation therapy services were deemed to violate the federal anti-kickback statute or similar laws, or if new federal or state laws were enacted rendering these arrangements illegal, our business would be adversely affected |
| If we fail to comply with physician self-referral laws as they are currently interpreted or may be interpreted in the future, or if other legislative restrictions are issued, we could incur a significant loss of reimbursement revenue |
| We are subject to federal and state statutes and regulations banning payments for referrals of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship and billing for services provided pursuant to such referrals if any occur |
| The federal Stark Law applies to Medicare and Medicaid and prohibits a physician from referring patients for certain services, including radiation therapy, radiology and laboratory services, to an entity with which the physician has a financial relationship |
| Financial relationship includes both investment interests in an entity and compensation arrangements with an entity |
| The state laws and regulations vary significantly from state to state, are often vague and, in many cases, have not been interpreted by courts or regulatory agencies |
| These state laws and regulations generally apply to services reimbursed by both governmental and private payors |
| Violation of these federal and state laws and regulations may result in prohibition of payment for services rendered, loss of licenses, fines, criminal penalties and exclusion from Medicare and Medicaid programs |
| We have financial relationships with our physicians, as defined by the federal Stark Law, in the form of compensation arrangements and ownership of our common stock issued by us in connection with acquisitions |
| We also have financial arrangements with physicians who refer Medicare and Medicaid patients to us, which relationships are also subject to the Stark Law |
| We rely on certain exceptions to self-referral laws including an exception for radiation oncologists referrals of radiation therapy services, as well as employee, group practice and in-office ancillary services exceptions, that we believe are applicable to our arrangements |
| In a limited number of markets we have relationships with non-radiation oncology physicians such as surgical and gynecological oncologists and urologists that are members of a group practice with our radiation oncologists and we rely on the group practice exception to self-referral laws with respect to such relationships |
| While we believe that our financial relationships with physicians and referral practices are in material compliance with applicable laws and regulations, government authorities might take a contrary position or prohibited referrals may occur |
| We cannot be certain that physicians who own our common stock or hold promissory notes will not violate these laws or that we will have knowledge of the identity of all beneficial owners of our common stock |
| If our financial relationships with physicians were found to be illegal, or if prohibited referrals were found to have been made, we could be subject to civil and criminal penalties, including fines, exclusion from participation in government and private payor programs and requirements to refund amounts previously received from government and private payors |
| In addition, expansion of our operations to new jurisdictions, or new interpretations of laws in our existing jurisdictions, could require structural and organizational modifications of our relationships with physicians to comply with that jurisdiction’s laws |
| Such structural and organizational modifications could result in lower profitability and failure to achieve our growth objectives |
| 31 ______________________________________________________________________ [52]Table of Contents Our costs and potential risks have increased as a result of the regulations relating to privacy and security of patient information |
| There are numerous federal and state regulations addressing patient information privacy and security concerns |
| In particular, the federal regulations issued under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, contain provisions that: • protect individual privacy by limiting the uses and disclosures of patient information; • require the implementation of security safeguards to ensure the confidentiality, integrity and availability of individually identifiable health information in electronic form; and • prescribe specific transaction formats and data code sets for certain electronic healthcare transactions |
| Compliance with these regulations requires us to spend money and our management to spend substantial time and resources |
| We believe that we are in material compliance with the HIPAA regulations with which we are currently required to comply |
| The HIPAA regulations expose us to increased regulatory risk if we fail to comply |
| If we fail to comply with the new regulations, we could suffer civil penalties up to dlra100 per violation with a maximum penalty of dlra25cmam000 per each requirement violated per calendar year and criminal penalties with fines up to dlra250cmam000 per violation, and our business could be harmed |
| Efforts to regulate the construction, acquisition or expansion of healthcare treatment centers could prevent us from developing or acquiring additional treatment centers or other facilities or renovating our existing treatment centers |
| Many states have enacted certificate of need laws which require prior approval for the construction, acquisition or expansion of healthcare treatment centers |
| In giving approval, these states consider the need for additional or expanded healthcare treatment centers or services |
| In the states of Kentucky, North Carolina and Rhode Island in which we currently operate, certificates of need must be obtained for capital expenditures exceeding a prescribed amount, changes in capacity or services offered and various other matters |
| Other states in which we now or may in the future operate may also require certificates of need under certain circumstances not currently applicable to us |
