| RADIOLOGIX INC ITEM 1A RISK FACTORS An investment in our common stock or notes involves a high degree of risk |
| You should carefully consider the risk factors listed below, as well as the other information included or incorporated in this report, before investing in our common stock or notes |
| Risks Related to Our Company and Our Industry Our revenue is dependent on referrals |
| We generate most of our revenue from fees charged for the use of our diagnostic imaging equipment at our centers |
| This revenue depends on referrals from third parties, many of which are made by physicians who have no contractual relationship with us |
| We also generate revenue from service fees that we receive from the contracted radiology practices |
| If a sufficiently large number of physicians discontinue referring patients to us, our procedure volume could decrease, which would reduce our revenue and operating margins |
| Further, commercial third-party payors have implemented programs to control costs that could limit the ability of physicians to refer patients to us |
| For example, prepaid healthcare plans, such as health maintenance organizations, in certain instances provide diagnostic-imaging services directly and contract directly with providers and require their enrollees to obtain these services from only these providers |
| Some insurance companies and self-insured employers also limit these services to contracted providers |
| These “closed panel” systems are now common in the managed care environment |
| Other systems create an economic disincentive for referrals to providers outside of the system’s designated panel of providers |
| We may not be able to compete successfully for managed care contracts against entities with greater resources within a market area |
| Changes in third-party payment rates or methods for diagnostic imaging services could create downward pricing pressure, which would result in a decline in our revenue and harm our financial position |
| Our revenue is derived through our ownership, operation and management of diagnostic imaging centers and from service fees paid to us by contracted radiology practices |
| Substantially all of the revenue of our diagnostic imaging centers and the contracted radiology practices is currently derived from commercial third-party payors, government sponsored healthcare programs (principally, Medicare and Medicaid) and private and other payors |
| For 2005, revenue generated at our diagnostic imaging centers consisted of 62prca from managed care, 29prca from Medicare and Medicaid, and 9prca from private and other payors |
| Any change in the rates of or conditions for reimbursement from commercial third-party payors, Medicare or Medicaid could substantially reduce the amounts reimbursed to us or our contracted radiology practices for services provided |
| These reductions could have a significant adverse effect on our revenue and financial results by creating downward pricing pressure |
| Deficit Reduction Act of 2005 (DRA) |
| On February 8, 2006, the President signed into law the Deficit Reduction Act of 2005 (DRA) |
| The DRA provides that reimbursement for the technical component for imaging services (excluding diagnostic and screening mammography) in non-hospital based freestanding facilities will be capped at the lesser of reimbursement under the Medicare Part B physician fee schedule or the Hospital Outpatient Prospective Payment System (HOPPS) schedule |
| Currently, the technical component of our imaging services is reimbursed under the Part B physician fee schedule, which generally allows for higher reimbursement than under the HOPPS Under the DRA, we will be reimbursed at the lower of the two schedules, beginning January 1, 2007 |
| The DRA also codifies the reduction in reimbursement for multiple images on contiguous body parts previously announced by the Centers for Medicare and Medicaid Services (CMS) |
| In November 2005, CMS announced that it will pay 100prca of the technical component of the higher priced imaging procedure and 50prca for the technical component of each additional imaging procedure for imaging procedures involving contiguous body parts within a family of codes when performed in the same session |
| Under current methodology, Medicare pays 100prca of the technical component of each procedure |
| CMS will phase in this rate reduction over two years, so that the reduction will be 25prca for each additional imaging procedure in 2006 and another 25prca in 2007 |
| We believe the implementation of the reimbursement reductions contained in the DRA will have a significant effect on our business, financial condition and results of operations |
| 13 ______________________________________________________________________ [51]Table of Contents [52]Index to Financial Statements We could be harmed if the contracted radiology practices terminate their agreements with us or lose a significant number of radiologists |
| Our diagnostic imaging services include a professional component that must be provided by radiologists who are not directly employed by us |
| We do not control the radiologists who perform professional services for us |
| Instead, these radiologists are employed by the contracted radiology practices that maintain agreements with us |
| These agreements typically have terms of between 10 and 40 years, but may be terminated by either party under certain limited conditions |
| Depending on the termination event, the radiology practice may have the right to require us to sell, assign and transfer to it, the assets and related liabilities and obligations associated with the professional and technical radiology services provided by the radiology practice immediately prior to the termination |