| We cannot assure you that we will be able to obtain the certificates of need or other required approvals for additional or expanded treatment centers or services in the future |
| In addition, at the time we acquire a treatment center, we may agree to replace or expand the acquired treatment center |
| If we are unable to obtain required approvals, we may not be able to acquire additional treatment centers or other facilities, expand the healthcare services we provide at these treatment centers or replace or expand acquired treatment centers |
| Our business may be harmed by technological and therapeutic changes |
| The treatment of cancer patients is subject to potentially revolutionary technological and therapeutic changes |
| Future technological developments could render our equipment obsolete |
| We may incur significant costs in replacing or modifying equipment in which we have already made a substantial investment prior to the end of its anticipated useful life |
| In addition, there may be significant advances in other cancer treatment methods, such as chemotherapy, surgery, biological therapy, or in cancer prevention techniques, which could reduce demand or even eliminate the need for the radiation therapy services we provide |
| We maintain a significant amount of debt to further our business or growth strategies |
| As of December 31, 2005, we had outstanding debt of dlra123dtta5 million |
| Approximately dlra189dtta7 million is available for borrowing in the future under our fourth amended and restated senior secured credit facility |
| Our significant indebtedness could have adverse consequences and could limit our business as follows: • a substantial portion our cash flows from operations may go to repayment of principal and interest on our indebtedness and we would have less funds available for our operations; • our senior credit facility contains numerous financial and other restrictive covenants, including restrictions on purchasing assets, selling assets, paying dividends to our shareholders and incurring additional indebtedness; • as a result of our debt we may be vulnerable to adverse general economic and industry conditions and we may have less flexibility in reacting to changes in these conditions; or • competitors with greater access to capital could have a significant advantage over us |
| 32 ______________________________________________________________________ [53]Table of Contents We may need to raise additional capital, which may be difficult to obtain at attractive prices and which may cause us to engage in financing transactions that adversely affect our stock price |
| We may need capital for growth, acquisitions, development, integration of operations and technology and equipment in the future |
| Any additional capital would be raised through public or private offerings of equity securities or debt financings |
| Our issuance of additional equity securities could cause dilution to holders of our common stock and may adversely affect the market price of our common stock |
| The incurrence of additional debt could increase our interest expense and other debt service obligations and could result in the imposition of covenants that restrict our operational and financial flexibility |
| Additional capital may not be available to us on commercially reasonable terms or at all |
| The failure to raise additional needed capital could impede the implementation of our operating and growth strategies |
| Our information systems are critical to our business and a failure of those systems could materially harm us |
| We depend on our ability to store, retrieve, process and manage a significant amount of information, and to provide our radiation treatment centers with efficient and effective accounting and scheduling systems |
| If our information systems fail to perform as expected, or if we suffer an interruption, malfunction or loss of information processing capabilities, it could have a material adverse effect on our business |
| Our financial results could be adversely affected by the increasing costs of professional liability insurance and by successful malpractice claims |
| We are exposed to the risk of professional liability and other claims against us and our radiation oncologists and other physicians and professionals arising out of patient medical treatment at our treatment centers |
| Our risk exposure as it relates to our non-radiation oncology physicians could be greater than with our radiation oncologists to the extent such non-radiation oncology physicians are engaged in diagnostic activities |
| Malpractice claims, if successful, could result in substantial damage awards which might exceed the limits of any applicable insurance coverage |
| Insurance against losses of this type can be expensive and insurance premiums are expected to increase significantly in the near future |
| Insurance rates vary from state to state, by physician specialty and other factors |
| The rising costs of insurance premiums, as well as successful malpractice claims against us or one of our physicians, could have a material adverse effect on our financial position and results of operations |
| It is also possible that our excess liability and other insurance coverage will not continue to be available at acceptable costs or on favorable terms |
| In addition, our insurance does not cover all potential liabilities arising from governmental fines and penalties, indemnification agreements and certain other uninsurable losses |
| For example, from time to time we agree to indemnify third parties, such as hospitals and clinical laboratories, for various claims that may not be covered by insurance |
| The radiation therapy market is highly competitive |
| Radiation therapy is a highly competitive business in each market in which we operate |
| Our treatment centers face competition from hospitals, other medical practitioners and other operators of radiation treatment centers |
| There is a growing trend of physicians in specialties other than radiation oncology, such as urology, entering the radiation treatment business including medical specialties that would otherwise be sources of referrals |