| The termination or material modification of any of them could reduce our revenue |
| If a significant number of radiologists terminate their relationships with the contracted radiology practices and the radiology practices cannot recruit sufficient qualified radiologists to fulfill practice obligations under our agreements with them, our ability to maximize the use of our diagnostic imaging centers could be adversely affected, thereby decreasing our revenue |
| Competition in recruiting radiologists and a shortage of qualified radiologists has made it difficult for some contracted radiology practices to maintain adequate levels of radiologists |
| Neither we nor the contracted radiology practices maintain insurance on the lives of any affiliated physicians |
| In 2004, we terminated management services agreements with contracted radiology practices in San Antonio, Texas and the Mid-Atlantic |
| Our success is dependent on an operational turnaround |
| We may be unable to successfully complete the operational turnaround of this Company |
| Over the past year we have reviewed our overall operations, disposed of under performing operations, invested in strategic projects such as our REWARD Program, authorized new equipment expenditures, increased marketing initiatives and placed greater focus on Physician Advisory Board (PAB) communications (which involve meetings planned throughout the year with representatives of our contracted radiology practices to discuss strategic initiatives in the market place) |
| There can be no assurance that these actions, or future actions that we may take, will successfully turnaround the operations of the Company |
| We may not be able to successfully complete our market development plans |
| We intend to increase our presence in existing markets through acquisitions of centers, developing de novo centers, and adding additional equipment at existing centers, establishing additional joint venture and outsourcing relationships and selectively entering into contractual relationships with high-quality, profitable radiology practices |
| We may not be able to expand either within our existing markets or in new markets |
| In addition, any expansion may not be beneficial to our overall strategy, and any such expansion may not ultimately produce returns that justify our investment |
| Our ability to expand is dependent upon many factors, including our ability to: • identify attractive and willing candidates for acquisitions, joint ventures or outsourcing relationships; • adapt our structure to comply with federal and state legal requirements affecting our arrangements with contracted radiology practices, including state prohibitions on fee-splitting, corporate practice of medicine and self-referrals; • obtain regulatory approvals and certificates of need, where necessary, and comply with licensing and certification requirements applicable to our diagnostic imaging centers, the contracted radiology practices and the physicians associated with the contracted radiology practices; • recruit a sufficient number of qualified radiology technologists; • expand our infrastructure and management; and • obtain adequate financing |
| Our ability to expand is also dependent on our ability to compete for opportunities |
| We may not be able to compete effectively for the acquisition of diagnostic imaging centers, joint venture opportunities or other outsourcing relationships |
| Our competitors may have better-established operating histories and greater resources than we do |
| Competitors may make it more difficult to complete acquisitions or joint ventures on terms beneficial to us |
| 14 ______________________________________________________________________ [53]Table of Contents [54]Index to Financial Statements Acquisitions involve a number of special risks, including the following: • possible adverse effects on our operating results; • diversion of management’s attention and resources; • failure to retain key personnel; • difficulties in integrating new operations into our existing management infrastructure; • amortization or write-offs of acquired intangible assets; and • risks associated with unanticipated events or liabilities |
| Additionally, although we will continue to structure our operations in an effort to comply with applicable antitrust laws, federal or state governmental authorities may view us as being dominant in a particular market and, therefore, cause us to divest ourselves of relationships or assets |
| We and the contracted radiology practices may become subject to burdensome lawsuits |
| We may be subject to professional liability claims, including, without limitation, for improper use or malfunction of our diagnostic imaging equipment |
| Our operations, as well as the services we provide on behalf of the contracted radiology practices, also may be subject to lawsuits for inappropriate use or disclosure of individually identifiable patient health information |
| We maintain insurance policies with coverages that we believe are appropriate in light of the risks attendant to our business and consistent with industry practice |
| We also require the contracted radiology practices to maintain professional liability insurance consistent with industry practice |
| However, adequate liability insurance may not be available to us and the contracted radiology practices in the future at acceptable costs or at all |
| Providing medical services entails the risk of professional malpractice and other similar claims |
| The physicians employed by the contracted radiology practices are from time to time subject to malpractice claims |
| We structure our relationships with the practices under our agreements with them in a manner that we believe does not constitute the practice of medicine by us or subject us to professional malpractice claims for acts or omissions of physicians in the contracted radiology practices |
| Nevertheless, claims, suits or complaints relating to services provided by the contracted radiology practices may be asserted against us in the future, including malpractice |
| 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 |
| In addition, claims might adversely affect our business or reputation |
| We have assumed and succeeded to substantially all of the obligations of some of the operations that we have acquired |
| Therefore, claims may be asserted against us for events that occurred prior to these acquisitions |
| In connection with our acquisitions, the sellers of the operations that we have acquired have agreed to indemnify us for certain claims |
| However, we may not be able to collect payment under these indemnity agreements, which could affect us adversely |
| Most of our imaging modalities require the utilization of radiation, and certain imaging modalities utilize radioactive materials |
| These operations generate regulated waste and could subject us to regulation, related costs and delays and potential liabilities for injuries or violations of environmental, health and safety laws |
| Most of our imaging modalities utilize radiation, and certain imaging modalities utilize radioactive material |
| These operations generate medical and other regulated wastes |
| Storage, use and disposal of these materials and waste products present 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 |
| We cannot completely eliminate the risk of accidental contamination or injury from these hazardous materials |
| In the event of an accident, we would be held liable for any resulting damages, and any liability could exceed the limits of or fall outside the coverage of our insurance |
| We could incur significant costs and the diversion of our management’s attention to comply with current or future environmental, health and safety laws and regulations |
| We may experience competition from other diagnostic imaging companies |
| This competition could adversely affect our revenue and our business |
| The market for diagnostic imaging services is competitive |
| We compete principally on the basis of our reputation for providing multiple modalities, our conveniently located centers and our cost-effective, high-quality diagnostic imaging services |
| We compete locally with groups of radiologists and some non-radiologist physician practices, established hospitals, clinics and certain other independent organizations that own and operate imaging equipment |
| Our major national competitors include 15 ______________________________________________________________________ [55]Table of Contents [56]Index to Financial Statements Alliance Imaging, Inc, InSight Health Services Corp, Medical Resources, Inc, and MedQuest, Inc |
| Some of our local or national competitors that 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 |
| Technological change in our industry could reduce the demand for our services and require us to incur significant costs to upgrade our equipment |
| Technological change in the diagnostic imaging industry has been gradual |
| In the future, however, the development of new technologies or refinements of existing modalities may make our existing equipment technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, our services |
| Diagnostic imaging equipment is currently manufactured by numerous companies |
| Competition among manufacturers for a greater share of the diagnostic imaging equipment market may result in technological advances in the speed and imaging capacity of new equipment |
| Consequently, the obsolescence of our equipment may be accelerated |
| We may not have the financial ability to acquire the new or improved equipment |
| A failure to meet our capital expenditure requirements could adversely affect our business |
| We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expenses of new diagnostic imaging centers and the acquisition of additional centers and new diagnostic imaging equipment |
| We incur capital expenditures to, among other things: • upgrade and replace existing equipment; • purchase new diagnostic imaging equipment; and • expand within our existing markets and enter new markets |
| To the extent we are unable to generate sufficient cash from our operations, funds are not available under our credit facility or we are unable to structure or obtain operating leases, we may be unable to meet our capital expenditure requirements |
| Furthermore, we may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all |
| Our success depends in part on our key personnel and we may not be able to retain sufficient qualified personnel |
| Our success depends in part on our ability to attract and retain qualified senior and executive management, managerial and technical personnel |
| Competition in recruiting these personnel may make it difficult for us to continue our growth and success |
| The loss of their services or our inability in the future to attract and retain management and other key personnel could hinder the implementation of our business strategy |
| We do not maintain key person insurance for any of our executive officers |