| If this trend continues it could harm our referrals and our business |
| Certain of our competitors have longer operating histories and significantly greater financial and other resources than us |
| Competitors with greater access to financial resources may enter our markets and compete with us |
| In the event that we are not able to compete successfully, our business may be adversely affected and competition may make it more difficult for us to affiliate with additional radiation oncologists on terms that are favorable to us |
| Our financial results may suffer if we have to write-off goodwill or other intangible assets |
| A portion of our total assets consist of goodwill and other intangible assets |
| Goodwill and other intangible assets, net of accumulated amortization, accounted for 22prca and 28prca of the total assets on our balance sheet as of December 31, 2004 and 2005, respectively |
| We may not realize the value of our goodwill or other intangible assets |
| We expect to engage in additional transactions that will result in our recognition of additional goodwill or other intangible assets |
| We evaluate on a regular basis whether events and circumstances have occurred that indicate that all or a portion of the carrying amount of goodwill or other intangible assets may no longer be recoverable, and is therefore impaired |
| Under current accounting rules, any determination that impairment has occurred would require us to write-off the impaired portion of our goodwill or the unamortized portion of our intangible assets, resulting in a charge to our earnings |
| Such a write-off could have a material adverse effect on our financial condition and results of operations |
| 33 ______________________________________________________________________ [54]Table of Contents Our failure to comply with laws related to hazardous materials could materially harm us |
| Our treatment centers provide specialized treatment involving the use of radioactive material in the treatment of the lungs, prostate, breasts, cervix and other organs |
| The materials are obtained from, and, if not permanently placed in a patient or used up, returned to, a third-party provider of supplies to hospitals and other radiation therapy practices, which has the ultimate responsibility for its proper disposal |
| We, however, remain subject to state and federal laws regulating the protection of employees who may be exposed to hazardous material and regulating the proper handling, storage and disposal of that material |
| Although we believe we are in compliance with all applicable laws, a violation of such laws, or the future enactment of more stringent laws or regulations, could subject us to liability, or require us to incur costs that would have a material adverse effect on us |
| Because our principal shareholders and management own a large percentage of our common stock, they will collectively be able to determine the outcome of all matters submitted to shareholders for approval regardless of the preferences of our other shareholders |
| As of February 1, 2006 certain of our officers beneficially owned approximately 46dtta5prca of our outstanding common stock and serve on our board of directors |
| As a result, these persons have a significant influence over the outcome of matters requiring shareholder approval including the power to: • elect our entire board of directors; • control our management and policies; • agree to mergers, consolidations and the sale of all or substantially all of our assets; • prevent or cause a change in control; and • amend our amended and restated articles of incorporation and bylaws at any time |
| Our stock price may fluctuate and you may not be able to resell your shares of our common stock at or above the price you paid |
| We became a public company on June 18, 2004 and there can be no assurance that we will be able to maintain an active market for our stock |
| A number of factors could cause the market price of our common stock be volatile |
| Some of the factors that could cause our stock price to fluctuate significantly, include: • variations in our financial performance; • changes in recommendations or financial estimates by securities analysts, or our failure to meet or exceed estimates; • announcements by us or our competitors of material events; • future sales of our common stock; • investor perceptions of us and the healthcare industry; • announcements regarding purported class action lawsuits by plaintiff lawfirms; and • general economic trends and market conditions |
| Sales of substantial amounts of our common stock, by our senior management shareholders could adversely affect our stock price and limit our ability to raise capital |
| As of February 1, 2006, our senior management shareholders beneficially owned approximately 47dtta0prca of our common stock |
| The market price of our common stock could decline as a result of sales by senior management of substantial amounts of our common stock in the public market or the perception that substantial sales could occur |
| These sales also may make it more difficult for us to sell common stock in the future to raise capital |
| 34 ______________________________________________________________________ [55]Table of Contents Florida law and certain anti-takeover provisions of our corporate documents and our executive employment agreements could entrench our management or delay or prevent a third party from acquiring us or a change in control even if it would benefit our shareholders |
| Our amended and restated articles of incorporation and bylaws and our executive employment agreements contain a number of provisions that may delay, deter or inhibit a future acquisition or change in control that is not first approved by our board of directors |
| This could occur even if our shareholders receive an attractive offer for their shares or if a substantial number or even a majority of our shareholders believe the takeover may be in their best interest |
| These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain approval from our board of directors prior to pursuing a transaction |