| Recently, there has been a shortage in certain of our markets of qualified radiology technologists, the personnel who operate our equipment |
| If we are unable to recruit and retain a sufficient number of qualified technologists, we will be unable to operate our centers at maximum capacity or we will be forced to staff our diagnostic imaging centers with temporary personnel, thereby increasing our operating costs and reducing our operating margin profitability |
| Our inability to enforce non-compete agreements with the radiologists may increase competition |
| Each of the contracted radiology practices under our comprehensive services model has entered into agreements with its physician shareholders and full-time employed radiologists that generally prohibit those shareholders and radiologists from competing for a period of two years within defined geographic regions after they cease to be owners or employees, as applicable |
| In most states, a covenant not to compete will be enforced only: • to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement; • if it does not unreasonably restrain the party against whom enforcement is sought; and • if it is not contrary to public interest |
| Enforceability of a non-compete covenant is determined by a court based on all of the facts and circumstances of the specific case at the time enforcement is sought |
| For this reason, it is not possible to predict whether, or to what extent, a court will enforce the contracted radiology practices’ covenants |
| The inability of the contracted radiology practices or us to enforce radiologists’ non-compete covenants could result in increased competition from individuals who are knowledgeable about our business strategies and operations |
| 16 ______________________________________________________________________ [57]Table of Contents [58]Index to Financial Statements It is difficult to estimate our uncollectible accounts receivable and contractual allowances for billed charges, which may impact our earnings |
| Due to the complex nature of billing for healthcare services, it is difficult for us to estimate our uncollectible accounts receivable and our contractual allowances for billed charges |
| If we have to revise our estimates and our existing reserves are not adequate, this may impact our earnings |
| Our ability to maximize the use of our diagnostic imaging equipment may be subject to seasonality |
| During the summer months our average daily diagnostic imaging procedures decrease, which reduces our service fee revenues during those months |
| The decrease in average daily diagnostic imaging procedures may have resulted from referring physicians or their patients taking vacation |
| We cannot give any assurance that our future procedure volume and service fee revenues will not be affected by similar circumstances during the summer months or other traditional vacation times of the year |
| Severe weather conditions can adversely affect our operations |
| We cannot give any assurance that our future procedure volume and service fee revenues will not be adversely affected by weather-related interruptions |
| Managed care contracts and capitated fee arrangements could reduce our operating margins |
| Under capitated or other risk-sharing arrangements, the healthcare provider typically is paid a pre-determined amount per-patient per-month from the payor in exchange for providing all necessary covered services to patients covered under the arrangement |
| These contracts pass much of the financial risk of providing outpatient diagnostic imaging services, including the risk of over-use, from the payor to the provider |
| Our success will depend in part on our ability to negotiate effectively, on behalf of the contracted radiology practices and the diagnostic imaging centers that we own, operate or manage, contracts with HMOs, employer groups and other third-party payors for services to be provided on a risk-sharing or capitated basis by some or all of the radiology practices and/or diagnostic imaging centers |
| Risk-sharing arrangements result in better revenue predictability, but more unpredictability of expenses and, consequently, profitability |
| We may not be able to negotiate satisfactory arrangements on a capitated or other risk-sharing basis, on behalf of our diagnostic imaging centers or the contracted radiology practices |
| In addition, to the extent that patients or enrollees covered by these contracts require more frequent or extensive care than anticipated, we would incur unanticipated costs not offset by additional revenue, which would reduce operating margins |
| We may be unable to generate revenue when our equipment is not operational |
| Timely, effective service is essential to maintaining our reputation and high utilization rates on our imaging equipment |
| Our warranties and maintenance contracts do not compensate us for loss of revenue when our systems are not fully operational |
| Equipment manufacturers may not be able to perform repairs or supply needed parts in a timely manner |
| Thus, if we experience more equipment malfunctions than anticipated or if we are unable to promptly obtain the service necessary to keep our equipment functioning effectively, our revenue could decline and our ability to provide services would be harmed |
| Our corporate organizational documents could discourage acquisition proposals and make difficult a change of control |
| Certain provisions of Radiologix’s Restated Certificate of Incorporation, as amended, Radiologix’s Amended and Restated Bylaws and Delaware law could discourage potential acquisition proposals, delay or prevent a change in control of Radiologix and, consequently, limit the price that investors might be willing to pay in the future for shares of our common stock |
| These provisions include the inability to remove directors except for cause and our ability to issue, without further stockholder approval, shares of preferred stock with rights and privileges senior to the common stock |
| We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an “interested stockholder” for three years after the stockholder became an interested stockholder |
| We have also entered into written employment agreements with our Chief Executive Officer and President, Senior Vice President, General Counsel and Secretary and Senior Vice President and Chief Financial Officer, which contain provisions that require us to pay certain amounts to the executives upon their termination following a change of control |
| These agreements may delay or prevent a change of control of Radiologix |
| Risks Relating to Government Regulation of Our Business State and federal anti-kickback and anti-self-referral laws may adversely affect our income |
| Various federal and state laws govern financial arrangements among healthcare 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 |
| Similarly, many state laws 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 anti-kickback laws may result in substantial civil or criminal penalties for individuals or entities and/or exclusion from 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 anti-kickback laws |
| However, these laws could be interpreted in a manner inconsistent with our operations |
| 17 ______________________________________________________________________ [59]Table of Contents [60]Index to Financial Statements Federal law prohibiting physician self-referrals (the “Stark Law”) prohibits a physician from referring Medicare or Medicaid patients to an entity for certain “designated health services” if the physician has a prohibited financial relationship with that entity, unless an exception applies |
| Certain radiology services are considered “designated health services” under the Stark Law |
| 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 |
| All of the states in which our diagnostic imaging centers are located have adopted a form of anti-kickback law and almost all of those states have also adopted a form of 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 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 |
| Enforcement of federal and state privacy and associated laws may adversely affect our income |
| How providers and their business associates use and disclose certain healthcare information has come under increasing public sensitivity and scrutiny |
| Additional risks for healthcare providers and their business associates are posed by the new HIPAA federal standards, which set forth guidelines concerning how individually-identifiable health information may be used and disclosed |
| Historically, state law has governed confidentiality issues |
| But as a result of the enactment of HIPAA, some states are considering revisions to their existing laws and regulations |
| These changes may or may not be consistent with the federal HIPAA provisions |
| We believe that our operations are compliant with these legal standards |
| Nevertheless, these laws and regulations are new and few have been interpreted by government regulators or courts |
| Consequently, our interpretations and activities may be challenged |
| Federal False Claims Act violations could affect our participation in government programs |
| The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved |
| The Federal False Claims Act further provides that a lawsuit there under may be initiated in the name of the United States by an individual who is an original source of the allegations |
| The government has taken the position that claims presented in violation of the federal anti-kickback law or Stark Law may be considered a violation of the Federal False Claims Act |
| Penalties include fines ranging from dlra5cmam500 to dlra11cmam000 for each false claim, plus three times the amount of damages that the federal government sustained because of the act of that person |
| We believe that we are in compliance with the rules and regulations that apply to the Federal False Claims Act |
| However, we could be found to have violated certain rules and regulations resulting in sanctions under the Federal False Claims Act |
| If we are found in violation, any sanctions imposed could result in fines and penalties and restrictions on and exclusions from participation in federal and state healthcare programs that are integral to our business |
| Our agreements with the contracted radiology practices must be structured to avoid the corporate practice of medicine and fee-splitting |
| The laws of many states, including many of the states in which the contracted radiology practices are located, prohibit us from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as splitting professional fees with physicians |
| These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion |
| A component of our business has been to enter into service agreements with radiology practices |
| We provide management, administrative, technical and other non-medical services to the radiology practices in exchange for a service fee |
| We structure our relationships with the radiology practices, including the purchase of diagnostic imaging centers, in a manner that we believe keeps us from engaging in the practice of medicine or exercising control over the medical judgments or decisions of the radiology practices or their physicians or violating the prohibitions against fee-splitting |