| Provisions that could delay, deter or inhibit a future acquisition or change in control include the following: • 10cmam000cmam000 shares of blank check preferred stock that may be issued by our board of directors without shareholder approval and that may be substantially dilutive or contain preferences or rights objectionable to an acquiror; • a classified board of directors with staggered, three-year terms so that only a portion of our directors are subject to election at each annual meeting; • the ability of our board of directors to amend our bylaws without shareholder approval; • special meetings of shareholders cannot be called by a shareholder; • obligations to make certain payments under executive employment agreements in the event of a change in control; and • Florida statutes which restrict or prohibit “control share acquisitions” and certain transactions with affiliated parties and permit the adoption of “poison pills” without shareholder approval |
| These provisions could also discourage bids for our common stock at a premium and cause the market price of our common stock to decline |
| In addition, these provisions may also entrench our management by preventing or frustrating any attempt by our shareholders to replace or remove our current management |
| Other than S Corporation distributions and our special distribution, we have not paid dividends and do not expect to in the future, which means that the value of our shares cannot be realized except through sale |
| Other than S Corporation distributions to our shareholders, including our special distribution in April 2004 prior to our initial public offering, we have never declared or paid cash dividends |
| We currently expect to retain earnings for our business and do not anticipate paying dividends on our common stock at any time in the foreseeable future |
| Because we do not anticipate paying dividends in the future, it is likely that the only opportunity to realize the value of our common stock will be through a sale of those shares |
| The decision whether to pay dividends on common stock will be made by the board of directors from time to time in the exercise of its business judgment |
| Furthermore, we are currently restricted from paying dividends by the terms of our senior secured credit facility |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results which could subject us to regulatory sanctions, harm our business and operating results and cause the trading price of our stock to decline |
| We are required under Section 404 of the Sarbanes-Oxley Act of 2002 to evaluate our internal controls for effectiveness |
| Effective internal controls are necessary for us to provide reliable financial reports |
| If we cannot provide reliable financial reports, our business, reputation and operating results could be harmed |
| We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement |
| For example, in early May 2005 we identified a material weakness related to our controls over lease accounting, which caused us to restate our prior financial statements |
| While we have since remediated the material weakness to ensure proper lease accounting in the future and believe that we currently have adequate internal controls, there can be no assurance that we will be able to implement and maintain adequate controls in the future |
| We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future |
| Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could subject us to regulatory sanctions, harm our business and operating results or cause us to fail to meet our reporting obligations |
| Inferior internal controls could also harm our reputation and cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock |
| 35 ______________________________________________________________________ [56]Table of Contents We have treatment centers in Florida and other areas that could be disrupted or damaged by hurricanes |
| Florida is susceptible to hurricanes and we currently have 24 radiation treatment centers located in Florida |
| Our Florida centers accounted for approximately 57prca of our total revenues during 2005 |
| Recently 21 of our treatment centers in South Florida were disrupted by Hurricane Wilma which required us to close all of these centers for a business day |
| Although none of these treatment centers suffered structural damage as a result of the hurricane, their utility services were disrupted |
| Our patients and employees were also affected by Hurricane Wilma |
| While we do not anticipate that Hurricane Wilma will have any long-term impact on our business, our Florida treatment centers and any of our other treatment centers located in other areas that are in the path of a hurricane could be subject to significant hurricane-related disruptions and/or damage in the future |
| If our treatment centers suffer any significant hurricane-related disruptions and/or damage in the future it could have an adverse affect on our business and financial results |
| We carry property damage and business interruption insurance on our facilities, but there can be no assurance that it would be adequate to cover all of our hurricane-related losses |
| Forward looking statements |
| We may make other written and oral communications from time to time that contain such statements |
| Forward-looking statements, including statements as to industry trends, future expectations and other matters that do not relate strictly to historical facts are based on certain assumptions by management |
| These statement are often identified by the use of words such as “may,” “will,” “expect,” “plans,” “believe,” “ anticipate,” “intend,” “could,” “estimate,” or “continue” and similar expressions or variations, and are based on the beliefs and assumptions of our management based on information then currently available to management |
| Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements |
| Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks discussed herein under the heading “Risk Factors |
| ” We caution readers to carefully consider such factors |
| Further, such forward-looking statements speak only as of the date on which such statements are made and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of such statements |