| State regulatory authorities or other parties may assert that we are engaged in the corporate practice of medicine or that the payment of service fees to us by the radiology practices constitutes fee-splitting |
| If such a claim were successfully asserted, we could be subject to civil and criminal penalties and could be required to restructure or terminate the applicable contractual arrangements |
| This result, or our inability to successfully restructure our relationships to comply with these statutes, could jeopardize our business strategy |
| 18 ______________________________________________________________________ [61]Table of Contents [62]Index to Financial Statements Licensing and certification laws may limit our ability to expand |
| Ownership, construction, operation, expansion and acquisition of diagnostic imaging centers are subject to various federal and state laws, regulations and approvals concerning licensing of centers, personnel, certificates of need and other required certificates for certain types of healthcare centers and major medical equipment |
| The laws of some of the states in which we operate limit our ability to acquire new diagnostic imaging equipment or expand or replace our existing equipment at diagnostic imaging centers in those states |
| In addition, free-standing diagnostic imaging centers that provide services that are not performed as part of a physician office must meet Medicare requirements to be certified as an independent diagnostic testing facility to bill the Medicare and Medicaid programs |
| We may not be able to receive the required regulatory approvals for any future acquisitions, expansions or replacements, and the failure to obtain these approvals could limit the market for our services |
| The regulatory framework is uncertain and evolving |
| Healthcare laws and regulations may change significantly in the future |
| We continuously monitor these developments and modify our operations from time to time as the regulatory environment changes |
| We cannot assure you, however, that we will be able to adapt our operations to address new regulations or that new regulations will not adversely affect our business |
| In addition, although we believe that we are operating in compliance with applicable federal and state laws, neither our current or anticipated business operations nor the operations of the contracted radiology practices have been the subject of judicial or regulatory interpretation |
| We cannot assure you that a review of our business by courts or regulatory authorities will not result in a determination that could adversely affect our operations or that the healthcare regulatory environment will not change in a way that restricts our operations |
| Certain states have enacted statutes or adopted regulations affecting risk assumption in the healthcare industry, including statutes and regulations that subject any physician or physician network engaged in risk-based managed care contracting to applicable insurance laws and regulations |
| These laws and regulations may require physicians and physician networks to meet minimum capital requirements and other safety and soundness requirements |
| Implementing additional regulations or compliance requirements could result in substantial costs to us and the contracted radiology practices and limits our ability to enter into capitated or other risk sharing managed care arrangements |
| We could be harmed if payors are unable to comply with HIPAA Standard Transaction and Code Set Requirements |
| The administrative provisions of HIPAA direct the federal government to adopt national electronic standards for automated transfer of certain healthcare data between healthcare payors, plans and providers |
| HIPAA is designed to enable the entire healthcare industry to communicate electronic data using a single set of standards, thus eliminating all nonstandard formats currently in use |
| Our contracted radiology practices and diagnostic imaging centers are “covered entities” under HIPAA, and as such, have to comply with the HIPAA electronic data interchange mandates |
| A failure in our continued ability to comply with HIPAA Standards or the discontinuance of CMS or payor contingency plans could cause us to experience a delay in claims processing by its payors or lead to a large number of rejected or denied claims |
| Either of these results may slow our cash collections and increase our accounts receivable days sales outstanding |
| Risks Related to Indebtedness Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations on our notes or notes issued to replace them |
| At December 31, 2005, we had approximately dlra170dtta2 million of indebtedness |
| In addition, we have the ability to borrow up to dlra28dtta6 million under our credit facility |
| Also, subject to restrictions in the indenture and the credit facility, we may incur additional indebtedness |
| Our high level of indebtedness could have important consequences, including the following: • our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; • we must use a substantial portion of our cash flow from operations to pay interest on our notes and our other indebtedness, which will reduce the funds available to us for other purposes; • all of the indebtedness outstanding under the credit facility is secured by substantially all of our assets and will mature prior to any notes; • our high level of indebtedness could place us at a competitive disadvantage to our competitors that have less debt; and • our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business |
| 19 ______________________________________________________________________ [63]Table of Contents [64]Index to Financial Statements We expect to obtain the money to pay our expenses and to pay the amounts due under our notes and other debt from our operations, borrowings under our credit facility and new borrowings |
| Our ability to meet our expenses depends on our future performance, which will be affected by financial, business, economic and other factors |
| We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors |
| Our business may not generate sufficient cash flow from operations in the future and future borrowings may not be available in an amount sufficient to enable us to repay indebtedness, including our notes, or to fund other liquidity needs |
| If we do not have enough money, we may be required to refinance all or part of our then existing debt (including our notes), sell assets or borrow more money |
| We cannot guarantee that we will be able to do so on terms acceptable to us, or at all |
| In addition, the terms of existing or future debt agreements, including our credit facility and any indenture, may restrict us from adopting any of these alternatives |
| The failure to generate sufficient cash flow or to achieve these alternatives could significantly adversely affect the value of our notes and our ability to pay the amounts due under them |
| Because our notes are unsecured, the right to enforce remedies is limited by the rights of holders of secured debt |
| Our credit facility is secured by substantially all of our assets and a pledge of the capital stock of all of our wholly owned subsidiaries |
| If we become insolvent or are liquidated, or if any payment under the credit facility is accelerated, our lenders will be entitled to exercise the remedies available to a secured lender under applicable law and will have a claim on those assets before the holders of any notes |
| The liquidation value of our assets may not be sufficient to repay in full any indebtedness under the credit facility, as well as our other indebtedness, including our notes |
| Our ability to repay our notes and our other debt depends on cash flow from our subsidiaries, some of which are not obligated to make funds available to make payments on notes |
| Our only material assets are our ownership interests in our subsidiaries |
| Consequently, we depend on distributions or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations, including with respect to our notes |
| Our non-guarantor subsidiaries are not obligated to make funds available for payment on our notes |
| Only our subsidiaries that are not unrestricted subsidiaries will guarantee our notes |
| The financial statements included in this report are presented on a consolidated basis, including all of our subsidiaries |
| The aggregate total assets at December 31, 2005 of our subsidiaries that are not guarantors of our notes were dlra17dtta8 million, or 7dtta6prca of our total assets at December 31, 2005 |
| The operating results of our guarantor subsidiaries may not be sufficient to enable us to make payments on our notes |
| In addition, our rights and the rights of our creditors, including holders of our notes, to participate in the assets of any of our non-guarantor subsidiaries upon their liquidation or recapitalization will generally be subject to the prior claims of those subsidiaries’ creditors |
| As a result, our notes are effectively subordinated to the indebtedness of the non-guarantor subsidiaries |
| As of December 31, 2005, the total liabilities of our non-guarantor subsidiaries, excluding intercompany liabilities, were dlra837cmam000, or 0dtta4prca of our total liabilities |
| The indenture for our notes and our credit facility impose significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions |
| The indenture for our notes and our credit facility impose significant operating and financial restrictions on us |
| These restrictions limit our ability to, among other things: • borrow money; • pay dividends on or redeem or repurchase our stock; • make investments; • create liens; • sell certain assets or merge with or into other companies; • enter into certain transaction with affiliates; • sell stock in our subsidiaries; and • restrict dividends, distributions or other payments from our subsidiaries |
| If we are unable to access the full dlra35 million under our credit facility, our ability to meet our capital expenditure requirements may be restricted |
| Our borrowing availability under our dlra35 million credit facility is determined through a formula, which allows us to borrow up to 85prca of eligible accounts receivable, as defined under the credit facility |
| At December 31, 2005, we had dlra27dtta2 million available for borrowing |
| To the extent that financing under the credit facility or other financing sources is not available to us or we are not able to generate sufficient cash through operations, we may be restricted in our ability to meet capital expenditure requirements |
| 20 ______________________________________________________________________ [65]Table of Contents [66]Index to Financial Statements A court could cancel the guarantees under certain circumstances |
| Each of our subsidiaries that is not an unrestricted subsidiary guarantees our notes |
| If, however, a guarantor becomes a debtor in a case under the United States Bankruptcy Code or encounters other financial difficulty, under federal or state fraudulent conveyance laws a court might avoid (that is, cancel) its guarantee |
| The court might do so if it found that, when the guarantor entered into its guarantee or, in some states, when payments became due under its guarantee, it (i) received less than reasonably equivalent value or fair consideration for the guarantee and (ii) either (a) was or was rendered insolvent, (b) was left with inadequate capital to conduct its business, or (c) believed or should have believed that it would incur debts beyond its ability to pay |
| The court might also avoid a guarantee, without regard to the above factors, if it found that the guarantor entered into its guarantee with actual intent to hinder, delay, or defraud its creditors |
| A court would likely find that a guarantor did not receive reasonably equivalent value or fair consideration for its guarantee unless it benefited directly or indirectly from the issuance of our notes |
| In addition, the court might direct a note holder to repay any amounts already received from the guarantor |
| If the court were to avoid any guarantor’s guarantee, we cannot assure a note holder that funds would be available to pay our notes from another guarantor or from any other source |
| The test for determining solvency for purposes of the foregoing will depend on the law of the jurisdiction being applied |
| In general, a court would consider an entity insolvent either if the sum of its existing debts exceeds the fair value of all its property, or if the present fair saleable value of its assets is less than the amount required to pay the probable liability on its existing debts as they become due |
| For this analysis, “debts” includes contingent and unliquidated debts |
| The indenture states that the liability of each guarantor on its guarantee is limited to the maximum amount that the subsidiary can incur without risk that the guarantee will be subject to avoidance as a fraudulent conveyance |
| This limitation may not protect the guarantees from a fraudulent conveyance attack or, if it does, that the guarantees will be in amounts sufficient, if necessary, to pay obligations under our notes when due |
| We may not be able to satisfy our obligations to holders of our notes upon a change of control |
| Upon the occurrence of a “change of control,” as defined in our indenture, a note holder will have the right to require us to purchase our notes at a price equal to 101prca of the principal amount, together with any accrued and unpaid interest and liquidated damages, if any, to the date of purchase |
| Our failure to purchase, or give notice of purchase of, our notes would be a default under the indenture, which would in turn be a default under our senior credit facility |
| Moreover, our failure to repay all amounts outstanding under our senior credit facility upon a default would also be a default under the indenture |
| In addition, a change of control may constitute an event of default under our credit facility |
| A default under our credit facility will result in an event of default under the indenture if the lenders accelerate the debt under our senior credit facility |
| If a change of control occurs, we may not have enough assets to satisfy all obligations under our credit facility and the indenture related to our notes |
| Upon the occurrence of a change of control, we could seek to refinance the indebtedness under our credit facility and our notes or obtain a waiver from the lenders or the note holders |
| We may not be able to obtain a waiver or refinance our indebtedness on commercially reasonable terms, if at all |
| No established trading market exists for our notes, and note holders may not be able to sell them quickly or at the price that note holders paid |
| We do not intend to list our notes on any securities exchange or to arrange for quotation on any automated dealer quotation system |
| and Wachovia Securities make a market in the notes, but they are not obligated to do so |
| They may discontinue any market making at any time, in their sole discretion |
| As a result, we cannot assure you as to the liquidity of any trading market for the notes |
| Note holders may not be able to sell notes at a particular time or at favorable prices |
| We also cannot assure note holders as to the level of liquidity of the trading market for the notes |
| As a result, note holders may be required to bear the financial risk of their investment in the notes indefinitely |
| Future trading prices of the notes may be volatile and will depend on many factors, including: • our operating performance and financial condition; • the interest of securities dealers in making a market for our notes; and • the market for similar securities |
| 21 ______________________________________________________________________ [67]Table of Contents [68]Index to Financial Statements There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected |
| Company management continues to monitor our controls to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002 |
| Our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud |
| An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objective of the control system are met |
| In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs |
| Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected |
| These inherent limitations include the realities that judgments in decision-making can be challenged and that breakdowns can occur because of simple errors or mistakes |
| Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of controls |
| The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions |
| Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate |
| Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected |