SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by
the Registrant
x
Filed by a Party other than the
Registrant
o
Check the appropriate box:
o
Preliminary Proxy Statement
o
Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x
Definitive Proxy Statement
o
Definitive Additional Materials
o
Soliciting Material Pursuant to § 240.14a-12
Radiation Therapy Services, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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x
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No fee required.
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o
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
Common Stock, par value $0.0001 per share of Radiation Therapy Services, Inc, (Common Stock)
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(2)
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Aggregate number of securities to which transaction applies:
23,725,688 Shares of Common Stock (including restricted Common Stock)
1,312,169 Options to purchase shares of Common Stock
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(3)
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Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): As of
October 19, 2007, there were (i) 23,725,688 shares of Common Stock
outstanding (including restricted Common Stock obligations) and owned
by shareholders other than Radiation Therapy Investments, LLC,
Radiation Therapy Services Holdings, Inc. and RTS MergerCo, Inc. and
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(ii) options to purchase 1,312,169 shares of Common Stock with an
exercise price less than $32.50 per share outstanding. The filing fee
was determined by adding (x) the product of (I) the number of shares
of Common Stock (including restricted stock obligations) that are
proposed to be acquired in the merger and (II) the merger
consideration of $32.50 in cash per share of Common Stock, plus (y)
$28,351,688 expected to be paid to holders of options to purchase
Common Stock with an exercise price of less than $32.50 per share in
exchange for the cancellation of such options, ((x) and (y) together,
the Total Consideration). The payment of the filing fee, calculated
in accordance with Exchange Act Rule 0-11(c)(1), was calculated by
multiplying the Total Consideration by .00003070
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(4)
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Proposed maximum aggregate value of transaction:
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$799,436,548
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(5)
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Total fee paid:
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$24,543
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þ
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
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(1)
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Amount previously paid:
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(2)
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Form, Schedule or Registration Statement No.:
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(3)
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Filing Party:
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(4)
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Date Filed:
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Radiation
Therapy Services, Inc.
2234
Colonial Boulevard, Ft. Myers, Florida 33907
January 11,
2008
Dear Shareholder:
You are cordially invited to attend a special meeting of
shareholders of Radiation Therapy Services, Inc.
(RTS, we, us or
our), to be held at, the Hyatt Regency Coconut Point
Resort & Spa, 5001 Coconut Road, Bonita Springs, Florida,
34134, on Wednesday, February 6, 2008, at 10:00 a.m.,
Eastern Time. At the special meeting, you will be asked to
consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of October 19, 2007 (the
Merger Agreement), among RTS, Radiation Therapy
Services Holdings, Inc. (Parent) and RTS MergerCo,
Inc. (Merger Sub), pursuant to which, upon
completion of the merger, each outstanding share of RTS common
stock, par value $0.0001 per share (other than shares held in
our treasury, shares owned by our subsidiaries, Radiation
Therapy Investments, LLC (Holdings), Parent or
Merger Sub and shares held by shareholders who perfect appraisal
rights in accordance with Florida law), will be converted into
the right to receive $32.50 in cash, without interest, and
Merger Sub will merge with and into RTS and RTS will become a
direct or indirect wholly owned subsidiary of Parent. Parent is
owned and controlled by Holdings and Holdings is a party to the
Merger Agreement for purposes of the termination fees section of
the Merger Agreement. Holdings is owned by an affiliate of
Vestar Capital Partners, a leading international private equity
firm. Certain of our executive officers
and/or
directors, Dr. Howard M. Sheridan, Dr. Daniel E.
Dosoretz, Dr. James H. Rubenstein and Dr. Michael J.
Katin as well as certain or our
non-executive
employees, are expected to exchange shares of RTS common stock
that they own for limited liability company interests in
Holdings in connection with the merger.
On October 19, 2007, the independent and disinterested
members of our board of directors (i.e. all members of the board
other than Dr. Howard M. Sheridan, our Chairman of the
Board, Dr. Daniel E. Dosoretz, our Chief Executive Officer,
Dr. James H. Rubenstein, our Medical Director and Secretary
and Dr. Michael J. Katin, each of whom is expected to
exchange shares of our common stock for units of limited
liability company interests in Holdings in connection with the
merger and therefore abstained from voting), based in part upon
the unanimous recommendation of the special committee of our
board of directors comprised of three of our five independent
and disinterested directors, among other things,
(i) determined that it was advisable and in the best
interests of RTS and its shareholders to enter into the Merger
Agreement and (ii) approved and adopted the Merger
Agreement and the transactions contemplated by the Merger
Agreement. Following such approval and adoption by the
independent and disinterested members of our board of directors,
our full board of directors unanimously, based in part upon the
unanimous recommendation of a special committee and the approval
and adoption of our independent and disinterested directors,
among other things, (i) determined that it was advisable
and in the best interests of RTS and its shareholders to enter
into the Merger Agreement and (ii) approved and adopted the
Merger Agreement and the transactions contemplated by the Merger
Agreement.
Therefore, our board of directors recommends that
you vote FOR the approval of the Merger
Agreement.
The proxy statement attached to this letter provides you with
information about the merger, the Merger Agreement and the
special meeting. A copy of the Merger Agreement is attached as
Annex A to the proxy statement.
We encourage you to read
the entire proxy statement and its annexes carefully.
You
may also obtain more information about us from documents we have
filed with the Securities and Exchange Commission.
Your vote is very important, regardless of the number of
shares of our common stock you own.
Under Florida law, the
merger cannot be completed unless the holders of a majority of
the outstanding shares of our common stock entitled to vote at
the special meeting vote for the approval of the Merger
Agreement.
If you do not vote, it will have the same effect
as a vote against the approval of the Merger Agreement.
Whether or not you plan to attend the special meeting in person,
please complete, sign, date and return promptly the enclosed
proxy card. If you hold shares through a broker or other
nominee, you should follow the procedures provided by your
broker or nominee. These actions will not limit your right to
vote in person if you wish to attend the special meeting and
vote in person.
Thank you in advance for your cooperation and continued support.
Sincerely,
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Leo R. Doerr
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Dr. Howard M. Sheridan
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Chairman of the Special Committee
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Chairman of the Board
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THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
THIS PROXY
STATEMENT IS DATED JANUARY 11, 2008, AND IS FIRST BEING
MAILED TO SHAREHOLDERS ON OR ABOUT JANUARY 15, 2008.
Radiation
Therapy Services, Inc.
2234
Colonial Boulevard Fort Myers, Florida 33907
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 6, 2008
TO THE SHAREHOLDERS OF RADIATION THERAPY SERVICES, INC.:
A special meeting of shareholders of Radiation Therapy Services,
Inc., a Florida corporation (RTS, we,
us or our), will be held at the Hyatt
Regency Coconut Point Resort & Spa, 5001 Coconut Road,
Bonita Springs, Florida, 34134, on Wednesday, February 6,
2008, beginning at 10:00 a.m., Eastern Time, for the
following purposes:
1. Approval of the Merger Agreement.
To
consider and vote on a proposal to approve the Agreement and
Plan of Merger, dated as of October 19, 2007 (the
Merger Agreement), among RTS, Radiation Therapy
Services Holdings, Inc. and RTS MergerCo, Inc., pursuant to
which, upon completion of the merger, each outstanding share of
RTS common stock, par value $0.0001 per share (other than shares
held in our treasury, shares owned by our subsidiaries,
Radiation Therapy Investments, LLC, Radiation Therapy Services
Holdings, Inc. or RTS MergerCo, Inc. and shares held by
shareholders who perfect appraisal rights in accordance with
Florida law), will be converted into the right to receive $32.50
in cash, without interest, and RTS MergerCo, Inc. will merge
with and into RTS and RTS will become a direct or indirect
wholly owned subsidiary of Radiation Therapy Services Holdings,
Inc.
2. Adjournment or Postponement of the Special
Meeting.
To approve the adjournment or
postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies if there are
insufficient votes properly cast at the time of the meeting to
approve the Merger Agreement.
3. Other Matters.
To transact such other
business as may properly come before the special meeting or any
adjournment or postponement thereof.
Only shareholders of record of our common stock as of the close
of business on January 10, 2008, will be entitled to notice
of, and to vote at, the special meeting and any adjournment or
postponement of the special meeting. All shareholders of record
are cordially invited to attend the special meeting in person.
Your vote is very important, regardless of the number of
shares of our common stock you own.
Under Florida law, the
merger cannot be completed unless the holders of a majority of
the outstanding shares of our common stock entitled to vote at
the special meeting vote for the approval of the Merger
Agreement. Even if you plan to attend the meeting in person, we
request that you complete, sign, date and return the enclosed
proxy card in the envelope provided and thereby ensure that your
shares will be represented at the meeting if you are unable to
attend. If you sign, date and mail your proxy card without
indicating how you wish to vote, your vote will be counted as a
vote
FOR
the approval of the Merger Agreement
and
FOR
the adjournment or postponement of
the special meeting, if necessary or appropriate, to solicit
additional proxies.
If you fail to vote by proxy or in person, the effect will be
that your shares will not be counted for purposes of determining
whether a quorum is present at the special meeting and, if a
quorum is present, will have the same effect as a vote against
the approval of the Merger Agreement.
If you are a
shareholder of record and wish to vote in person at the special
meeting, you may withdraw your proxy and vote in person.
We have concluded that shareholders of RTS who do not vote in
favor of the approval of the Merger Agreement will have the
right to seek appraisal of the fair value of their shares if the
merger is completed, but only if they comply with all procedural
requirements of Florida law, which are summarized in the
accompanying proxy statement under the caption Appraisal
Rights beginning on page 85.
The Merger Agreement and the merger are described in the
accompanying proxy statement and a copy of the Merger Agreement
is included as Annex A to the proxy statement.
By Order Of The Board Of Directors,
James H.
Rubenstein
Secretary
January 11, 2008
TABLE OF
CONTENTS
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Page
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1
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10
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15
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25
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i
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Page
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68
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A-1
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B-1
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C-1
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D-1
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E-1
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F-1
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ii
This summary term sheet highlights selected information from
this proxy statement and may not contain all of the information
that is important to you. To understand the merger fully, and
for a more complete description of the terms of the merger, you
should carefully read this entire proxy statement, the annexes
attached to this proxy statement, the documents referred to in
this proxy statement and any information incorporated by
reference. We have included section references to direct you to
a more complete description of the topics presented in this
summary term sheet. In this proxy statement, the terms
RTS, we, us, our
and the Company refer to Radiation Therapy Services,
Inc., a Florida corporation. In addition, we refer to Radiation
Therapy Investments, LLC as Holdings, to Radiation
Therapy Services Holdings, Inc. as Parent, and to
RTS MergerCo, Inc. as Merger Sub.
The Proposal.
You are being asked to vote on a
proposal to approve the Agreement and Plan of Merger, dated as
of October 19, 2007 (the Merger Agreement),
among RTS, Parent, Merger Sub and Holdings. Pursuant to the
Merger Agreement, upon completion of the merger, each
outstanding share of RTS common stock, par value $0.0001 per
share (other than shares held in our treasury, shares owned by
our subsidiaries, Holdings, Parent or Merger Sub and shares held
by shareholders who perfect appraisal rights in accordance with
Florida law), will be converted into the right to receive $32.50
in cash, without interest, and Merger Sub will merge with and
into RTS and RTS will become a direct or indirect wholly owned
subsidiary of Parent. In the event that there are not sufficient
votes properly cast at the time of the special meeting to
approve the Merger Agreement, shareholders may also be asked to
vote on a proposal to adjourn or postpone the special meeting to
solicit additional proxies. See The Special Meeting
beginning on page 63.
The Parties to the Merger Agreement.
RTS owns,
operates and manages treatment centers focused principally on
providing radiation treatment alternatives ranging from
conventional external beam radiation to newer,
technologically-advanced options. RTS is one of the largest
companies in the United States focused principally on providing
radiation therapy. RTS opened its first radiation treatment
center in 1983 and as of September 30, 2007 provides
radiation therapy services in 83 treatment centers. RTSs
treatment centers are clustered into 27 local markets in
16 states, including Alabama, Arizona, California,
Delaware, Florida, Kentucky, Maryland, Massachusetts, Michigan,
Nevada, New Jersey, New York, North Carolina, Pennsylvania,
Rhode Island, and West Virginia. Of these 83 treatment centers,
25 treatment centers were internally developed, 48 were acquired
and 10 involve hospital-based treatment centers. RTS has
continued to expand its affiliation with physician specialties
in other areas including gynecological and surgical oncology and
urology in a limited number of local markets to strengthen its
clinical working relationships.
Holdings is a Delaware limited liability company and Parent is a
Delaware corporation and a wholly owned subsidiary of Holdings.
Each of these entities were formed in anticipation of the merger
by Vestar Capital Partners V, L.P. an investment fund (the
Vestar Capital Fund) sponsored by Vestar Capital
Partners, a private equity firm (Vestar Capital
Partners or Vestar). Vestar Capital Partners
and Vestar Capital Fund are collectively referred to in this
proxy statement as Vestar Capital. Upon completion
of the merger, RTS will be a direct or indirect wholly owned
subsidiary of Parent and Holdings. Certain of our executive
officers
and/or
directors, Dr. Howard M. Sheridan, Dr. Daniel E.
Dosoretz, Dr. James H. Rubenstein and Dr. Michael J.
Katin, as well as certain of our non-executive employees, are
expected to exchange shares of our common stock for units of
limited liability company interests in Holdings, immediately
prior to the merger. We refer to Sheridan, Dosoretz, Rubenstein
and Katin as the Rollover Investors. Holdings and
Parent currently have
de minimis
assets and no
operations. Holdings is a party to the Merger Agreement only for
purposes of the termination fees section.
Vestar Capital Partners is a leading international private
equity firm specializing in management buyouts and growth
capital investments. The firms investment strategy is
targeted towards companies in the U.S., Europe and Japan with
valuations in the $100 million to $4 billion range.
Since the firms founding in 1988, the Vestar funds have
completed over 60 investments in companies with a total value of
approximately $20 billion. These companies have varied in
size and geography and span a broad range of industries. The
firms strategy is to invest behind incumbent management
teams, family owners or corporations in a creative, flexible and
entrepreneurial way with the overriding goal to build long-term
franchise value. Vestar currently
manages funds with committed capital totaling approximately
$7 billion and has offices or affiliates operating in New
York, Denver, Boston, Paris, Milan, Munich and Tokyo.
Merger Sub is a Florida corporation formed by Parent in
anticipation of the merger. Subject to the terms and conditions
of the Merger Agreement and in accordance with Florida law, at
the effective time of the merger, Merger Sub will merge with and
into RTS and RTS will continue as the surviving corporation.
Merger Sub currently has
de minimis
assets and no
operations.
Going-Private Transaction.
This is a
going private transaction. If the merger is
completed, your shares will be converted into the right to
receive $32.50 in cash per share, without interest and less any
applicable withholding tax, and:
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Parent will directly or indirectly own our entire equity
interest;
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you will no longer have any interest in our future earnings or
growth;
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we will no longer be a public company;
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our common stock will no longer be traded on the NASDAQ Global
Select Market Exchange (the NASDAQ); and
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we may no longer be required to file periodic and other reports
with the Securities and Exchange Commission (the
SEC).
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See Special Factors Certain Effects of the
Merger beginning on page 39.
Special Committee.
A special committee of our
board of directors was formed and given the full power and
authority to review, evaluate, and determine whether it would be
appropriate to move forward with any potential transaction or
strategic alternative, as well as to review, evaluate and, if
appropriate, negotiate and recommend approval or rejection to
the board of directors regarding whether to proceed with a sale
of RTS or other strategic alternative. The special committee
consisted entirely of independent and disinterested members of
our board of directors. The members of the special committee are
Leo R. Doerr, Ronald E. Inge, and Rabbi Solomon Agin. Initially,
independent director Herbert Dorsett was a member of the special
committee, but was unable to continue that role after
August 2, 2007, due to health related issues. Janet
Watermeier, our other independent director and newest member of
the board, was not a member of the special committee due to her
then limited knowledge and experience with the Company. Our
non-independent directors are Dr. Sheridan,
Dr. Dosoretz, Dr. Rubenstein and Dr. Katin. See
Special Factors Fairness of the Merger;
Recommendations of the Special Committee and Our Board of
Directors beginning on page 25.
Special Committee and Board
Recommendation.
The special committee unanimously
determined that the merger is both procedurally and
substantively fair to RTSs unaffiliated shareholders and
in the best interests of our shareholders, and unanimously
recommended that our board of directors approve and adopt the
Merger Agreement. Based in part on the recommendation of the
special committee, the independent and disinterested members of
our board of directors (with Dr. Sheridan, our Chairman of
the Board; Dr. Dosoretz, our Chief Executive Officer,
Dr. Rubenstein our Medical Director and Secretary and
Dr. Katin abstaining) unanimously determined that the
merger is both procedurally and substantively fair to RTSs
unaffiliated shareholders, and in the best interests of our
shareholders, and unanimously approved and adopted the Merger
Agreement and the transactions contemplated by the Merger
Agreement. In addition, all of the members of our board of
directors, also based in part on the recommendation of the
special committee as well as the approval and adoption of the
independent and disinterested directors, unanimously determined
that the merger is both procedurally and substantively fair to
RTSs unaffiliated shareholders, and in the best interests
of our shareholders, and unanimously approved and adopted the
Merger Agreement and the transactions contemplated by the Merger
Agreement.
ACCORDINGLY, OUR BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT.
See Special Factors Fairness of
the Merger; Recommendations of the Special Committee and Our
Board of Directors beginning on page 25.
2
Opinion of Morgan Joseph & Co.
Inc.
In connection with the merger, the special
committee received an opinion, subsequently confirmed in
writing, from Morgan Joseph & Co. Inc., its financial
advisor (Morgan Joseph), as to the fairness, from a
financial point of view and as of the date of such opinion to
the holders of our common stock (other than the Rollover
Investors), of the $32.50 per share merger consideration to be
received by those holders of our common stock. The opinion also
was provided to our board of directors for its information in
connection with its consideration of the transactions
contemplated by the Merger Agreement. The full text of Morgan
Josephs written opinion, dated October 18, 2007, is
attached to this proxy statement as Annex B. You are
encouraged to read this opinion carefully in its entirety for a
description of the assumptions made, procedures followed,
matters considered and limitations on the scope of review
undertaken.
Morgan Josephs opinion addressed only the
fairness of the merger consideration to our shareholders (other
than the Rollover Investors) from a financial point of view as
of the date of the opinion and did not address any other aspect
of the merger, including the merits of the underlying decision
by RTS to enter into the Merger Agreement. The opinion was
addressed to the special committee and was provided to our board
of directors for its information and use, but does not
constitute a recommendation as to how any shareholder should
vote or act on any matter relating to the proposed merger.
See Special Factors Opinion of Morgan
Joseph & Co. Inc. beginning on page 34.
Purpose of the Transaction.
The purpose of the
transaction is for Vestar Capital and the Rollover Investors to
acquire all of the outstanding equity interests of RTS and to
enable RTSs shareholders to realize a premium on their
shares of RTS common stock based on the closing price of our
common stock on October 19, 2007. See Special
Factors Purposes and Reasons of the Rollover
Investors beginning on page 30.
Position of the Rollover Investors Regarding the Fairness of
the Merger.
Each of the Rollover Investors
believes that the merger is both procedurally and substantively
fair to RTSs unaffiliated shareholders. Their belief is
based upon their knowledge and analysis of RTS, as well as the
factors discussed in the section entitled Special
Factors Position of Rollover Investors Regarding the
Fairness of the Merger beginning on page 30.
Position of Parent, Merger Sub and Vestar Capital Regarding
the Fairness of the Merger.
Parent, Merger Sub
and Vestar Capital believe that the merger is both procedurally
and substantively fair to RTSs unaffiliated shareholders.
Their belief is based upon their knowledge and analysis of RTS,
as well as the factors discussed in the section entitled
Special Factors Position of Holdings, Parent,
Merger Sub and Vestar Capital Regarding the Fairness of the
Merger beginning on page 33.
Special Meeting.
The special meeting will be
held on Wednesday, February 6, 2008, beginning at
10:00 a.m., Eastern Time, at the Hyatt Regency Coconut
Point Resort & Spa, 5001 Coconut Road, Bonita Springs,
Florida, 34134.
Record Date and Quorum.
You are entitled to
vote at the special meeting if you were the record owner of
shares of our common stock at the close of business on Thursday,
January 10, 2008, the record date for the special meeting.
You will have one vote for each share of RTS common stock that
you owned on the record date. As of the record date, there were
23,704,917 shares of our common stock entitled to vote at
the special meeting, 14,504,854 of which were held by persons
other than the Rollover Investors. The holders of a majority of
the outstanding shares of our common stock at the close of
business on the record date represented in person or by proxy
will constitute a quorum for purposes of the special meeting.
See Special Meeting Record Date and
Quorum beginning on page 63.
Required Vote.
Under Florida law, the holders
of a majority of the outstanding shares of our common stock
entitled to vote at the special meeting voting in favor of
approval is required to approve the Merger Agreement.
A
failure to vote your shares of our common stock or an abstention
will have the same effect as voting against the approval of the
Merger Agreement.
Directors and executive officers Dosoretz,
Sheridan, Rubenstein and Katin have each entered into Support
and Voting Agreements obligating them to vote their shares of
RTS common stock, which represents approximately 40.4% of our
outstanding common stock, for approval of the Merger Agreement.
Our directors and executive officers collectively beneficially
3
own approximately 40.5% of our common stock. The merger does
not require the approval of at least a majority of our
unaffiliated shareholders. See The Special
Meeting Required Vote beginning on
page 63.
Approvals and Consents Required.
The
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the
Hart-Scott-Rodino
Act), provides that transactions such as the merger may
not be completed until certain information has been submitted to
the Federal Trade Commission and the Antitrust Division of the
U.S. Department of Justice and certain waiting period
requirements have been satisfied. RTS and Parent filed
notification reports with the Department of Justice and the
Federal Trade Commission under the
Hart-Scott-Rodino
Act on November 9, 2007. The Federal Trade Commission
granted early termination of the applicable waiting period on
November 20, 2007. Additionally, it is a condition to
closing under the Merger Agreement that certain health care
related governmental approvals, consents or licenses specified
by the parties shall have been obtained, except where the
failure to obtain such consents or approvals would not
reasonably be expected to have an adverse affect equal to or
greater than 2.5% of the revenues, EBITDA or assets of the
Company and it subsidiaries or give rise to a violation of
criminal law. It is also a condition to closing under the Merger
Agreement that certain third party consents related to
indebtedness and leases specified by the parties shall have been
obtained. See Special Factors Approvals and
Consents beginning on page 58.
Interests of RTSs Directors and Executive Officers in
the Merger.
Our directors and executive officers
collectively beneficially own approximately 40.5% of our common
stock. See Security Ownership of Certain Beneficial Owners
and Management. Our directors (other than our independent
directors) and executive officers have interests in the merger
that are different from, or in addition to, their interests as
RTS shareholders. These interests include:
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Directors and executive officers Dosoretz, Sheridan, Rubenstein
and Katin have each entered into Support and Voting Agreements
obligating them to vote their shares of RTS common stock, which
represents approximately 40.4% of our common stock, for approval
of the Merger Agreement.
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At the effective time of the merger, all RTS equity-based awards
will vest and be cashed out, which would result in an aggregate
cash payment to our directors and executive officers of
approximately $12,238,109 based on holdings as of
November 1, 2007.
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Immediately prior to the effective time of the merger,
Messrs. Sheridan, Dosoretz, Rubenstein and Katin will
exchange certain shares of RTS common stock for units of limited
liability company interests in Holdings, a holding company of
Parent. As a result, immediately following the closing, each of
Messrs. Sheridan, Dosoretz, Rubenstein and Katin are
expected to own (excluding the units they may receive under the
management equity incentive plan) approximately 1.8%, 7.2%, 3.5%
and 2.6%, respectively, of the then outstanding units of
Holdings (excluding incentive units). Additional non-executive
employees are expected to exchange RTS common stock
and/or
cash
for units of limited liability company interests in Holdings or
purchase units at the same price per share as the Rollover
Investors for an aggregate of 2.0% of the outstanding units of
Holdings (excluding incentive units). These non-executive
employees consist of approximately 11 individuals
identified by Vestar Capital Partners in consultation with
Dr. Dosoretz as among those important to the success of
RTS. The determination of the amount of such exchanges or
purchases was made or will be made by Vestar Capital in
consultation with such non executive employees and
Dr. Dosoretz. The final capitalization of Holdings has not
yet been determined, and will be determined prior to closing.
The opportunity to exchange shares of RTS common stock
and/or
cash
for equity interests in Holdings is intended to provide an
equity-based incentive and retention benefit with respect to
future operations of Holdings, Parent and its subsidiaries.
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Each of Messrs. Dosoretz and Rubenstein is party to an
employment agreement that provides for change in control
severance benefits in the event of certain terminations of
employment in connection with or following the merger. Assuming
hypothetically that the merger was completed on December 1,
2007, and qualifying terminations of employment of these two
executives were to occur on that date, the aggregate cash
severance benefit under these agreements (excluding any
estimated tax
gross-up
payment) would be approximately $5,990,000. Dr. Dosoretz
would also receive certain ancillary
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severance benefits and would be eligible for tax
gross-up
payments. Each of Messrs. Sheridan, Dosoretz, Rubenstein
and Katin has agreed that if the merger closes, their existing
employment agreements will be terminated and new employment
agreements will be entered into to provide compensation and
benefits to the executives following the closing, in which event
they would waive any and all severance and other benefits
described in this paragraph. See Special
Factors Interests of our Directors and Executive
Officers in the Merger beginning on page 45.
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The new employment agreement for Dr. Dosoretz that is
expected to take effect at the closing of the merger provides
for $6,000,000 to be paid to Dr. Dosoretz in three equal
annual installments in consideration of his non-competition
covenant.
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Incentive awards of both time and performance based units of
limited liability company interests in Holdings representing
10.92% of the common equity value of Holdings following return
of preferred capital and accreted return on preferred capital
(the Common Equity Value) will be issued at closing
and will be allocated as follows: Dosoretz will receive
incentive units representing 6.5% of the Common Equity Value;
Rubenstein 0.52%; Katin 0.13%; and other non-executive employees
of RTS 3.38%.
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It is expected that each of Messrs. Sheridan, Dosoretz and
Rubenstein will serve on the board of managers of Holdings as of
the closing of the merger.
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Immediately prior to completion of the merger, it is expected
that Messrs. Sheridan, Dosoretz, Rubenstein and Katin will
exchange approximately 338,462, 1,384,616, 676,923, and
492,308 shares of RTS common stock, respectively, for units
of limited liability company interests in Holdings representing
approximately 1.8%, 7.2%, 3.5% and 2.6%, respectively, of the
outstanding units of Holdings immediately following the
effective time of the merger (excluding incentive units).
Messrs. Sheridan, Dosoretz, Rubenstein and Katin will
receive cash equal to the per share merger consideration to be
received by RTSs shareholders in the merger for the
remaining shares of RTS common stock that they own, and
$11,760,000 for outstanding options held by them ($7,860,000 to
Dr. Dosoretz and $3,900,000 to Dr. Rubenstein).
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RTS directors and officers are entitled to continued
indemnification and insurance coverage under the Merger
Agreement.
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Certain directors and executive officers are also party to
transactions with RTS and its affiliates as discussed under
Special Factors Related Party
Transactions beginning on page 51.
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The aggregate consideration expected to be received by our
directors, and executive officers in connection with the merger
in respect of the shares of RTS common stock (other than the
shares to be contributed to Holdings in exchange for equity
interests in Holdings) and options held by them is approximately
$317.6 million, and is set forth in more detail under
Special Factors Interests of Our Directors and
Executive Officers in the Merger beginning on
page 45. The consideration to be paid to RTSs
unaffiliated shareholders in the merger for their shares of RTS
common stock is expected to be approximately $471 million.
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Management Agreement.
In connection with the
merger, RTS, Holdings and Parent have agreed to enter into a
management agreement with Vestar Capital Partners relating to
certain advisory and consulting services Vestar Capital Partners
will render to RTS, Holdings and Parent. Under the management
agreement, Vestar Capital Partners will receive a
$10 million transaction fee upon the closing of the merger
for services rendered in connection with the consummation of
merger and be reimbursed for its reasonable out of pocket
expenses. The management agreement also provides for Vestar
Capital Partners to receive an annual management fee equal to
the greater of (i) $850,000 or (ii) an amount equal to
1.0% of the RTSs consolidated EBITDA which fee will be
payable quarterly. Parent, Holdings and RTS will indemnify
Vestar Capital Partners and its affiliates against all losses,
claims, damages and liabilities arising out of the performance
by Vestar Capital Partners of its services pursuant to the
management agreement, other than those that have resulted
primarily from the gross negligence or willful misconduct of
Vestar Capital Partners
and/or
its
affiliates. See Special Factors
Interests of our Directors and Executive Officers in the
Merger beginning on page 45.
5
Appraisal Rights.
We have concluded that our
shareholders are entitled to appraisal rights and to obtain
payment in cash of the fair value of their shares of our common
stock as determined pursuant to Florida law in the event of
consummation of the merger. Such fair value could be greater
than, equal to or less than the $32.50 per share (without
interest) that our shareholders are entitled to receive pursuant
to the Merger Agreement. To preserve their appraisal rights,
shareholders must deliver to us prior to the vote being
undertaken at the special meeting written notice of the
shareholders intent to demand payment and must not vote,
or cause or permit to be voted, any of their shares of our
common stock in favor of the approval of the Merger Agreement.
Failure to strictly comply with the specific procedures required
by Florida law will result in the loss of appraisal rights. A
copy of the provisions of Florida law that provide for appraisal
rights and govern such procedures are reproduced in its entirety
as Annex C to this proxy statement.
Financing.
The total amount of funds required
to complete the merger and the related transactions, including
payment of fees and expenses in connection with the merger, is
anticipated to be approximately $1.1 billion. This amount
is expected to be provided through a combination of
(i) equity contributions from Vestar Capital and the
Rollover Investors, totaling approximately $660 million and
(ii) debt financing totaling $575 million of which,
approximately $475 million is expected to be funded at
closing. Vestar Capital Fund may allocate a portion of its
equity commitment to limited partners of Vestar Capital Fund and
certain other co-investors, provided that such allocation will
not limit the obligations of Vestar Capital Fund under the
equity commitment letter to the extent any such co-investor
fails to purchase the equity allocated to it. See Special
Factors Financing beginning on page 42.
The closing of the merger is not conditioned on the receipt of
the debt or equity financing by Parent. Parent and Merger Sub,
however, are not required to consummate the merger until after
the earlier to occur of (x) the completion of a 25
consecutive business day marketing period (during which the
purchasing entities will market the debt financing) and
(y) April 21, 2008. The marketing period will begin to
run after we have obtained the required shareholder approval,
satisfied certain closing conditions in the Merger Agreement,
and provided Parent and Merger Sub with certain financial
statements and financial data customarily included in private
placements pursuant to Rule 144A of the Securities Act of
1933, as amended (the Securities Act). See The
Merger Agreement Effective Time; The Marketing
Period beginning on page 66.
Equity Commitment.
Vestar Capital has provided
an irrevocable equity commitment letter to Parent and RTS
pursuant to which it has agreed to provide up to
$560 million in equity financing for the Merger (other than
the amounts provided by the Rollover Investors), subject to the
satisfaction of the closing conditions set forth in the Merger
Agreement. In the event the Merger does not close, Vestar
Capital has agreed to provide equity funds (i) up to the
amount of $25,000,000 with respect to any termination fee
payable by Parent and up to $3,000,000 in reimbursement of
RTSs out of pocket deal expenses and (ii) up to the
amount of $40,000,000 (inclusive of any termination fee and
expense reimbursement payable by Holdings) with respect to
damages arising from failures of Parent or Merger Sub to comply
with the Merger Agreement. See Special Factors
Financing beginning on page 42.
Accounting Treatment of The Merger.
We expect
the merger to be accounted for as a business combination for
financial accounting purposes, whereby the purchase price would
be allocated to the Companys assets and liabilities based
on their relative fair values as of the date of the merger in
accordance with Financial Accounting Standards No. 141,
Business Combinations.
See Special
Factors Accounting Treatment of the Merger
beginning on page 58.
Material United States Federal Income Tax Consequences of the
Merger.
For U.S. federal income tax
purposes, the disposition of RTS common stock pursuant to the
merger generally will be treated as a sale of the shares of our
common stock for cash by each of our shareholders. As a result,
in general, each shareholder will recognize gain or loss equal
to the difference, if any, between the amount of cash received
in the merger and such shareholders adjusted tax basis in
the shares surrendered. Such gain or loss will be capital gain
or loss if the shares of common stock surrendered are held as a
capital asset in the hands of the shareholder, and will be
long-term capital gain or loss if the shares of common stock
have a holding period of more than one year at the effective
time of the merger.
We recommend that our shareholders
consult their own tax advisors as to the particular tax
consequences to them of the merger.
See Special
Factors Material United States Federal Income Tax
Consequences beginning on page 55.
6
Litigation.
We are aware of two lawsuits filed
in connection with the proposed merger. Shareholder complaints
were filed on October 24, 2007 and November 16, 2007,
respectively, against RTS, each of RTSs directors and
Vestar Capital Partners as purported class actions on behalf of
the public shareholders of RTS in the Circuit Court of Lee
County, Florida. On January 3, 2008, one of the two
lawsuits was dismissed voluntarily. The remaining complaint has
been amended and the amended complaint alleges, among other
things, that the directors of RTS breached their fiduciary
duties in connection with the proposed transaction. Among other
things, the complaint seeks to enjoin RTS, its directors and
Vestar Capital from proceeding with or consummating the merger.
Vestar Capital is alleged to have aided and abetted the
individual defendants in breaching their fiduciary duties. Based
on the facts known to date, and the allegations in the
complaint, we believe that the claims asserted in the complaint
are without merit and we intend to vigorously defend against the
complaint. The absence of an injunction prohibiting the
consummation of the merger is a condition to the closing of the
merger. See Special Factors Litigation
beginning on page 57.
Treatment of Stock Options and Other Stock-Based Awards.
Except as we otherwise agreed to in writing with Parent and
Merger Sub:
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each outstanding option to purchase or acquire shares of our
common stock, whether vested or unvested, will become fully
vested and be converted into the right to receive a cash payment
equal to the excess (if any) of the $32.50 per share cash merger
consideration over the exercise price per share of the option,
multiplied by the number of shares subject to the option,
without interest and less any applicable withholding taxes; and
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each award of restricted stock will be converted into the right
to receive $32.50 per share in cash, less any applicable
withholding taxes.
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See The Merger Agreement Treatment of Stock,
Stock Options and Other Stock-Based Awards beginning on
page 67.
Anticipated Closing of the Merger.
The parties
to the Merger Agreement are using commercially reasonable
efforts to complete the merger as soon as possible. We
anticipate completing the merger shortly after the special
meeting, subject to the approval of the Merger Agreement by our
shareholders and the satisfaction of the other closing
conditions. See The Merger Agreement Effective
Time; The Marketing Period beginning on page 66. We
will issue a press release when the merger has been completed.
Procedure for Receiving Merger
Consideration.
As soon as reasonably practicable
after the effective time of the merger and in any event not
later than the third business day following the effective time,
a paying agent will mail a letter of transmittal and
instructions to you and the other RTS shareholders. The letter
of transmittal and instructions will tell you how to surrender
your stock certificates in exchange for the merger
consideration. Y
ou should not return your stock certificates
with the enclosed proxy card, and you should not forward your
stock certificates to the paying agent without a letter of
transmittal.
Solicitation of Transactions; Recommendation to
Shareholders.
The Merger Agreement restricts our
ability to solicit or encourage alternative acquisition offers.
Notwithstanding these restrictions, under certain circumstances
required for our board of directors to comply with its fiduciary
duties, our board of directors or the special committee may
respond to an unsolicited bona fide written proposal received by
us. If, prior to the approval by our shareholders of the Merger
Agreement, our board of directors or the special committee
determines that any such unsolicited bona fide written proposal
is a superior proposal, our board of directors may withdraw or
change its recommendation of the merger or we may terminate the
Merger Agreement if our board of directors or the special
committee concludes in good faith, after consultation with
RTSs or the special committees outside legal counsel
and the special committees financial advisor, that, in
light of the superior proposal, failure to do so would be
inconsistent with our directors fiduciary obligations
under applicable law. In the event the Merger Agreement is
terminated as a result the foregoing we will be required to pay
Holdings a termination fee of $25 million and reimburse the
out-of-pocket fees and expenses incurred by Parent and Merger
Sub up to a maximum amount of $3 million. See The
Merger Agreement Solicitation of Transactions;
Recommendation to Shareholders beginning on page 75.
7
Conditions to Closing.
Before we can complete
the merger, a number of conditions must be satisfied or waived
by all parties. These include:
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the approval of the Merger Agreement by the holders of a
majority of the outstanding shares of our common stock entitled
to vote at the special meeting;
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the absence of laws or governmental judgments or orders that
prohibit the completion of the merger;
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the expiration or termination of any applicable waiting period
under the
Hart-Scott-Rodino
Act;
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the receipt of certain governmental consents and approvals;
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the obtaining of certain third party consents and approvals;
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the performance by each of the parties of its obligations prior
to the effective time of the merger under the Merger Agreement
in all material respects;
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the aggregate amount of dissenting shares being less than 5% of
the total outstanding shares immediately prior to the effective
time;
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the accuracy of the representations and warranties of each of
the parties to the Merger Agreement, subject to the materiality
and other standards set forth in the Merger Agreement; and
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the absence of any change, circumstance or effect since the date
of the Merger Agreement that has had or would reasonably be
expected to have a Company material adverse effect.
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See The Merger Agreement Conditions to the
Merger beginning on page 80.
Termination of the Merger Agreement.
The
Merger Agreement may be terminated at any time prior to the
effective time of the merger, whether before or after
shareholder approval has been obtained (unless otherwise
specified), as follows:
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by mutual written consent of RTS and Parent;
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by either RTS or Parent, if:
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the merger has not been consummated on or before April 21,
2008 (or as such date may be extended pursuant to the Merger
Agreement);
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a final, non-appealable injunction, order, decree or ruling
prohibits the merger; or
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our shareholders do not approve the Merger Agreement at the
special meeting or any adjournment thereof; or
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by RTS, if:
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Parent breaches or fails to perform in any material respect any
of its representations, warranties or agreements in the Merger
Agreement such that the closing conditions would not be
satisfied and cannot be cured by April 21, 2008, provided
that RTS is not then in material breach of the Merger
Agreement; or
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prior to obtaining shareholder approval, the special committee
or our board of directors concludes in good faith that, in light
of a superior acquisition proposal, failure to terminate the
Merger Agreement would be inconsistent with the directors
exercise of their fiduciary obligations to our shareholders,
provided that RTS has complied in all material respects with the
requirements regarding non-solicitation of alternative proposals
and change of recommendation, and concurrent with the
termination, we enter into a definitive agreement with respect
to the superior acquisition proposal; or
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Parent does not give effect to a closing within five business
days after notice by RTS to Parent that the mutual conditions
and the conditions to Parents obligation to close the
merger are satisfied and Parent does not effect the merger
within three business days after the final day of the marketing
period; provided that RTS is not then in breach of any of its
representation, warranty or covenant that would result in a
failure to satisfy closing conditions.
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by Parent if:
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RTS, or any of its subsidiaries or representatives has failed to
comply in any material respects with the requirements regarding
non-solicitation of alternative proposals or a change of
recommendation with respect to the Merger Agreement or the board
of directors or special committee shall have resolved to do
so; or
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RTS has breached or failed to perform in any material respect
any of its representations, warranties or agreements contained
in the Merger Agreement, which breach or failure to perform
would result in a failure of a condition to the obligation of
Parent to close the merger and it cannot be cured by
April 21, 2008; provided that Parent is not then in
material breach of the Merger Agreement; or
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the RTS board of directors has effected a change of
recommendation or RTS has failed to include the recommendation
in its proxy statement.
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See The Merger Agreement Termination
beginning on page 81.
Termination Fees and Expenses.
Under certain
circumstances, in connection with the termination of the Merger
Agreement by us, we will be required to pay to Holdings a
termination fee in the amount of $25,000,000 and reimburse
Holdings for certain fees and expenses of Parent relating to the
Merger Agreement in an aggregate amount not to exceed
$3,000,000. Parent has agreed to pay us a termination fee of
$25,000,000 and reimburse us for certain fees and expenses
relating to the Merger Agreement in an aggregate amount not to
exceed $3,000,000 if we terminate the Merger Agreement in
certain circumstances related to the failure of Parent to
promptly close the transaction upon satisfaction of its closing
conditions or a material breach by Parent of the Merger
Agreement resulting in failure to satisfy a closing condition
which cannot be cured by April 21, 2008. See The
Merger Agreement Termination Fees and Expenses
beginning on page 83.
Market Price of RTS Common Stock.
The closing
price of RTS common stock on the NASDAQ Global Select Market on
October 19, 2007, the last trading day prior to the
announcement of the proposed merger transaction, was $21.56 per
share. The $32.50 per share to be paid for each share of RTS
common stock in the merger represents a premium of approximately
51% to the closing price of RTS common stock on October 19,
2007. See Market Price of Our Common Stock beginning
on page 92.
Additional Information.
You can find more
information about RTS in the periodic reports and other
information we file with the SEC. The information is available
at the SECs public reference facilities and at the website
maintained by the SEC at
http://www.sec.gov.
For a more detailed description of the additional information
available, please see Where You Can Find More
Information beginning on page 98.
9
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
The following questions and answers are intended to address some
commonly asked questions regarding the special meeting, the
Merger Agreement and the merger. These questions and answers may
not address all questions that may be important to you as our
shareholder. Please refer to the more detailed information
contained elsewhere in this proxy statement, the annexes to this
proxy statement and the documents referred to in this proxy
statement.
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Q:
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What is the proposed transaction?
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A:
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The proposed transaction is the merger of Merger Sub with and
into RTS pursuant to the Merger Agreement. Once the Merger
Agreement has been approved by the RTS shareholders and the
other closing conditions under the Merger Agreement have been
satisfied or waived, Merger Sub will merge with and into RTS.
RTS will be the surviving corporation in the merger and will
become a direct or indirect wholly owned subsidiary of Parent
and Holdings. Parent and Holdings are controlled by Vestar
Capital. The Rollover Investors are expected to exchange shares
of RTS common stock for units of limited liability company
interests in Holdings in connection with the merger. In the
event that there are not sufficient votes at the time of the
special meeting to approve the Merger Agreement, shareholders
may also be asked to vote upon a proposal to adjourn or postpone
the special meeting to solicit additional proxies.
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Q:
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What matters will be voted on at the special meeting?
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A:
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You will be asked to consider and vote on proposals to do the
following:
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to approve the Merger Agreement;
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to approve the adjournment or postponement of the special
meeting, if necessary or appropriate, to solicit additional
proxies if there are insufficient votes at the time of the
meeting to approve the Merger Agreement; and
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to transact such other business that may properly come before
the special meeting or any adjournment or postponement thereof.
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Q:
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What will I receive in the merger?
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A:
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Upon completion of the merger, you will receive $32.50 in cash,
without interest and less any required withholding taxes, for
each share of our common stock that you own. For example, if you
own 100 shares of our common stock, you will receive
$3,250.00 in cash in exchange for your shares of our common
stock, less any required withholding taxes. You will not own
shares in the surviving corporation.
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Q:
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Where and when is the special meeting?
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A:
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The special meeting will take place at the Hyatt Regency Coconut
Point Resort & Spa, 5001 Coconut Road, Bonita Springs,
Florida, 34134, on Wednesday, February 6, 2008, at
10:00 a.m., Eastern Time.
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Q:
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May I attend the special meeting?
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A:
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All shareholders of record as of the close of business on
Thursday, January 10, 2008, the record date for the special
meeting, may attend the special meeting. In order to be admitted
to the special meeting, a form of personal identification will
be required, as well as either an admission ticket or proof of
ownership of RTS common stock. If you are a shareholder of
record, your admission ticket is attached to your proxy card.
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If your shares are held in the name of a bank, broker or other
holder of record, and you plan to attend the special meeting,
you must present proof of your ownership of RTS common stock,
such as a bank or brokerage account statement, to be admitted to
the meeting, or you may request an admission ticket in advance.
If you would rather have an admission ticket, you can obtain one
in advance by mailing a written request, along with proof of
your ownership of RTS common stock, to:
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10
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Radiation Therapy Services, Inc.
2234 Colonial Boulevard,
Ft. Myers, Florida 33907
Attention: Investor Relations
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Please note that if you hold your shares in the name of a bank,
broker or other holder of record and plan to vote at the
meeting, you must also present at the meeting a proxy issued to
you by the holder of record of your shares.
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No cameras, recording equipment, electronic devices, large bags,
briefcases or packages will be permitted in the special meeting.
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Q:
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Who can vote at the special meeting?
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A:
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You can vote at the special meeting if you owned shares of RTS
common stock at the close of business on Thursday,
January 10, 2008, the record date for the special meeting.
As of the close of business on that day, 23,704,917 shares
of RTS common stock were outstanding. See The Special
Meeting beginning on page 63.
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Q:
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How are votes counted?
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A:
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Votes will be counted by the inspector of election appointed for
the special meeting, who will separately count For
and Against votes, abstentions and broker non-votes.
A broker non-vote occurs when a nominee holding
shares for a beneficial owner does not receive instructions with
respect to the proposal from the beneficial owner. Because the
approval of the Merger Agreement under Florida law requires the
affirmative vote of the holders of a majority of the outstanding
shares of our common stock entitled to vote at the special
meeting, the failure to vote, broker non-votes and abstentions
will have the same effect as voting Against the
approval of the Merger Agreement. With respect to the proposal
to adjourn or postpone the special meeting, if necessary or
appropriate, to solicit additional proxies, because the approval
of such proposal requires the affirmative vote of holders
representing a majority of the shares present in person or by
proxy at the special meeting, broker non-votes and abstentions
will have the same effect as voting Against that
proposal. A failure to vote, however, will have no effect with
respect to the adjournment proposal.
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Q:
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How many votes are required to approve the Merger
Agreement?
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A:
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Under Florida law, holders of a majority of the outstanding
shares of our common stock entitled to vote at the special
meeting voting in favor of approval is required to approve the
Merger Agreement. Accordingly, failure to vote or an abstention
will have the same effect as a vote against the approval of the
Merger Agreement. Approval of the proposal to adjourn or
postpone the special meeting, if necessary or appropriate, to
solicit additional proxies if there are not sufficient votes
properly cast at the time of the meeting to approve the Merger
Agreement requires the affirmative vote of holders representing
a majority of the shares present in person or by proxy at the
special meeting. The merger does not require the approval of at
least a majority of the Companys unaffiliated shareholders.
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Q:
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How many votes do we already know will be voted in favor of
the Merger Agreement?
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A:
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Directors and executive officers Dosoretz, Sheridan, Rubenstein,
Katin and Watson who collectively beneficially own approximately
40.4% of our common stock, have each entered into a Support and
Voting Agreement to vote their shares for approval of the Merger
Agreement.
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Q:
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How does our board of directors recommend that I vote on the
proposals?
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A:
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Our board of directors recommends that our shareholders vote
FOR the approval of the Merger Agreement. You should
read Special Factors Fairness of the Merger;
Recommendations of the Special Committee and Our Board of
Directors beginning on page 25 for a discussion of
the factors that the special committee and our board of
directors considered in deciding to recommend approval of the
Merger Agreement to our shareholders. Our board of directors
recommends that our shareholders vote
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11
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FOR the proposal to adjourn or postpone the special
meeting, if necessary or appropriate, to solicit additional
proxies.
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Q:
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What function did the special committee serve with respect to
the merger and who are its members?
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A:
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The principal function of the special committee with respect to
the merger was to consider, evaluate, assess, negotiate and
reject or recommend to RTSs full board of directors any
potential transaction or strategic alternative, including the
merger proposal submitted by Vestar Capital Partners. The
special committee is composed of three independent and
disinterested directors, Rabbi Agin, Leo Doerr and Ron Inge.
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Q:
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What do I need to do now?
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A:
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We urge you to read this proxy statement carefully in its
entirety, including its annexes, and to consider how the merger
affects you. If you are a shareholder of record, then you can
ensure that your shares are voted at the special meeting by
completing, signing and dating the enclosed proxy card and
returning it in the envelope provided. If you hold your shares
in street name, you can ensure that your shares are
voted at the special meeting by instructing your broker on how
to vote, as discussed below.
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Q:
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Who will bear the cost of this solicitation?
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A:
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The expenses of preparing, printing and mailing this proxy
statement and the proxies solicited hereby will be borne by RTS.
Additional solicitation may be made by telephone, facsimile or
other contact by certain directors, officers, employees or
agents of RTS, none of whom will receive additional compensation
therefore. Vestar Capital, directly or through one or more
affiliates or representatives, may, at their own cost, also make
additional solicitation by mail, telephone, facsimile or other
contact in connection with the merger.
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Q:
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Will a proxy solicitor be used?
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A:
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Yes. RTS has retained Georgeson Inc. to assist in the
solicitation of proxies for the special meeting. RTS has paid
Georgeson Inc. a retainer of $8,000 toward a final fee to be
agreed upon based on customary fees for the services provided,
which fee will include the reimbursement of out-of-pocket fees
and expenses.
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Q:
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If my shares are held in street name by my
broker, will my broker vote my shares for me?
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A:
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Yes, but only if you provide instructions to your broker on how
to vote. You should follow the directions provided by your
broker regarding how to instruct your broker to vote your
shares. Without those instructions, your shares will not be
voted. Broker non-votes will be counted for the purpose of
determining the presence or absence of a quorum, but will not be
deemed votes cast and will have the same effect as voting
against approval of the Merger Agreement and adjournment or
postponement of the special meeting to solicit additional
proxies.
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Q:
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Can I change my vote?
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A:
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Yes. You can change your vote at any time before your proxy is
voted at the special meeting. If you are a registered
shareholder, you may revoke your proxy by notifying the
Corporate Secretary of RTS in writing or by submitting by mail a
new proxy dated after the date of the proxy being revoked. In
addition, your proxy may be revoked by attending the special
meeting and voting in person (you must vote in person, as simply
attending the special meeting will not cause your proxy to be
revoked).
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Please note that if you hold your shares in street
name and you have instructed your broker to vote your
shares, the above-described options for changing your vote do
not apply, and instead you must follow the directions received
from your broker to change your vote.
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12
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Q:
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What does it mean if I get more than one proxy card or vote
instruction card?
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A:
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If your shares are registered differently or are in more than
one account, you will receive more than one proxy card or, if
you hold your shares in street name, more than one
vote instruction card. Please complete and return all of the
proxy cards or vote instruction cards you receive to ensure that
all of your shares are voted.
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Q:
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Should I send in my stock certificates now?
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A:
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No. Shortly after the merger is completed, you will receive
a letter of transmittal with instructions informing you how to
send in your stock certificates to the paying agent in order to
receive the merger consideration. You should use the letter of
transmittal to exchange stock certificates for the merger
consideration to which you are entitled as a result of the
merger. If your shares are held in street name by
your broker, bank or other nominee, you will receive
instructions from your broker, bank or other nominee as to how
to affect the surrender of your street name shares
in exchange for the merger consideration.
DO NOT SEND ANY
STOCK CERTIFICATES WITH YOUR PROXY.
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Q:
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When can I expect to receive the merger consideration for my
shares?
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A:
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Once the merger is completed, you will be sent a letter of
transmittal with instructions informing you how to send in your
stock certificates in order to receive the merger consideration.
Once you have submitted your properly completed letter of
transmittal, RTS stock certificates and other required documents
to the paying agent, the paying agent will send you the merger
consideration payable with respect to your shares.
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Q:
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I do not know where my stock certificate is how
will I get my cash?
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A:
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The materials the paying agent will send you after completion of
the merger will include the procedures that you must follow if
you cannot locate your stock certificate. This will include an
affidavit that you will need to sign attesting to the loss of
your certificate. You may also be required to provide a bond to
RTS in order to cover any potential loss.
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Q:
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What happens if I sell my shares before the special
meeting?
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A:
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The record date of the special meeting is earlier than the
special meeting and the date that the merger is expected to be
completed. If you transfer your shares of our common stock after
the record date but before the special meeting, you will retain
your right to vote at the special meeting, but will have
transferred the right to receive the $32.50 per share in cash to
be received by our shareholders in the merger. In order to
receive the $32.50 per share, you must hold your shares through
completion of the merger.
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Q:
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Am I entitled to assert appraisal rights instead of receiving
the merger consideration for my shares?
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A:
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Yes. As a holder of our common stock, you are entitled to assert
appraisal rights under Florida law in connection with the merger
if you meet certain conditions, which conditions are described
in this proxy statement under the caption Appraisal
Rights beginning on 86.
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Q:
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What are the consequences of the merger to members of
RTSs management and board of directors?
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A:
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Following the merger, it is expected that the members of our
management will continue as management of the surviving
corporation. Our current board of directors, however, will be
replaced by a new board of directors to be nominated by Parent,
although we understand that Messrs. Sheridan, Dosoretz, and
Rubenstein will continue to serve as directors. Like all other
RTS shareholders, members of our management and board of
directors will be entitled to receive $32.50 per share in cash
for each of their shares of our common stock (including any
restricted shares less applicable withholding taxes). However,
the Rollover Investors and certain additional non-executive
members of management are expected to exchange certain of their
shares for units of limited liability company interests in
Holdings. All options
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(whether or not vested) to acquire our common stock will be
canceled at the effective time of the merger and holders of
these options will be entitled to receive a cash payment equal
to the amount, if any, by which $32.50 exceeds the exercise
price of the option, multiplied by the number of shares of our
common stock underlying the options.
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Q:
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Will members of RTSs management or board of directors
hold any equity interests in the surviving corporation following
the consummation of the merger?
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A:
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Messrs. Sheridan, Dosoretz, Rubenstein and Katin are
expected to contribute shares of RTS common stock to Holdings in
exchange for units of limited liability company interests in
Holdings, the holding company of Parent. They will also be given
the opportunity to acquire additional equity interests in
Holdings under the management equity incentive plan described
under Special Factors Interests of Our
Directors and Executive Officers in the Merger
Management Equity Incentive Plan, In addition, certain
non-executive employees of RTS are expected to exchange RTS
common stock for equity interests in Holdings at the same price
per share as Messrs. Sheridan, Dosoretz, Rubenstein and
Katin. It is currently expected that Messrs. Sheridan,
Dosoretz, Rubenstein and Katin will each own (excluding the
units they may receive under the management equity incentive
plan) approximately 1.8%, 7.2%, 3.5% and 2.6%, respectively, of
the outstanding units of Holdings immediately after the merger
(excluding incentive units). Messrs. Sheridan, Dosoretz,
Rubenstein and Katin currently beneficially own approximately
9.3%, 16.0%, 10.8%, and 4.2%, respectively, of our outstanding
shares of common stock. Each holder of voting units in Holdings
will be entitled to one vote per unit. Accordingly, each of
Messrs. Sheridan, Dosoretz, Rubenstein and Katin will have
a voting interest that corresponds with his respective voting
unit ownership of Holdings. See Special
Factors Certain Effects of the Merger
beginning on page 41.
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Q:
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Who can help answer my other questions?
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A:
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If you have more questions about the merger, you should contact
our proxy solicitation agent, Georgeson, Inc., at (877) 278-9671
(toll-free). Banks and brokers can call (212) 440-9128
(collect). If your broker holds your shares, you may call your
broker for additional information.
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14
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement, and the documents to which we refer you in
this proxy statement, contain not only historical information,
but also forward-looking statements. Forward-looking statements
represent RTSs expectations or beliefs concerning future
events, including the following: any projections or forecasts,
including the financial forecast included under Financial
Forecast beginning on page 96, any statements regarding
future sales, costs and expenses and gross profit percentages,
any statements regarding the continuation of historical trends,
any statements regarding the expected number of future treatment
center openings and expected capital expenditures, any
statements regarding the sufficiency of our cash balances and
cash generated from operating and financing activities for
future liquidity and capital resource needs and any statement
regarding the expected completion and timing of the merger and
other information relating to the merger. Without limiting the
foregoing, the words believes,
anticipates, plans, expects,
should, estimates and similar
expressions are intended to identify forward-looking statements.
You should read statements that contain these words carefully.
They discuss our future expectations or state other
forward-looking information and may involve known and unknown
risks over which we have no control. Those risks include,
without limitation:
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the satisfaction of the conditions to consummation of the
merger, including the approval of the Merger Agreement by our
shareholders;
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the actual terms of the financing that will be obtained for the
merger;
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the current condition of the credit market;
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the occurrence of any event, change or other circumstance that
could give rise to the termination of the Merger Agreement,
including a termination under circumstances that could require
us to pay a termination fee of up to $25,000,000 to Holdings and
to reimburse Holdings for Parents out-of-pocket expenses
up to $3,000,000;
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although the debt financing described in this proxy statement is
not subject to the lenders satisfaction with their due
diligence or to a market out, such financing might
not be funded on the closing date because of failure to meet the
closing conditions or for other reasons;
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the effect of the buyer failing to close on the merger and our
inability to obtain specific performance;
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the amount of the costs, fees, expenses and charges related to
the merger;
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the effect of the announcement or pendency of the merger on our
business relationships, operating results and business
generally, including our ability to retain key employees;
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the risk that the merger may not be completed in a timely manner
or at all, which may adversely affect our business and the price
of our common stock;
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the potential adverse effect on our business, properties and
operations because of certain covenants we agreed to in the
Merger Agreement;
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the outcome of the legal proceedings instituted against us and
others in connection with the merger;
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risks related to diverting managements attention from our
ongoing business operations;
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the healthcare industry is a highly competitive industry with
many well-established competitors and a growing number of
competitors;
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our results and ability to grow can be impacted by market
changes relating to the historical sources of our patient
referrals (i.e. urologists and oncologists) beginning to compete
with us rather than referring patients to us;
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our results could be impacted by changes in medicare
reimbursement rates applicable to us, including possible changes
to the current capital equipment utilization rate assumption of
50%; local, regional, national and international economic
conditions; the seasonality of our business; demographic trends;
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employee availability; government actions and policies;
inflation; and increases in various costs, including treatment
equipment;
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our results can be affected by healthcare regulations and
governmental regulations and the impact of or changes in such
governmental regulations can affect our ability to grow our
business;
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our ability to expand is dependent upon various factors such as
the availability of attractive sites for new treatment centers;
ability to add new treatment centers and acquire new treatment
centers at favorable prices; ability to obtain all required
governmental permits and licenses on a timely basis; impact of
government moratoriums or approval processes, which could result
in significant delays; the ability to generate or borrow funds;
the ability to negotiate suitable lease terms; and the ability
to recruit and train skilled management and employees;
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weather and natural disasters could result in treatment center
closures or delays in our ability to provide treatment which
could also adversely affect our results; and
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other risks detailed in our filings with the SEC, including
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2006. See Where You
Can Find More Information on page 98.
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We believe that the assumptions on which the forward-looking
statements in this proxy statement are based are reasonable.
However, we cannot assure you that the actual results or
developments we anticipate will be realized or, if realized,
that they will have the expected effects on our business or
operations. In light of significant uncertainties inherent in
the forward-looking statements contained herein, readers should
not place undue reliance on such statements. All subsequent
written and oral forward-looking statements concerning the
merger or other matters addressed in this proxy statement and
attributable to us or any person acting on our behalf are
expressly qualified in their entirety by the cautionary
statements contained or referred to in this section.
Forward-looking statements speak only as of the date of this
proxy statement or the date of any document incorporated by
reference in this document. Except as required by applicable law
or regulation, we do not undertake to update these
forward-looking statements to reflect future events or
circumstances.
16
This proxy statement and the accompanying form of proxy are
being furnished to RTSs shareholders in connection with
the solicitation of proxies by our board of directors for use at
a special meeting of our shareholders to be held at the Hyatt
Regency Coconut Point Resort & Spa, 5001 Coconut Road,
Bonita Springs, Florida, 34134, on February 6, 2008, at
10:00 a.m., Eastern Time.
We are asking our shareholders to vote on the approval of the
Merger Agreement. If the merger is completed, RTS will become a
direct or indirect wholly owned subsidiary of Parent, and our
shareholders will have the right to receive $32.50 in cash,
without interest, for each outstanding share of our common stock.
Our board of directors periodically reviews and assesses
strategic alternatives available to maximize value to our
shareholders and prospects for continued operations as an
independent public company. During recent years, the costs and
management time and attention requirements of being a public
company have significantly increased. In addition, at the end of
fiscal 2006 and during the first quarter of 2007 management and
the board of directors began to believe that RTSs capital
requirements to fund the maintenance and growth of its future
operations would be significantly increased as compared to prior
years. These increases were attributable to a variety of
business and operational reasons related to our expansion,
including, but not limited to, the addition of equipment in new
local markets and existing markets, expanded employee and
infrastructure requirements and acquisition and development
costs. During December 2006 and January 2007, members of our
senior management had preliminary informal meetings with
representatives from various investment banking firms, regarding
potential debt financing opportunities that might be available
to RTS. During the same period, management and the board of
directors also began to believe that because it would be a
significant challenge to finance both short-term and long-term
growth and maintain satisfactory levels of profitability, it
would be necessary to evaluate the current state of its capital
structure.
On March 1, 2007, at a regular board of directors meeting
with representatives from management and our outside legal
advisor Shumaker, Loop & Kendrick, LLP
(Shumaker) present, an investment banking firm
discussed with the board of directors, at our invitation, the
potential availability of more permanent types of debt financing
including, term bank debt, high yield bonds and convertible debt
as well as the advantages and disadvantages of each and the
favorable market conditions for such financing options. The
board of directors discussed the various debt options and the
related costs. Management expressed its belief that regardless
of the type of capital source, RTS should consider raising
additional capital given the then current favorable market
conditions. Management indicated that entering into new debt
financing arrangements could add a certain amount of liquidity
to RTSs balance sheet, but indicated that such debt
financing would primarily be used to replace our existing bank
debt. At this meeting, the board of directors expressed its
belief that while debt financing alone may not be sufficient to
address all of RTSs future capital needs, it authorized
management to further explore the replacement of RTSs
existing bank debt with a more permanent form of capital.
At the March 1, 2007 board meeting, our Chief Executive
Officer and President, Dr. Daniel Dosoretz, also reviewed
with the board of directors the most recent trends in the
healthcare industry, including Medicare reimbursement and
increased competition from non-radiation oncology physicians and
their potential impact on RTSs business and operating
strategies. There was discussion regarding financing
alternatives, private equity investment and the benefits and
risks of being a public company. The board of directors
discussed the challenges and opportunities that RTS may face in
the future associated with its business, including but not
limited to continued growth, capital expenditures, reimbursement
rates and personnel needs and constraints. The board of
directors, while considering opportunities (such as growth in
RTSs business and equipment utilization initiatives
designed to maximize patient care and thereby revenue), also
discussed the advantages and disadvantages associated with
remaining a public company (including, without limitation,
future uncertainties associated with Medicare reimbursement
policy changes, as well as increased competition from
non-radiation oncologist physicians, and their potential impact
on market perceptions and RTSs stock price).
17
Dr. Dosoretz also informed the board of directors at the
March 1, 2007 board meeting that he had recently received
several unsolicited contacts from third parties inquiring about
interest in a possible transaction with RTS. He indicated that
no specific proposals had been made or discussed, and that these
contacts were limited to general inquiries. The board of
directors discussed in general the potential strategic
alternatives that could be available to RTS including debt
financing, bank debt, convertible debt, private equity and a
strategic transaction, and the board of directors determined to
continue with RTSs existing growth strategy of internal
and external development through investing in our existing
facilities and selectively acquiring new facilities. The board
of directors expressed a desire to review all possible strategic
alternatives available for shareholders to realize substantial
value that may not be available at another time given the then
current activity in the mergers and acquisitions market and
strength of the financing markets and noted that the decision to
pursue any specific transaction, financing or other strategic
opportunity must be subject to the boards prior review and
approval.
In March 2007, Wachovia Capital Markets, LLC (Wachovia
Securities), one of our longstanding financial advisors,
was engaged as our financial advisor in connection with
assisting us in exploring and evaluating potential strategic
alternatives available to RTS. On March 27, 2007, we
commenced, with the assistance of Wachovia Securities, a third
party solicitation process regarding a potential sale of RTS as
one of our possible strategic alternatives. During late March
2007 and April 2007, as part of its engagement and at our
direction, Wachovia Securities initially contacted 14 strategic
buyers and 20 financial buyers (including Vestar Capital
Partners) regarding their interest in a possible transaction
with RTS, as one of our potential strategic alternatives. These
parties were selected by RTS, in consultation with Wachovia
Securities, based on a determination of which parties might have
an interest in, and the ability to conclude, a transaction at a
reasonable price if we decided to pursue this particular type of
strategic alternative. In late April and early May of 2007, an
additional eight potential financial buyers were contacted
regarding their interest in a possible transaction with RTS.
On April 10, 2007, the board of directors convened a
special meeting, which was attended by members of our management
as well as representatives from our legal and financial
advisors. Representatives from Wachovia Securities updated our
board of directors regarding the on-going strategic alternative
process and reviewed and discussed potential strategic
alternatives for RTS, including various financing options such
as term bank debt high yield bonds and convertible debt as well
as a sale of RTS. The board of directors, while clearly
reiterating that it had not made any determination of which
strategic alternative, if any, RTS should ultimately pursue,
directed Wachovia Securities to continue to assist RTS in
exploring possible options with potential parties that might be
interested in a possible business combination with, interest in,
or acquisition of, RTS, so that the board could evaluate
potential options.
On April 26, 2007, the board of directors held a special
meeting, at which meeting members of our management as well as
representatives from our legal and financial advisors also
participated. The board of directors discussed certain financial
and strategic alternatives available to RTS, including, among
other things, debt refinancing, equity transactions and
recapitalization alternatives and a potential sale, and the
various considerations and advantages and disadvantages related
to these alternatives. Wachovia Securities updated the board on
the preliminary indications of interest received from six
potential financial buyers and one potential strategic buyer.
These preliminary indications of interest, which at this time
were based solely on public information since non-public
information had not yet been made available to parties,
reflected potential valuations for RTS within a range of $34.00
to $40.00 per share of RTS common stock. The closing price of
our common stock on April 26, 2007 was $29.47.
At the April 26, 2007 meeting, the board of directors
indicated that it believed that it would be in the best
interests of RTS and its shareholders to continue to explore
strategic options available to RTS and unanimously approved
going forward with the next steps towards exploring potential
strategic alternatives. These next steps, with respect to a
potential sale transaction, included forwarding proposed
confidentiality and nondisclosure agreements to the interested
potential financial and strategic buyers that had expressed
interest (including negotiating any requested revisions) and
assembling a data room and formulating management presentations.
At the April 26 meeting, the board of directors reiterated that
its approval of further exploring a potential sale transaction
was not a decision to engage in such a transaction. Any decision
to engage in a debt
18
financing or strategic transaction would be made, if at all,
only after appropriate consideration of possible strategic and
financial alternatives.
On May 3, 2007, at a regular meeting the board of directors
appointed David Watson, the Chief Financial Officer of RTS and
Ronald Inge, one of our independent and disinterested directors,
to work with RTSs outside legal counsel and authorized
them to make any decisions on RTSs behalf regarding the
confidentiality and nondisclosure agreements to be entered into
with potential financial and strategic buyers. Confidentiality
and nondisclosure agreements were determined to be necessary so
that we could provide such parties with non-public information.
During the period of May 8, 2007 through May 16, 2007,
Vestar Capital Partners and six other parties entered into
confidentiality and nondisclosure agreements. Such parties were
provided access to the data room, as well as other non-public
information from us. Following the execution of the
confidentiality and nondisclosure agreements and review of the
information in the data room, the sole strategic buyer among the
interested parties informed us that it was withdrawing from the
process due to recent changes in such strategic buyers
business, leaving only the six potential financial buyers. The
interested parties were provided guidelines and a timeframe for
submitting a formal written proposal. The interested parties
were notified that RTS expected to promptly evaluate the
proposals (with the assistance of RTSs legal and financial
advisors) to determine if RTS would continue to explore its
strategic alternatives. They were also notified that if RTS
elected to continue the process, it would select a limited
number of parties to complete due diligence and negotiate
definitive agreements based on the belief of the board of
directors that inviting a limited number of parties who were the
most realistic potential acquirors would result in a more
efficient and manageable process, limiting both the disruption
to RTS as well as the disclosure of RTSs most sensitive
confidential information. Members of RTSs management,
including David Watson, Daniel Dosoretz and James Rubenstein,
participated in presentations and general discussions with
interested parties, along with RTSs financial advisor,
regarding RTSs business and operations.
On June 14, 2007, the board of directors met to further
discuss the status of the potential financial and strategic
alternatives process. Members of our management and
representatives of our legal advisor also attended the meeting.
The board of directors again discussed possible strategic
alternatives, including, among other things, debt refinancing,
equity transactions and recapitalization alternatives and a
potential sale of the Company. However, no decision was made by
the board of directors as to a particular course of action at
the meeting. Shumaker discussed the fiduciary duties of the
directors under the applicable corporate law of the State of
Florida. After discussions regarding the ability of prospective
members to be independent and whether they were disinterested in
the context of any potential alternative transaction to serve on
a special committee, the board of directors established a
special committee of independent and disinterested directors,
originally comprised of Rabbi Agin and Messrs. Doerr
(Chairman), Inge and Dorsett (who was relieved from service on
the special committee on August 2, 2007 for health
reasons). Janet Watermeier, who joined RTSs board of
directors as an independent director in May 2007 and was
attending her first board meeting, was not appointed to the
special committee due to her then limited knowledge and
experience with RTS.
At the June 14, 2007 meeting establishing the special
committee, the board of directors gave the special committee
full power and authority to review, evaluate and determine
whether it would be appropriate to move forward with any
potential transaction or other strategic alternative, as well as
to review, evaluate and, if appropriate, negotiate and recommend
approval or rejection to the board of directors regarding
whether to proceed with a sale of RTS or other strategic
alternative. It was reiterated at the meeting that throughout
the process the board of directors had instructed management not
to discuss their own potential arrangements with any parties
that might be interested in a transaction and that management
should not do so in the future unless authorized by the special
committee.
Immediately following the board of directors meeting on
June 14, 2007, the special committee met to address the
next steps. The special committee requested and was provided
with a list of law firms experienced in, and capable of,
providing legal services to special committees, including,
without limitation Holland & Knight, LLP
(Holland & Knight). The special committee
met separately and considered potential legal counsel, including
firms not included on the list. The special committee chairman
had discussions with several
19
law firms and obtained engagement letters from three law firms
for the special committee to consider. Subsequently, the special
committee engaged Holland & Knight as its legal
advisor on June 25, 2007.
On June 18, 2007, Vestar Capital Partners submitted a
preliminary formal indication of interest at $36.75 per share of
RTS common stock and, on June 19, 2007, another bidder
(Bidder One) submitted a preliminary formal
indication of interest at $38.00 per share of RTS common stock.
On such dates, the closing price per share of RTS common stock
was $26.77 and $26.35, respectively. Each proposal required
equity participation by senior management of RTS. On
June 20, 2007, a third party expressed a willingness to
engage in a private investment in RTS at no premium to
RTSs stock price. On such date, the closing price per
share of RTSs common stock was $25.79.
On June 21, 2007, the board of directors held a special
meeting to discuss the results of the strategic alternatives
process to date. Members of our management and representatives
of our legal and financial advisors also attended the meeting.
The board of directors received an update regarding current
capital market conditions in the leveraged finance, equity and
convertible debt markets, and there was a discussion regarding
the pros and cons of high yield debt, convertible debt, bank
debt and share repurchase and equity alternatives. The board of
directors also received an overview of the third party
solicitation process conducted to date regarding a potential
sale of RTS. Wachovia Securities noted that during the process a
total of 11 participants had submitted initial indications of
interest based on public information. Our legal and financial
advisors reviewed with the board of directors the two formal
proposals received to date and it was noted that both proposals
contemplated rollover by management of a portion of their
holdings in the proposed transaction. After a discussion, the
board of directors determined that the special committee would
need to consider the proposals at its sole discretion and inform
the board of its decision on the next steps in the process.
On June 25, 2007, the special committee held a meeting to
discuss with Holland & Knight the special
committees role and the written proposals that had been
submitted. Holland & Knight advised the members of the
special committee regarding their fiduciary duties in the
context of evaluating the strategic alternatives available to
RTS, including, without limitation, a sale of RTS. The special
committee decided to engage a financial advisor to assist the
special committee in determining whether a sale was appropriate
and ensure that RTS engaged in an appropriate marketing and
sales process. Holland & Knight agreed, at the request
of the special committee, to contact four financial advisors,
including Morgan Joseph, and arranged for each of them to make a
presentation to the special committee. Chairman Doerr noted that
up to this point in time bidders had not been permitted to
contact management to discuss managements participation in
a potential transaction. The special committee unanimously
agreed that because the bidders had been narrowed to two parties
(Vestar Capital Partners and the other interested party) and the
proposals from both parties contemplated equity participation by
RTS management, it would now be appropriate for management to
begin speaking directly to the bidders to discuss such matters
as employment agreements, management stock rollover, and other
matters relative to management. It was further noted that,
because management owned approximately 40.4% of RTSs
outstanding common stock, no acquisition transaction could
likely be achieved without management participation and support.
Beginning on June 28, 2007, management engaged in
discussions with the two bidders regarding the potential terms
of employment agreements, management stock rollover and other
matters relating to management and apprised Holland &
Knight of the status. Prior to such time, management had not
engaged in any discussions or negotiations with any potential
bidders regarding such matters and managements role was
limited to the presentations and general discussions with
potential bidders regarding RTSs business and operations.
From June 28, 2007 through July 2, 2007, the special
committee met for presentations by the four potential financial
advisors in order to assess the ability of each to assist the
special committee in determining whether a sale of RTS was in
the best interest of the nonaffiliated shareholders, and if so,
to facilitate the sale of RTS.
On July 3, 2007, the special committee met to discuss the
proposals from the four potential financial advisors. After
lengthy discussions, the special committee determined that all
four potential financial advisors were well qualified, but that
Morgan Joseph and one other firm had the best overall fit with
RTS and the
20
special committee. The special committee instructed
Holland & Knight to negotiate with two of the
potential financial advisors, one of which was Morgan Joseph.
On July 5, 2007, the special committee met to discuss
Holland & Knights communications with the two
potential financial advisors. A discussion ensued regarding the
engagement letters received from each of the financial advisors
and the relative preference of the special committee for either
firm. The special committee agreed that the special
committees financial advisor should not be chosen based
upon fees alone, but also based upon: integrity; reputation; its
ability to negotiate on behalf of the special committee; and
experience.
On July 6, 2007, the special committee voted to engage
Morgan Joseph as its financial advisor. As part of its
engagement, Morgan Joseph was requested to review the process
undertaken by RTS, with the assistance of Wachovia Securities,
in exploring strategic alternatives. The special committee
instructed Morgan Joseph to contact a limited number of
additional potential financial and strategic buyers that had not
been previously contacted on RTSs behalf by Wachovia
Securities that were most likely to offer an appropriate price
for RTS and that offered a reasonable degree of certainty to
close on a prompt basis. In deciding to limit the number of
potential buyers approached by Morgan Joseph, the special
committee took into account, among other things, the process
already undertaken by RTS, with the assistance of Wachovia
Securities.
On July 11, 2007, representatives of Morgan Joseph provided
the special committee with a proposed timetable for its
activities, which was then approved. After extensive
discussions, the special committee reached a consensus that all
potential buyers should provide indications of interest by no
earlier than July 25, 2007 to ensure potential buyers had
sufficient time to evaluate RTS.
On July 13, 2007, a special committee meeting was held at
which Morgan Joseph provided an update on its activities.
Representatives of Morgan Joseph described to the special
committee the discussions between Morgan Joseph and Wachovia
Securities over the past week. Representatives of Morgan Joseph
discussed the potential buyers that had been approached at
RTSs direction by Wachovia Securities and then discussed
five additional potential buyers that Morgan Joseph intended to
approach. Representatives of Morgan Joseph also indicated to the
special committee preliminarily that it believed that RTS had
allocated a sufficient amount of time to its third party
solicitation process and that the number and type of potential
buyers of RTS that were contacted was generally appropriate
given the type of industry in which RTS operates and the size of
and financing needs for a potential transaction. Representatives
of Morgan Joseph stated that seven of the parties (including
Vestar Capital Partners) previously contacted entered into
confidentiality and non disclosure agreements and six of these
(including Vestar Capital Partners) continued to conduct further
due diligence. Following a lengthy discussion, the special
committee directed Morgan Joseph to proceed with contacting
these parties.
On July 25, 2007, the special committee met to discuss with
representatives of Morgan Joseph its contacts with additional
potential buyers. Representatives of Morgan Joseph indicated
that it had contacted five additional potential buyers. One of
these buyers declined to consider a bid. The other four agreed
to evaluate RTS but ultimately decided not to submit an
indication of interest. Representatives of Morgan Joseph
indicated that it would complete its evaluation of the
Companys third party solicitation process by July 27,
2007. The special committee then engaged in a discussion
regarding the factors that were relevant to the decision of
continuing as a public company or entering into a transaction
that would result in RTS being taken private. Among other
factors, increasing compliance costs of being a public company
and increased potential liability for noncompliance were
discussed.
During the week of July 23, 2007, the Dow Jones Industrial
Average declined approximately 600 points largely as a result of
concerns related to subprime lending. Given this market
uncertainty, debt financing for potential buyers of RTS became
increasingly difficult and more costly.
On August 2, 2007, the board of directors, during its
regularly scheduled board meeting, relieved Mr. Dorsett
from all of his committee assignments, including service on the
special committee, as a result of health-related problems.
On August 2, 2007, the per share price of RTSs common
stock declined significantly following the Companys
earnings release which announced that RTS had failed to meet its
expected financial performance and lowered its future estimates
for the second consecutive quarter. Also, during early August
2007, the equity
21
and debt capital markets experienced significant volatility,
particularly related to subprime debt. As a result, the special
committee requested that Morgan Joseph temporarily discontinue
its efforts until the capital markets stabilized and RTS was
able to revise its estimates and projections. RTS completed its
revised estimates and projections on or about August 29,
2007.
On September 6, 2007, the special committee met to discuss
the status of potential buyers of RTS. Representatives of Morgan
Joseph stated that six other potential buyers that had been
contacted by Morgan Joseph made inquiries about RTS.
Representatives of Morgan Joseph also discussed with the special
committee revised forecasts and projections prepared by RTS that
included significant downward revisions to revenue growth and
EBITDA based upon RTSs revised expectations. These revised
expectations were largely the result of a reexamination of
RTSs prospects by management as a result of the failure to
meet expectations for two consecutive quarters. Representatives
of Morgan Joseph also expressed concern about whether adequate
debt financing would be available in light of RTSs
performance and the current credit conditions in the market.
Representatives of Morgan Joseph expressed their belief that the
amounts lenders would be willing to lend, relative to similar
transactions in the recent past, would be significantly reduced
primarily as a result of significant decrease in liquidity and
other changes in the debt markets that had occurred in the
preceding 60 days and the expected future continuation and
impact of those changes. After extensive discussions, the
special committee reached a consensus that all potential buyers
should provide revised indications of interest by no later than
September 14, 2007.
Between September 10, 2007 and September 14, 2007,
Morgan Joseph contacted potential buyers, including those who
were involved in the process prior to RTSs stock price
decline in August 2007, to assess such potential buyers
interest in RTS following such stock price decline. Morgan
Joseph received five indications of interest as a result of its
contact with potential buyers. Bidder One submitted a
revised indication of interest which reflected a range of $27.00
to $28.00 per share of RTS common stock. The second bidder
indicated a range of $28.00 to $30.00 per share of RTS common
stock (Bidder Two). The third bidder, a
strategic buyer, indicated a range of $29.00 to $32.00 per share
of RTS common stock (Bidder Three). The fourth
bidder indicated a range of $30.00 to $34.00 per share of RTS
common stock (Bidder Four). Vestar Capital
Partners provided a revised indication of interest at $32.00 per
share of RTS common stock. Vestar Capital Partners indicated in
its bid proposal that it desired a 10-business day exclusivity
period. Vestar Capital Partners also informed Morgan Joseph that
the Company had until September 21, 2007 to accept its
proposal.
During the week of September 16, 2007, Morgan Joseph
engaged in discussions with all of the bidders. Morgan Joseph
attempted to raise each bid and also to ascertain the level of
interest of each bidder, the necessary due diligence for each
bidder to proceed and the ability of each bidder to close the
acquisition.
On September 20, 2007, Morgan Joseph, at the direction of
the special committee, asked Vestar Capital Partners to increase
its bid from $32.00 per share to $34.00 per share in exchange
for the 10-business day exclusivity period.
On September 21, 2007, the special committee met to discuss
the status of the various potential buyers of the Company.
Representatives of Morgan Joseph indicated that Vestar Capital
Partners had declined to increase its bid to $34.00 per share in
exchange for a 10-business day exclusivity period.
Representatives of Morgan Joseph also informed the special
committee that Vestar Capital Partners reiterated its
requirement that the special committee accept or reject its
proposal by 5:00 p.m. on September 21, 2007.
Representatives of Morgan Joseph also indicated that
Bidder One informed them that it would not make a bid at
$30.00 per share or higher. As a result, the proposal from
Bidder One was rejected by the special committee.
Also at this meeting, the special committee concluded that
because Bidder Twos range was too low, it was not a
suitable buyer. The special committee also concluded that
Bidder Three was not a suitable buyer because
(i) given Bidder Threes bid range,
Bidder Threes proposal was unlikely to exceed Vestar
Capital Partners proposal, and (ii) Bidder Three
indicated its desire to integrate operations of RTS with another
company post closing, and management had indicated an
unwillingness to work with Bidder Threes management.
22
The special committee gave additional consideration to
Bidder Fours proposal. Bidder Four indicated to
Morgan Joseph that before it could make a more definitive
indication of interest, which would include specifics regarding
the price it would be willing to pay, it would require meetings
with management and at least three weeks of due diligence after
such meetings were concluded. The special committee further
instructed Morgan Joseph to engage in discussions with
Bidder Four to clarify the amount of due diligence that
would be required by Bidder Four and assess the likelihood
that Bidder Four would make a bid at the top end of its
range. The special committee then determined that it would
reject the deadline established by Vestar Capital Partners and
also directed Morgan Joseph to attempt to increase Vestar
Capital Partners bid in exchange for the 10-business day
exclusivity period.
Thereafter, on September 21, 2007, Morgan Joseph informed
Vestar Capital Partners that RTS needed more time to evaluate
Vestar Capital Partners proposal and, as a result, would
not meet Vestar Capital Partners deadline of
5:00 p.m. September 21, 2007. Vestar Capital
Partners agreed to extend its proposal deadline until
5:00 p.m., September 24, 2007. Morgan Joseph also
continued discussions with Bidder Four. During September 22
and 23, 2007, Morgan Joseph attempted to increase Vestars
bid in discussions with Vestars representatives.
During the day of September 24, 2007, Morgan Joseph
continued discussions with Vestar Capital Partners and
Bidder Four. Morgan Joseph indicated to Bidder Four that
another bidder (Vestar) was seeking exclusivity and that such
bidder had made an offer that was attractive to the special
committee and was the highest bid yet received. Bidder Four
responded by indicating that it was not willing to accelerate
the time period in which it would be willing to make a more
definitive indication of interest.
On September 24, 2007, the special committee met to further
discuss the status of the potential buyers of RTS.
Representatives of Morgan Joseph indicated that Vestar Capital
Partners agreed to increase its bid to $32.50 per share and that
Vestar Capital Partners emphasized that such bid was its last
and final bid and that it would only participate in further
discussions if it received a 10-business day exclusivity period.
Representatives of Morgan Joseph indicated that nothing had come
to their attention that was likely to preclude it from rendering
a fairness opinion at consideration of $32.50 per share if asked
to do so. The special committee then discussed the two potential
bids that remained: the bids from Vestar Capital Partners and
Bidder Four. The special committee noted that
Bidder Four had reiterated to Morgan Joseph that it needed
three weeks after meetings with management to conduct due
diligence before it could provide a formal bid (rather than just
a price range). The special committee discussed the fact that
even though the top of Bidder Fours price range was
higher than that of Vestar Capital Partners, there was no
assurance that any bid would be made by Bidder Four upon
the completion of its due diligence. In addition, the special
committee noted that Vestar Capital Partners bid currently
offered more certainty of value to the unaffiliated shareholders
of RTS given that Vestar Capital Partners had substantially
completed its due diligence. As a result, the special committee
determined that waiting at least an additional three weeks for
Bidder Four to complete its due diligence presented too
much risk to RTS because it was likely that Vestar Capital
Partners (based upon Vestars consistent communications to
the Company regarding its time frame and unwillingness to extend
that time frame) would cease participation if its request for a
10-business day exclusivity period was not accepted.
Accordingly, the special committee approved entering into the
10-business day exclusivity period with Vestar Capital Partners.
The special committee at that time did not approve the sale of
RTS. The exclusivity period with Vestar Capital Partners began
on September 25, 2007.
At the September 24, 2007 special committee meeting, the
special committee discussed other alternatives available to the
Company and the concerns regarding RTSs ability to meet
earnings expectations if RTS continued as a public company. The
special committee also expressed concerns regarding uncertainty
related to medicare reimbursements and the potential related
impact to RTSs stock price and future prospects.
Significant concerns were also expressed regarding the slowing
of RTSs growth rate and the difficulty of financing future
growth.
Beginning on September 27, 2007, extensive negotiations
were conducted with Vestar Capital Partners regarding the terms
of the merger agreement and the management arrangements. Vestar
Capital Partners and its lenders completed their due diligence
related to RTS.
23
On October 5, 2007, the board of directors held a meeting
to discuss the status of the strategic alternatives process.
Members of our management and representatives of our legal and
financial advisors, as well as representatives of the special
committees financial advisor, also attended the meeting.
The board of directors further discussed, among other things,
the potential strategic alternatives, including refinancing and
recapitalization alternatives, that had been discussed at the
board of directors meeting on June 21, 2007. In addition,
Wachovia Securities updated the board of directors as to the
then current debt market conditions, noting that the debt
markets had been severely impacted by subprime related
activities in August 2007 which continued to have an adverse
impact on liquidity and available commitments for leveraged
transactions and debt financings. At this meeting, a
representative from Morgan Joseph apprised the board of
directors of its work with the special committee and indicated
that it had reviewed the third party solicitation process that
had been undertaken by RTS with the assistance of Wachovia
Securities, and noted that it believed that such process had
been very thorough.
On October 5, 2007, the special committee met with
Holland & Knight to discuss the status of negotiations
with Vestar Capital Partners. Holland & Knight
apprised the special committee of the material terms of the
merger agreement that remained unresolved. The special committee
provided its positions on the unresolved material terms and
requested Holland & Knight to communicate these
positions to Vestar Capital Partners and report back to the
special committee following these communications. Numerous
informal discussions between the special committee and
Holland & Knight occurred during the period from
October 5, 2007 through October 18, 2007.
During the exclusivity period and through October 19, 2007,
management continued to negotiate the terms of employment
agreements, management stock rollover and other management
agreements with Vestar Capital Partners and apprised
Holland & Knight of the status of such negotiations.
On October 10, 2007, the exclusivity period with Vestar
Capital Partners expired. Although the special committee elected
not to extend the 10-business day exclusivity period, because
the special committee and Vestar Capital Partners were working
in good faith towards resolving the outstanding issues on the
Merger Agreement, the committee did not initiate discussions
with any third parties pending resolution of outstanding issues
with Vestar Capital Partners.
On October 12, 2007, the special committee met with
Holland & Knight and representatives of Morgan Joseph.
Representatives of Morgan Joseph discussed the progress of the
negotiations to that date and provided an update on the overall
condition of the capital markets. Holland & Knight
updated the special committee regarding the status of the
negotiations regarding the terms of the merger agreement with
Vestar Capital Partners. The special committee and
Holland & Knight discussed and agreed upon the
upcoming action items and the overall timing for moving forward.
The special committee considered RTSs strategic
alternatives without coming to any definitive resolution.
On October 16, 2007, the special committee met twice with
Holland & Knight to discuss the status of negotiations
with Vestar Capital Partners. The special committee discussed
the material unresolved terms of the merger agreement and
provided guidance on its position with respect to such
unresolved terms. Among those unresolved terms was the open
issue of the size of the termination fee and related expense
reimbursement. Holland & Knight noted that it was
continuing to attempt to obtain a termination fee of
$22.5 million but that it had encountered significant
resistance and that its expectation was that Vestar would remain
firm in demanding a termination fee of $25.0 million plus a
$3.0 million expense reimbursement. Negotiations continued
throughout the days and evenings of October 16, 2007
through October 18, 2007.
Our board of directors approved an amendment to RTSs
Bylaws effective as of October 17, 2007 providing that
Section 607.0902 of the Florida Business Corporation Act,
Floridas control share acquisition statute,
does not apply to any control-share acquisition of any equity
securities of RTS. The control-share acquisition statute is
intended to deter hostile takeovers of publicly held Florida
corporations.
During the evening of October 18, 2007, the special
committee met to evaluate the proposed merger agreement and the
other strategic alternatives available to RTS. Representatives
of Morgan Joseph and Holland & Knight also attended
the meeting. Holland & Knight summarized for the
special committee the
24
terms of the merger agreement and the terms of related
agreements. Representatives of Morgan Joseph then discussed with
the special committee the current status of the strategic
alternatives available to RTS and reiterated their concerns
related to RTSs projections, ability to achieve historical
profitability and ability to obtain debt financing on acceptable
terms. After a thorough discussion and analysis with Morgan
Joseph, the special committee determined that the other
strategic alternatives available to RTS offered less value to
the shareholders of RTS when compared to the proposed sale to
Vestar Capital Partners. The special committee considered
remaining as an independent public company, but concluded that
due to a number of factors, including RTSs capital needs,
regulatory conditions, the Companys competitive situation
and financial projections and industry conditions generally,
that a cash price of $32.50 per share exceeded the likely future
value of RTSs common stock for a considerable period. The
special committee also considered debt financing, but based upon
the current and expected condition of the debt markets, it
concluded that it was unlikely that adequate debt financing
would be available on attractive terms. The special committee
also determined that it was unlikely that, given the price of
RTS common stock, any equity financing could be accomplished at
a price that would be acceptable to the Company and its
shareholders. Representatives of Morgan Joseph then discussed
their financial analyses of the proposed transaction with Vestar
Capital Partners and delivered its verbal opinion, which was
subsequently confirmed by delivery to the special committee of a
written opinion, dated October 18, 2007, to the effect
that, as of that date and based on and subject to the matters
described in its written opinion, the proposed consideration of
$32.50 per share of RTSs common stock to be received by
RTSs shareholders (other than shareholders who perfect
appraisal rights and other than the Rollover Investors) was
fair, from a financial point of view, to those shareholders. The
full text of Morgan Josephs opinion, which describes the
assumptions made, general procedures followed, matters
considered and the limitations on the scope of review conducted
by Morgan Joseph in rendering its opinion is attached as
Annex B. Following a thorough discussion of the proposed
acquisition, early in the morning on October 19, 2007, the
special committee voted unanimously in favor of the merger
agreement and to recommend that the full board of directors and
shareholders approve and adopt the merger agreement and the
merger. As part of its determination with respect to the
fairness of the consideration to be received by RTSs
unaffiliated shareholders, the special committee adopted the
conclusion and the analyses underlying such conclusion set forth
in the Morgan Joseph opinion based upon its review as to the
reasonableness of such conclusion and analyses.
Later in the morning of October 19, 2007, the board of
directors met to vote upon the proposed Merger Agreement with
Vestar Capital Partners. At this meeting, the five independent
and disinterested members of the board of directors (Rabbi Agin,
Messrs. Doerr, Inge and Dosoretz and Ms. Watermeier)
first unanimously approved entering into and adopting the Merger
Agreement, and unanimously recommended shareholder approval and
adoption of the Merger Agreement. Immediately following the
approval and adoption of the Merger Agreement by the independent
and disinterested members of the board of directors, the entire
board of directors unanimously approved entering into and
adopting the Merger Agreement. The independent and disinterested
members of the board of directors also unanimously approved the
Support and Voting Agreements, the merger and all of the other
agreements contemplated by the Merger Agreement for all purposes
of the Business Combination law of the State of Florida such
that it would not prohibit, restrict or otherwise adversely
affect any of the agreements, arrangement and transaction
contemplated by the Merger Agreement and the Support and Voting
Agreements.
On the afternoon of October 19, 2007, RTS and Vestar
Capital Partners entered into the Merger Agreement. RTS and
Vestar Capital Partners issued a joint press release announcing
the transaction after the close of market on October 19,
2007.
Fairness
of the Merger; Recommendations of the Special Committee and Our
Board of Directors
In this section, we used the capitalized term Board
to refer to our board of directors, other than
Dr. Sheridan, our Chairman of the Board, Dr. Dosoretz,
our Chief Executive Officer, Dr. Rubenstein and
Dr. Katin. The Board believes that the merger (which is the
Rule 13e-3
transaction for which a
Schedule 13E-3
Transaction Statement has been filed with the SEC) is both
procedurally and substantively fair to RTSs unaffiliated
shareholders and in the best interests of RTSs
shareholders. On October 19, 2007, the special
25
committee and board of directors separately approved and adopted
the Merger Agreement and authorized the transactions
contemplated by the Merger Agreement, including the merger, and
recommended that RTSs shareholders approve and adopt the
Merger Agreement. In addition, the special committee believes
that sufficient procedural safeguards were and would be present
to ensure the fairness of the merger and to permit the special
committee to represent effectively the interests of RTSs
unaffiliated shareholders without retaining an unaffiliated
representative to act solely on behalf of such shareholders. The
approval of the merger by a majority of RTSs unaffiliated
shareholders is not required under Florida law. Accordingly, the
special committee did not believe it was necessary to obtain the
approval of at least a majority of RTSs unaffiliated
shareholders. A special committee consisting of independent
directors is a mechanism designed to ensure procedural fairness.
The special committee was created to act solely for and on
behalf of RTSs unaffiliated shareholders. It retained
independent legal and financial advisors to assist it; and the
special committee received a written opinion from its
independent financial advisor as to the fairness, from a
financial point of view, of the merger consideration. The
special committee believed these protections were adequate to
safeguard the interests of RTSs unaffiliated shareholders.
The special committee also considered a number of other factors,
including those discussed below, each of which it believed
supported its decision and provided assurance of the fairness of
the merger to RTSs unaffiliated shareholders. In reaching
these conclusions, the Board and the special committee
considered the following material factors, among others which
led it to the conclusion that the $32.50 per share merger
consideration was fair to RTSs unaffiliated shareholders:
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their belief based upon revisions to our financial forecasts and
projections including significant downward revisions to revenue
growth and EBITDA, which resulted in a decrease in the value of
our common stock and limited our ability to obtain financing on
favorable terms;
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the fact that projections that RTSs capital requirements
to fund the maintenance and growth of future operations would
substantially increase and RTS would face a significant
challenge to finance both short-term and long-term growth while
maintaining acceptable levels of profitability, and
consequently, that the $32.50 per share merger consideration
would result in greater value to our shareholders than pursuing
our current business plans;
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the possibility that Medicare and Medicaid reimbursement rates
would be substantially reduced in the future, a possibility
heightened by the change of administration that will occur
following the 2008 elections, and that the enactment of new laws
governing Medicare and Medicaid could have a material adverse
effect on our profitability and results of operations;
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concern over recent increases in the costs and management time
and attention requirements of complying with federal securities
and corporate governance laws applicable to public companies;
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the view that traditional means of expansion in the radiation
treatment industry may be limited due to increased competition,
particularly the trend of physicians in specialties other than
radiation oncology entering the radiation treatment field,
including medical specialties that would otherwise be sources of
referrals;
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the possibility that advances in cancer prevention techniques
could cause a decrease in the market for RTSs services;
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growing concern over the environmental effects of the radiation
treatment industry;
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increased costs due to malpractice litigation, liability
insurance and technological changes which could render current
radiation treatment equipment obsolete;
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the $32.50 in cash to be received by RTSs shareholders in
the merger represents:
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a premium of approximately 51.0% over the closing price of
shares of RTS common stock on October 19, 2007, the last
trading day prior to announcement of the merger;
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a premium of approximately 51.0% over the average closing price
of shares of RTS common stock over a
30-day
period; and
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a premium of approximately 33.0% over the average closing price
of shares of RTS common stock over a
90-day
period;
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that holders of RTS common stock will have the opportunity to
demand appraisal of the fair value of their shares under Florida
law;
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that the consideration to be paid in the merger is all cash,
which provides certainty of value to RTSs shareholders;
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their view that the financing for the merger would be obtained
based on the financing commitments received by Parent and Merger
Sub with respect to the Merger Agreement, the institutions
providing such commitments and the conditions to the obligations
of such institutions to fund such commitments, each as described
under the caption Special Factors
Financing on page 43;
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their belief that RTSs stock price was not likely to trade
at or above the $32.50 price offered in the merger in the near
future. The board of directors and the special committee based
this belief on a number of factors, including: the
directors knowledge and understanding of RTSs
prospects in an increasingly competitive industry; the
uncertainty regarding possible changes in governmental policies
related to reimbursement; the slowing of RTSs growth rate;
the increased uncertainty regarding RTSs ability to obtain
financing necessary to fund future growth; the impact of
RTSs failure over successive quarters to meet its internal
financial projections and business plan and the impact of such
failure on stock price and research analyst target prices;
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at a meeting on October 18, 2007, the special committee
adopted the financial analysis conducted by Morgan Joseph and
the conclusions reached by Morgan Joseph in its opinion,
described in detail under Opinion of Morgan
Joseph & Co. Inc. to the effect that, as of
October 18, 2007, and based on and subject to the various
factors, assumptions and limitations set forth in its written
opinion, the $32.50 per share merger consideration to be
received by holders of shares of RTS common stock (other than
the Rollover Investors) was fair from a financial point of view
to those shareholders;
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alternatives to the merger, including the increased level of
execution risk and the decreased likelihood of successful
completion, of any such alternatives;
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their belief, after a thorough, independent review, that the
sale to Vestar Capital Partners (including the $32.50 per share
merger consideration) was more favorable to RTS shareholders
than the potential value that might result from other
alternatives available to RTS, including remaining an
independent public company and pursuing the current strategic
plan, pursuing acquisitions, pursuing a leveraged buyout
transaction with private equity firms other than Vestar Capital
Partners, or pursuing a sale to or merger with a company in the
same or a related industry, given the potential rewards, risks
and uncertainties associated with those alternatives;
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their belief that the efforts of RTS to market itself to
potentially interested parties, with the assistance of
RTSs and the special committees financial advisors,
constituted a thorough and fair process to ensure that the
$32.50 per share price provided in the transaction is the best
reasonably available to RTS shareholders;
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the terms of the Merger Agreement, including the fact that the
Merger Agreement contains provisions that provide RTS with the
right, subject to certain conditions, to explore unsolicited
proposals and to terminate the Merger Agreement and accept a
Superior Proposal prior to shareholder approval of
the Merger Agreement, subject to payment of a customary
break-up
fee
and, in certain circumstances, to reimbursement of Parents
out-of-pocket fees and expenses. The special committee believed
that this provision together with the pre-transaction third
party solicitation efforts were important in ensuring that the
transaction would be substantively fair to RTSs
unaffiliated shareholders and in the best interests of
RTSs unaffiliated shareholders and provided the special
committee with adequate flexibility to explore potential
transactions with other parties;
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the fact that the members of the special committee were
unanimous in their determination to approve and adopt the Merger
Agreement and that the Merger Agreement was approved and adopted
by all of the directors of RTS who are not participating in the
transaction;
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the fact that the Merger Agreement is subject to limited
conditions, including the fact that Parent delivered a financing
commitment from reputable and financially sound lenders that,
together with the equity commitment received, are sufficient to
pay the merger consideration; and
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the fact that the transaction will be subject to the approval of
RTSs shareholders.
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The special committee and the board of directors also believe
the process by which RTS entered into the Merger Agreement with
Parent and Merger Sub was fair, and in reaching that
determination the special committee and the board of directors
took into account, in addition to the factors above, the
following:
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the consideration and negotiation of the Vestar Capital
transaction was conducted under the oversight of the members of
the special committee, consisting of three of the independent
directors of RTS, and that no limitations were placed on the
authority of the special committee. Accordingly, the special
committee was free to explore a transaction with any other
bidder it determined was more favorable or likely to be more
favorable than Vestar Capitals proposal, except for the
limited period of exclusivity the special committee granted to
Vestar Capital. The purpose of establishing the special
committee and granting it the exclusive authority to review,
evaluate and negotiate the terms of the transaction on behalf of
RTS was to ensure that RTSs unaffiliated shareholders were
adequately represented by disinterested directors. None of the
members of the special committee has any financial interest in
the merger that is different from RTSs unaffiliated
shareholders generally;
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the special committee was advised by independent legal counsel
and a nationally recognized financial advisor selected by the
special committee. The special committee engaged
Holland & Knight as legal counsel, Morgan Joseph as
financial advisor and for the purpose of delivering an opinion
regarding fairness and to advise the special committee in its
efforts to represent RTSs shareholders (other than the
Rollover Investors). In determining to retain Morgan Joseph to
act as the special committees financial advisor, the
special committee was aware that Morgan Joseph is a national
investment bank that had not, in the past, rendered services to
RTS, Vestar Capital or any of Vestar Capitals portfolio
companies; and
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the special committee had extensive arms length
negotiations with Vestar Capital over several months, which,
among other things, resulted in an increase in the merger
consideration of 1.6% from $32.00 to $32.50 per share and these
negotiations followed several weeks of negotiations between
Vestar Capital Partners and RTSs financial advisor.
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The special committee and the board of directors were aware of
and also considered the following adverse factors associated
with the merger, among others:
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that the shareholders of RTS (other than the Rollover Investors
and additional members of management who may be given the
opportunity to exchange restricted or unrestricted stock for
units of limited liability company interests in Holdings) will
have no ongoing equity participation in the surviving
corporation following the merger, meaning that such shareholders
will cease to participate in RTSs future earnings or
growth, or to benefit from any potential increases in the value
of RTS common stock;
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that the proposed merger will be a taxable transaction for RTS
shareholders whose shares are converted into cash in the merger;
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that if the merger is not completed, RTS will be required to pay
its fees associated with the transaction as well as, under
certain circumstances, reimburse Vestar Capital for its
out-of-pocket fees and expenses associated with the transaction;
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that the Merger Agreement does not provide for a post-signing
market test, although the special committee and the board of
directors were satisfied that the process prior to entering into
the Merger Agreement provided the special committee and the
board of directors with an adequate opportunity to
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conduct a thorough pre-signing market test to ensure that the
$32.50 per share merger consideration is the best available to
RTSs unaffiliated shareholders;
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that RTS will be required to pay to Holdings a termination fee
and, in certain circumstances, to reimburse Holdings for
Parents out-of-pocket fees and expenses if the Merger
Agreement is terminated under certain circumstances; and
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that if the merger is not completed, RTS may be adversely
affected due to potential disruptions in its operations.
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In addition, the special committee was aware that the Rollover
Investors would be entering into arrangements with Holdings
simultaneous with the execution of the Merger Agreement
providing that such persons will exchange a portion of their
shares of RTS common stock for units of limited liability
company interests in Holdings in connection with the completion
of the transaction and that such persons would remain employed
in substantially their respective current capacities following
the completion of the transaction on terms that are more
favorable than the current terms of their employment. Although
the special committee was aware of these interests (and had
reviewed agreements setting forth material terms of these
arrangements), the special committees primary concern was
to ensure that the per share merger consideration and other
terms of the Merger Agreement were both procedurally and
substantively fair to RTSs unaffiliated shareholders and
in the best interests of RTSs shareholders. See
Special Factors Interests of Our Directors and
Executive Officers in the Merger beginning on page 45.
In analyzing the transaction relative to the going concern value
of RTS, the special committee and the board of directors each
took into account the
30-day
and
90-day
average stock prices, which the special committee and the board
of directors considered a meaningful reflection of RTSs
going concern value. The special committee and the board of
directors did not consider the net book value or the liquidation
value of RTS common stock in determining the substantive
fairness of the merger to RTSs unaffiliated shareholders.
They believed that net book value, does not reflect, or have any
meaningful impact on, the market trading price of RTS common
stock. The merger consideration of $32.50 per share of RTS
common stock is higher than the net book value of the RTS common
stock. They also believed that RTSs value is derived,
among other things, from the cash flows generated from its
continuing operations, rather than from the value of its assets
that might be realized in a liquidation. Further, because
RTSs assets include a significant amount of intangible
assets, leased properties and other assets that are not readily
transferable or are subject to restrictions on their transfer in
a liquidation scenario, it was concluded that RTS is not
susceptible to a meaningful liquidation valuation. Moreover, the
special committee and the board of directors believed that a
large part of RTSs success is attributable to its market
share and market presence created by operating radiation
treatment centers and its reputation for quality patient care,
and any liquidation of its assets or break-up or piecemeal sale
of its parts would not maximize shareholder value because it
would not likely compensate RTSs shareholders for the
value inherent in its operations. Therefore, the special
committee and the board of directors believed that the
liquidation methodology would result in a lower valuation for
RTS than had been proposed in the merger negotiations.
In view of the large number of factors considered by the special
committee and the board of directors in connection with the
evaluation of the Merger Agreement and the merger and the
complexity of these matters, except as expressly noted above,
the special committee and the board of directors did not
consider it practicable to, nor did it attempt to, quantify,
rank or otherwise assign relative weights to the specific
factors it considered in reaching its decision, nor did it
evaluate whether these factors were of equal importance. In
addition, individual directors may have given different weight
to the various factors. The special committee held discussions
with Morgan Joseph with respect to the quantitative and
qualitative analysis of the financial terms of the merger. The
special committee and the board of directors conducted a
discussion of, among other things, the factors described above,
with RTSs management and the special committees and
RTSs legal and financial advisors. The special committee
and the Board reached the conclusion that the merger is both
procedurally and substantively fair to RTSs unaffiliated
shareholders and in the best interests of RTSs
shareholders. Therefore, the board of directors recommends that
you vote
FOR
the approval of the Merger
Agreement. Other than as described in this proxy statement, RTS
is not aware of any firm offers by any other person during the
prior two years for a merger or consolidation of RTS with
another company, the sale or
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transfer of all or substantially all of RTSs assets or a
purchase of RTSs securities that would enable such person
to exercise control of RTS.
Purposes
and Reasons of the Rollover Investors
The purposes of the Rollover Investors for engaging in the
merger are to enable our shareholders to realize a premium on
their shares of RTS based on the closing price of shares of our
common stock on October 18, 2007 and to enable the Rollover
Investors to continue to own minority equity interests in RTS
after shares of RTS Common Stock cease to be publicly traded. In
addition, Vestar Capital had requested that as part of the
equity financing for the merger, the Rollover Investors and
certain non-executive employees make an equity investment in
Holdings by contributing a portion of their shares of RTS common
stock to Holdings or make a cash investment in Holdings.
Purposes
and Reasons of Holdings, Parent, Merger Sub and Vestar
Capital
For Holdings, Parent and Merger Sub, the purpose of the merger
is to effectuate the transactions contemplated by the Merger
Agreement. For Vestar Capital, the purpose of the merger is to
allow it to acquire all of the outstanding equity interests of
RTS and to bear the rewards and risks of such ownership after
shares of RTS common stock cease to be publicly traded.
Holdings, Parent, Merger Sub and Vestar Capital did not consider
any alternatives for achieving these purposes. The transaction
was structured in the manner described in this proxy statement
in order to provide Holdings, Parent, Merger Sub and Vestar
Capital the best opportunity to achieve the purposes described
above and will have the effect of RTS becoming a private company
and a subsidiary of Holdings. Holdings, Parent, Merger Sub and
Vestar Capital have undertaken to pursue the transaction at this
time in light of the opportunities they perceive to strengthen
RTSs competitive position, strategy and financial
performance under a new form of ownership.
Position
of the Rollover Investors Regarding the Fairness of the
Merger
Under the rules governing going private
transactions, the Rollover Investors are required to express
their beliefs as to the substantive and procedural fairness of
the merger to RTSs unaffiliated shareholders. The Rollover
Investors are making the statements included in this subsection
solely for the purposes of complying with the requirements of
Rule 13e-3
and related rules under the Securities Exchange Act of 1934, as
amended (the Exchange Act).
Messrs. Sheridan, Dosoretz, Rubenstein and Katin, each in
his capacity as a member of our board of directors, participated
in the deliberations of the resolutions of the board of
directors on October 19, 2007 approving and adopting the
Merger Agreement and authorizing the transactions contemplated
by the Merger Agreement. Following the approval and adoption of
the Merger Agreement by all of our independent directors, our
full board unanimously approved and adopted the Merger
Agreement. Messrs. Sheridan, Dosoretz, Rubenstein and Katin
were not members of, and did not participate in the
deliberations of, the special committee.
The Rollover Investors believe the merger is substantively and
procedurally fair to RTSs unaffiliated shareholders on the
basis of the factors described below. However, the Rollover
Investors have not performed, or engaged a financial advisor to
perform, any valuation or other analysis for the purposes of
assessing the substantive and procedural fairness of the merger
to RTSs unaffiliated shareholders.
In making their determination that the merger is substantively
fair to RTSs unaffiliated shareholders, the Rollover
Investors expressly adopted the unanimous recommendation of the
special committee and considered the following material positive
factors, among others:
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their belief based upon our historical and current financial
performance and results of operation, our prospects and long
term strategy, our competitive position in our industry, the
outlook for the radiation treatment industry and general,
regulatory economic and stock market conditions, that the $32.50
per share merger consideration would result in greater value to
our shareholders than pursuing our current business plans;
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$32.50 in cash to be received by RTSs shareholders in the
merger represents:
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a premium of approximately 51.0% over the closing price of a
share of RTS common stock on October 19, 2007, the last
trading day prior to announcement of the merger;
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a premium of approximately 51.0% over the average closing price
of a share of RTS common stock over a
30-day
period leading up to announcement of the merger; and
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a premium of approximately 33.0% over the average closing price
of a share of RTS common stock over a
90-day
period leading up to announcement of the merger;
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their belief that RTSs stock price was not likely to trade
at or above the $32.50 per share price offered in the merger in
the near future based on a number of factors, including
RTSs financial performance and results of operations as
compared to its historical financial performance and results of
operations, their knowledge and understanding of RTSs
prospects in an increasingly competitive highly regulated
industry, RTSs competitive position in the industry,
potential competition, the outlook for reimbursement rates,
research analyst target prices and general economic and stock
market conditions;
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alternatives to the merger, including the increased level of
execution risk, and the decreased likelihood of successful
completion, of any such alternatives;
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their belief, based on the factors described in the preceding
bullet points, that the $32.50 per share merger consideration
would result in greater value to RTSs shareholders than
remaining a public entity and either pursuing managements
current business plan or undertaking a leveraged
recapitalization, assuming one was possible in which RTS would
incur debt and engage in a significant share repurchase program,
or other alternatives considered as part of the strategic
alternative initiative;
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holders of RTS common stock will have the opportunity to demand
appraisal of the fair value of their shares under Florida law;
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the merger will provide consideration to RTSs unaffiliated
shareholders entirely in cash, thus eliminating any uncertainty
in valuing the consideration to be received by such shareholders;
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their view that the financing for the merger would be obtained
based on the financing commitments received by Parent and Merger
Sub with respect to the Merger Agreement, the institutions
providing such commitments and the conditions to the obligations
of such institutions to fund such commitments, each as described
under the caption Special Factors
Financing on page 42;
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the special committee unanimously determined, and the two
independent and disinterested members of our board of directors
unanimously determined, that the Merger Agreement and the
transactions contemplated by the Merger Agreement, including the
merger, are both procedurally and substantively fair to
RTSs unaffiliated shareholders and in the best interests
of RTSs shareholders;
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that, prior to the Merger Agreement, RTS actively sought
competing proposals for a business combination or acquisition
and the special committee was permitted to do so as
well; and
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the special committee received the opinion of Morgan Joseph,
dated October 18, 2007, to the effect that, as of that date
and based upon and subject to the factors, assumptions and
limitations set forth in its written opinion, the $32.50 per
share in cash to be received by the holders of the outstanding
shares of RTS common stock pursuant to the Merger Agreement was
fair from a financial point of view to those holders (other than
the Rollover Investors).
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The Rollover Investors also considered the following material
negative factors, among others:
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RTSs shareholders, with the exception of the Rollover
Investors and certain other members of RTS management who may
acquire equity interests in Parent in connection with the
closing of the merger, will have no ongoing equity participation
in RTS following the merger; such shareholders will cease to
participate in RTSs future earnings or growth, if any, or
to benefit from increases, if any, in the value of RTS common
stock and will not participate in any future sale of RTS to a
third party;
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after the Merger Agreement was signed there would be no attempt
made to contact other possible purchasers of RTS or to conduct a
further public auction of RTS;
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the cash consideration to be received by the holders of RTS
common stock will be taxable to them; and
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RTS common stock has traded at a price greater than $32.50 per
share during the past twelve months.
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The Rollover Investors believe that the merger is procedurally
fair to RTSs unaffiliated shareholders based upon the
following material factors, among others:
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the special committee consisted entirely of directors who are
independent and disinterested directors and included a majority
of the independent and disinterested directors on our board of
directors;
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the members of the special committee will not personally benefit
from the consummation of the merger in a manner different from
RTSs unaffiliated shareholders;
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the special committee retained and was advised by independent
legal counsel experienced in advising on similar transactions;
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the special committee retained and was advised by Morgan Joseph,
which assisted the committee in its evaluation of the fairness
from a financial point of view, to the holders of RTS common
stock (other than the Rollover Investors) of the $32.50 per
share cash merger consideration to be received by those
shareholders;
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the merger was unanimously approved and adopted by the members
of the special committee and by the other two independent and
disinterested members of our board of directors;
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the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of our common
stock entitled to vote at the special meeting; and
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prior to entering into the Merger Agreement a third party
solicitation process was conducted by RTS and the special
committee solicited competing acquisition proposals prior to
entering into the Merger Agreement.
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The Rollover Investors believe that the merger is procedurally
fair despite the fact that our board of directors did not retain
an unaffiliated representative, other than the special
committee, to act solely on behalf of RTSs shareholders
for purposes of negotiating the terms of the Merger Agreement.
In this regard, the Rollover Investors note that the use of a
special committee of independent and disinterested directors is
a mechanism recognized to ensure the procedural fairness of
transactions of this type. The Rollover Investors also believe
that the merger is procedurally fair despite the fact that
Messrs. Sheridan, Dosoretz, Rubenstein and Katin, each in
his capacity as a member of our board of directors, participated
in the deliberation of the resolutions of our board of directors
on October 19, 2007, approving and adopting the Merger
Agreement and the transactions contemplated by the Merger
Agreement and Mr. Watson was present during such
deliberations; in this regard, the Rollover Investors note that
all of the other members of the RTS board who voted on the
transaction approved and adopted the Merger Agreement.
The Rollover Investors did not consider the net book value of
RTS common stock in determining the substantive fairness of the
merger to RTSs unaffiliated shareholders because they
believe that net book value, which is an accounting concept,
does not reflect, or have any meaningful impact on, the market
trading price of RTS common stock. They note, however, that the
merger consideration of $32.50 per share of RTS common stock is
higher than the net book value of the RTS common stock. The
Rollover Investors did not consider liquidation value in
determining the substantive fairness of the merger to RTSs
unaffiliated shareholders because of their belief that
liquidation value did not present a meaningful valuation for RTS
and its business; rather, it was the belief of the Rollover
Investors that RTSs value is derived from the cash flows
generated from its continuing operations, rather than from the
value of its assets that might be realized in a liquidation.
Further, because RTSs assets include a significant amount
of intangible assets, leased properties and other assets that
are not readily transferable or are subject to restrictions on
their transfer in a liquidation scenario, the Rollover Investors
concluded that RTS is not susceptible to a meaningful
liquidation valuation. Moreover, it was the belief of the
Rollover Investors that a large part of RTSs success is
attributable to its
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market share and market presence created by operating radiation
treatment centers and its reputation for quality patient care,
and any liquidation of its assets or
break-up
or
piecemeal sale of its parts would not maximize shareholder value
because it would not likely compensate RTSs shareholders
for the value inherent in its operations. Therefore, the
Rollover Investors believed that the liquidation methodology
would result in a lower valuation for RTS than had been proposed
in the merger negotiations.
The foregoing discussion of the information and factors
considered and given weight by the Rollover Investors in
connection with their evaluation of the substantive and
procedural fairness to RTSs unaffiliated shareholders of
the Merger Agreement and the transactions contemplated by the
Merger Agreement is not intended to be exhaustive but is
believed to include all material factors considered by them. The
Rollover Investors did not find it practicable to and did not
quantify or otherwise attach relative weights to the foregoing
factors in reaching their position as to the substantive and
procedural fairness to RTSs unaffiliated shareholders of
the Merger Agreement and the transactions contemplated by the
Merger Agreement. The Rollover Investors believe that these
factors provide a reasonable basis for their belief that the
merger is substantively and procedurally fair to RTSs
unaffiliated shareholders. This belief should not, however, be
construed as a recommendation to any RTS shareholder to vote to
approve the Merger Agreement. However, Messrs. Sheridan,
Dosoretz, Rubenstein and Katin, each in his capacity as a member
of our board of directors, concur with the recommendation of our
board of directors that our shareholders approve the Merger
Agreement. See Special Factors Fairness of the
Merger; Recommendations of the Special Committee and Our Board
of Directors beginning on page 25.
Position
of Holdings, Parent, Merger Sub and Vestar Capital Regarding the
Fairness of the Merger
Holdings, Parent, Merger Sub and Vestar Capital are making the
statements included in this section solely for the purposes of
complying with the applicable requirements of
Rule 13e-3
and related rules under the Exchange Act. The views of Holdings,
Parent, Merger Sub and Vestar Capital should not be construed as
a recommendation to any shareholder as to how that shareholder
should vote on the proposal to approve the Merger Agreement.
Holdings, Parent, Merger Sub and Vestar Capital attempted to
negotiate the terms of a transaction that would be most
favorable to them, and not to the shareholders of RTS, and,
accordingly, did not negotiate the Merger Agreement with a goal
of obtaining terms that were fair to such shareholders. None of
Holdings, Parent, Merger Sub or Vestar Capital believe that it
has or had any duty, fiduciary or otherwise to RTS or its
shareholders, including with respect to the merger and its
terms. The shareholders of RTS were, as described elsewhere in
this proxy statement, represented by the special committee that
negotiated with Holdings, Parent, Merger Sub and Vestar Capital
on their behalf, with the assistance of independent legal and
financial advisors.
None of Holdings, Parent, Merger Sub or Vestar Capital
participated in the deliberations of the special committee and
none of them participated in the conclusions of the special
committee or the board of directors of RTS that the merger was
fair to RTSs unaffiliated shareholders, nor did they
undertake any independent evaluation of the fairness of the
merger or engage any financial advisor for such purposes.
While Holdings, Parent, Merger Sub and Vestar Capital found
persuasive the conclusions of the special committee and the
board of directors with respect to the substantive and
procedural fairness of the merger to RTSs unaffiliated
shareholders as set forth in the proxy statement under
Fairness of the Merger Recommendations of the
Special Committee and Our Board of Directors, they did not
base their determination expressed below on the special
committees analyses of factors. In addition, Holdings,
Parent, Merger Sub and Vestar Capital believe the proposed
merger is substantively and procedurally fair to RTSs
unaffiliated shareholders based on the following other factors:
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$32.50 in cash to be received by RTSs shareholders in the
merger represents:
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a premium of approximately 51.0% over the closing price of a
share of RTS common stock on October 19, 2007, the last
trading day prior to announcement of the merger;
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a premium of approximately 51.0% over the average closing price
of a share of RTS common stock over a
30-day
period leading up to announcement of the merger; and
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33
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a premium of approximately 33.0% over the average closing price
of a share of RTS common stock over a
90-day
period leading up to announcement of the merger;
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a special committee consisting solely of independent and
disinterested RTS directors unanimously determined, and the two
other independent and disinterested members of RTSs board
of directors unanimously determined, that the Merger Agreement
and the transaction contemplated by the Merger Agreement,
including the merger, are both procedurally and substantively
fair to RTSs unaffiliated shareholders and in the best
interest of RTSs shareholders;
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the $32.50 per share merger consideration and other terms and
conditions of the Merger Agreement resulted from extensive
arms length negotiations between the special committee and
its advisors and Parent and Merger Sub and their respective
advisors;
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the historical results of operations, financial condition,
assets, liabilities, business strategy and prospects of RTS and
the nature of the industry in which RTS competes;
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holders of RTS common stock will have the opportunity to demand
appraisal of the fair value of their shares under Florida law;
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the merger will provide consideration to RTSs unaffiliated
shareholders entirely in cash, thus eliminating any uncertainty
in valuing the consideration to be received by such shareholders;
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the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of our common
stock entitled to vote at the special meeting;
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the Merger Agreement resulted after a pre-signing third party
solicitation process that permitted the special committee to
solicit and consider competing acquisition proposals; and
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notwithstanding that the Morgan Joseph opinion was provided
solely for the information and assistance of the special
committee, the fact that the special committee received an
opinion from Morgan Joseph to the effect that as of
October 18, 2007 and based on and subject to the various
factors, assumptions and limitations set forth in its written
opinion, the $32.50 per share in cash to be received by the
holders of the outstanding shares of RTS common stock pursuant
to the Merger Agreement was fair from a financial point of view
to those holders (other than the Rollover Investors).
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Holdings, Parent, Merger Sub and Vestar Capital did not consider
the liquidation value of RTS because they considered RTS to be a
viable, going concern and therefore did not consider liquidation
value to be a relevant methodology. Further, Holdings, Parent,
Merger Sub and Vestar Capital did not consider the net book
value, which is an accounting concept, as a factor because they
believed that net book value is not a material indicator of the
value of RTS as a going concern but rather is indicative of
historical costs. Holdings, Parent, Merger Sub and Vestar
Capital note that net book value per share of RTS stock was
lower than the $32.50 per share cash merger consideration.
The foregoing discussion of the information and factors
considered and given weight by Holdings, Parent, Merger Sub and
Vestar Capital in connection with the fairness of the Merger
Agreement and the merger is not intended to be exhaustive but is
believed to include all material factors considered by Holdings,
Parent, Merger Sub and Vestar Capital. Holdings, Parent, Merger
Sub and Vestar Capital did not find it practicable to, and did
not, quantify or otherwise attach relative weights to the
foregoing factors in reaching their position as to the fairness
of the Merger Agreement and the merger. Holdings, Parent, Merger
Sub and Vestar Capital believe that these factors provide a
reasonable basis for their position that the merger is fair to
RTSs unaffiliated shareholders.
Opinion
of Morgan Joseph & Co. Inc.
The special committee engaged Morgan Joseph to advise it and
render a written opinion regarding the fairness, from a
financial point of view, to our shareholders, other than the
Rollover Investors, of the consideration to be received by those
shareholders in the merger. The special committee selected
Morgan Joseph to render an opinion regarding fairness, from a
financial point of view, because Morgan Joseph has
34
substantial experience with transactions similar to the
transaction and Morgan Joseph regularly engages in the valuation
of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings,
secondary distributions of listed and unlisted securities, and
private placements.
At a meeting of the special committee on October 18, 2007,
Morgan Joseph rendered its oral opinion, subsequently confirmed
in writing, to the effect that, as of such date and based upon
the assumptions made, matters considered and limits of review
set forth in its written opinion, the consideration to be
received by our shareholders, other than the Rollover Investors,
in the transaction was fair, from a financial point of view, to
those shareholders.
The full text of the Morgan Joseph opinion is attached to this
proxy statement as Annex B. The description of the opinion
set forth in this section is qualified in its entirety by
reference to the full text of the Morgan Joseph opinion set
forth in Annex B. You are urged to read the Morgan Joseph
opinion carefully and in its entirety for a description of the
procedures followed, assumptions made, and matters considered by
Morgan Joseph, as well as the qualifications and limitations on
the Morgan Joseph opinion and the review undertaken by Morgan
Joseph in rendering the Morgan Joseph opinion.
The Morgan Joseph opinion was directed to the special
committee and addresses the fairness, from a financial point of
view, to our shareholders, other than the Rollover Investors, of
the consideration to be received by those shareholders in the
merger. The Morgan Joseph opinion does not address the merits of
the underlying business decision of the Company to enter into
the merger and does not constitute a recommendation to the
Company, the board of directors, the special committee or any
other committee of the board of directors, our shareholders, or
any other person as to how such person should vote or as to any
other specific action that should be taken in connection with
the merger.
In connection with rendering its opinion, Morgan Joseph reviewed
and analyzed, among other things, the following:
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the October 18, 2007 draft of the Merger Agreement, the
October 18, 2007 draft of the voting agreement and the
draft of the equity commitment letter sent to Morgan Joseph on
October 18, 2007, which we represented to Morgan Joseph
were, with respect to the material terms and conditions thereof,
substantially in the form of definitive agreements to be
executed by the parties thereto promptly after the receipt of
the Morgan Joseph opinion;
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the Companys annual report on
Form 10-K
filed with the SEC with respect to our fiscal year ended
December 31, 2006, the Companys quarterly reports on
Form 10-Q
filed with the SEC with respect to our fiscal quarters ended
March 31, 2007 and June 30, 2007, respectively, which
our management had identified as being the most current
financial statements available, and certain other filings made
by the Company with the SEC;
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certain other publicly available business and financial
information concerning the Company, and the industry in which we
operate, which Morgan Joseph believed to be relevant;
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certain internal information and other data relating to the
Company, and our business and prospects, including budgets,
forecasts, projections and certain presentations prepared by our
senior management, which were provided to Morgan Joseph by the
Companys financial advisor (see Financial
Forecast beginning on page 96);
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the reported prices and trading activity of our common stock;
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certain publicly available information concerning certain other
companies which Morgan Joseph believed to be relevant and the
trading markets for certain of such other companies
securities; and
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the financial terms of certain unrelated transactions which
Morgan Joseph believed to be relevant.
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Morgan Joseph also met with and participated in conference calls
with certain of our officers and employees as well as
representatives from the Companys financial advisor
concerning our business, operations, assets, financial condition
and prospects, as well as the merger, and Morgan Joseph
undertook such other studies, analyses and investigations as it
deemed appropriate.
35
In performing its analyses, Morgan Joseph made numerous
assumptions with respect to industry performance, general
business, economic, market and financial conditions and other
matters, many of which are beyond the control of Morgan Joseph
and the Company. Any estimates contained in the analyses
performed by Morgan Joseph are not necessarily indicative of
actual values or future results, which may be significantly more
or less favorable than suggested by those analyses.
Additionally, estimates of the value of businesses or securities
do not purport to be appraisals or to reflect the prices at
which those businesses or securities might actually be sold.
Accordingly, the analyses and estimates are inherently subject
to substantial uncertainty.
Morgan Joseph, with our permission, assumed and relied upon the
accuracy and completeness of all financial and other information
and data provided to or otherwise reviewed by or discussed with
it, and upon the assurances of our senior management that all
information relevant to its opinion had been disclosed and made
available to it. Morgan Joseph further relied on the assurances
of our senior management that they were not aware of any facts
that would make such information inaccurate or misleading.
Morgan Joseph neither attempted independently to verify any such
information or data, nor did Morgan Joseph assume any
responsibility to do so. Morgan Joseph also assumed, with our
permission, that the forecasts and projections of the Company,
which were provided to or reviewed by Morgan Joseph, had been
reasonably prepared in good faith based on the then best current
estimates, information and judgment of our senior management as
to our future financial condition, cash flows and results of
operations. In that regard, Morgan Joseph assumed, with our
permission, that (i) such forecasts and projections would
be achieved in the amounts and at the times contemplated thereby
and (ii) all of our material assets and liabilities
(contingent or otherwise) were as set forth in our financial
statements or other information made available to Morgan Joseph.
Morgan Joseph expressed no opinion with respect to such
forecasts and projections or the estimates and judgments on
which they were based. Morgan Joseph made no independent
investigation of any legal, accounting or tax matters affecting
the Company, and Morgan Joseph assumed the correctness of all
legal, accounting and tax advice given to the Company and the
board of directors and any committee thereof. Morgan Joseph
further assumed that the merger would be consummated on the
terms described in the drafts of the Merger Agreement, the
commitment letter and the voting agreement, without any waiver,
delay, amendment or modification of any material terms or
conditions. Morgan Joseph did not conduct a physical inspection
of any of our properties and facilities, nor did it make or
obtain any independent evaluation or appraisal of such
properties and facilities. Although Morgan Joseph took into
account its assessment of general economic, market and financial
conditions and its experience in transactions that, in whole or
in part, it deemed to be relevant for purposes of its analyses,
as well as its experience in securities valuation in general,
the Morgan Joseph opinion was necessarily based upon economic,
financial, political, regulatory and other conditions as they
existed and could be evaluated on the date of the Morgan Joseph
opinion and Morgan Joseph assumed no responsibility to update or
revise its opinion based upon events or circumstances occurring
after the date of the Morgan Joseph opinion.
Set forth below is a summary of the material financial analyses
presented by Morgan Joseph to the special committee in
connection with rendering its opinion. The summary set forth
below does not purport to be a complete description of the
analyses performed by Morgan Joseph in this regard. Certain of
the summaries of financial analyses include information set
forth in tabular format. In order to fully understand the
financial analyses used by Morgan Joseph, the tables must be
read together with the text of each summary. The tables alone do
not constitute a complete description of the financial analyses.
The preparation of opinions regarding fairness, from a financial
point of view, involve various determinations as to the most
appropriate and relevant methods of financial analyses and the
application of these methods to the particular circumstances,
and, therefore, such opinions are not readily susceptible to a
partial analysis or summary description. Accordingly,
notwithstanding the separate analyses summarized below, Morgan
Joseph believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors
considered by it, without considering all of its analyses and
factors, or attempting to ascribe relative weights to some or
all of its analyses and factors, could create an incomplete view
of the evaluation process underlying the Morgan Joseph opinion.
No company or transaction used in the analyses described below
is identical to the Company or the merger. Accordingly, an
analysis of the results thereof necessarily involves complex
considerations and judgments concerning differences in financial
and operating characteristics and other factors that could
affect
36
the merger or the public trading or other values of the Company
or companies to which they are being compared. Mathematical
analysis (such as determining the average or median) is not in
itself a meaningful method of using selected acquisition or
company data. In addition, in performing such analyses, Morgan
Joseph relied on projections prepared by research analysts at
established securities firms, any of which may or may not prove
to be accurate.
The following is a summary of the material analyses performed by
Morgan Joseph in connection with the Morgan Joseph opinion:
Valuation
of the Company
Selected Publicly Traded Companies
Analysis.
Using publicly available information,
Morgan Joseph reviewed the stock prices (as of October 17,
2007) and selected market trading multiples of the
following companies in the broadly defined healthcare services
industry that, in Morgan Josephs opinion, may be
considered similar to the Company in certain respects for
purposes of this analysis:
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Pediatrix Medical Group, Inc.;
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Psychiatric Solutions, Inc.;
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Magellan Health Services, Inc.;
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NightHawk Radiology Holdings, Inc.;
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AmSurg Corp.;
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MedCath Corporation;
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LCA-Vision Inc.;
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Alliance Imaging, Inc.;
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American Dental Partners, Inc.;
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RadNet, Inc.;
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RehabCare Group, Inc.; and
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TLC Vision Corporation
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The financial information reviewed by Morgan Joseph included
market trading multiples exhibited by the selected companies
with respect to their 2007 estimated financial performance in
general and earnings before interest, taxes, depreciation and
amortization in particular, which we refer to as EBITDA. The
table below provides a summary of these comparisons:
Multiples
Observed from the Selected Companies
2007E
EBITDA:
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Multiple Percentile
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Mean
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Median
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High
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Low
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Multiple Range
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9.2x
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8.5x
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16.1x
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4.2x
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2007E EBITDA for the Company
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$103 million
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$103 million
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Implied Equity Valuation Range Per Share
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$26.54
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$23.69
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Selected Acquisitions Analysis.
Using publicly
available information, Morgan Joseph reviewed the purchase
prices and multiples paid in the following selected mergers and
acquisitions in the broadly defined healthcare services industry
that were announced since January 1, 2004 that, in Morgan
Josephs opinion, may
37
be considered similar to the merger in certain respects for
purposes of this analysis. The table below provides a summary of
these comparisons:
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Announcement
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Target
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Acquiror
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Date
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Symbion, Inc.
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Crestview Partners, L.P.
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4/24/07
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Universal Hospital Services, Inc.
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Bear Stearns Merchant Banking
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4/16/07
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Surgical Care Affiliates, Inc.
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TPG Partners V, L.P.
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3/26/07
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Triad Hospitals, Inc.
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Community Health Systems, Inc.
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3/19/07
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HealthSouth Corporation Outpatient Rehabilitation Division
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Select Medical Corporation
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1/29/07
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United Surgical Partners International, Inc.
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Welsh, Carson, Anderson & Stowe
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1/8/07
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HCA Inc.
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Bain Capital Partners, Kohlberg Kravis Roberts & Co.,
Merrill Lynch Global Private Equity
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7/24/06
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LifeCare Holdings, Inc.
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The Carlyle Group
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7/19/05
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Renal Care Group, Inc.
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Fresenius Medical Care AG
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5/4/05
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Diagnostic Imaging Group LLC
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Evercore Capital Partners
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4/5/05
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Gambro Healthcare, Inc.
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DaVita Inc.
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12/6/04
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Select Medical Corporation
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Welsh, Carson, Anderson & Stowe
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10/18/04
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US Oncology, Inc.
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Welsh, Carson, Anderson & Stowe
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3/22/04
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National Nephrology Associates, Inc.
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Renal Care Group Inc.
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2/2/04
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The financial information reviewed by Morgan Joseph included the
purchase prices and multiples paid by the acquiring company of
the target companys most recent LTM financial results
available preceding the announcement of the acquisition. The
table below summarizes the results of this analysis:
LTM
EBITDA
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Multiple Percentile
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25th
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75th
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High
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Low
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Multiple Range
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8.1x
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9.7x
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12.6x
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7.3x
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LTM EBITDA for the Company
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$92 million
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$92 million
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Implied Equity Value Per Share
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$18.23
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$24.18
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Discounted Cash Flow Analysis.
Using certain
projected financial information supplied by the senior
management of the Company for calendar years 2007 through 2012,
Morgan Joseph calculated the net present value of the
Companys free cash flows using a discount rate of 13.1%.
Morgan Josephs estimate of the appropriate discount rate
was based on the estimated cost of capital for the selected
public companies. Morgan Joseph also calculated the terminal
value of the Company in the year 2012 based on multiples of
EBITDA ranging from 8.0x to 9.0x and discounted these terminal
values using the assumed range of discount rates. Morgan
Josephs estimate of the appropriate range of terminal
multiples was based upon the multiples of the selected public
companies and the precedent transactions.
This analysis resulted in a range of equity values per share
indicated in the table below:
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Terminal Value Multiples
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8.0x
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8.5x
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9.0x
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Discount Rate:
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13.1%
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$
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29.90
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$
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32.11
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$
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34.32
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Inherent in any discounted cash flow valuation are the use of a
number of assumptions, including the accuracy of projections and
the subjective determination of an appropriate terminal value
and discount rate to apply to the projected cash flows of the
entity under examination. Variations in any of these assumptions
or judgments could significantly alter the results of a
discounted cash flow analysis.
38
Leveraged Buyout Analysis.
Based on the
financial forecasts and projections provided by the senior
management of the Company for calendar years 2007 through 2012,
Morgan Joseph performed a leveraged buyout analysis to determine
the potential implied enterprise value that might be achieved in
an acquisition in a leveraged buyout transaction assuming an
exit from the business in four or five years. Estimated exit
values were calculated by applying a range of exit value
multiples from 9.5x to 10.5x 2012E EBITDA, which exit value
multiples were derived from the implied EBITDA multiples paid
for the target companies in the precedent transactions referred
to above under Discounted Cash Flow Analysis. Morgan Joseph then
derived a range of theoretical purchase prices based on assumed
required internal rates of return for a buyer between
approximately 19% and 26%, which range of percentages was, in
Morgan Josephs professional judgment, generally reflective
of the range of required internal rates of return commonly
assumed when performing a leveraged buyout analysis of this
type. This analysis indicated an implied equity value of
approximately $28.00 to $32.00 per share.
Miscellaneous.
The Company and Morgan Joseph
entered into a letter agreement dated July 5, 2007 relating
to the services to be provided by Morgan Joseph in connection
with the merger. We agreed to pay Morgan Joseph a fee of
$1.45 million in connection with its (i) analysis of
strategic alternatives to maximize shareholder value,
(ii) analysis of the process undertaken by the Company,
with the assistance of the Companys financial advisor, to
explore the possibility of a transaction such as the proposed
merger, and (iii) delivery of the Morgan Joseph opinion.
None of these fees were contingent upon either the conclusion of
its opinion or the consummation of the merger. We also agreed to
reimburse Morgan Joseph for its reasonable out-of-pocket
expenses incurred in connection with its engagement, including
certain fees and disbursements of its legal counsel, and to
indemnify Morgan Joseph against liabilities relating to or
arising out of its engagement, including liabilities under the
securities laws. In the ordinary course of its business, Morgan
Joseph may acquire, hold or sell, long or short positions, or
trade or otherwise effect transactions in debt, equity and other
securities and financial instruments (including loans and other
obligations) of, or investments in, the Company, portfolio
companies of Vestar, and their respective affiliates. Other than
this engagement, Morgan Joseph had not been, and was not,
engaged by the Company, Vestar Capital Partners or any of the
portfolio companies of Vestar Capital Partners.
Certain
Effects of the Merger
If the merger is completed, all of the equity interests in RTS
will be owned directly or indirectly by Parent, which
immediately following the effective time of the merger will be
owned directly or indirectly by Vestar Capital, the Rollover
Investors and certain other RTS non-executive employees who may
acquire units of limited liability company interests in
Holdings. Immediately before, and contingent upon the completion
of, the merger, the Rollover Investors and certain other RTS
non-executive employees are expected to exchange certain shares
of RTS common stock
and/or
cash
for units of limited liability company interests in Holdings.
Except for the Rollover Investors, Vestar Capital and the RTS
non-executive employees, no current shareholder of RTS will have
any ownership interest in, nor be a shareholder of, RTS
immediately following the completion of the merger. As a result,
our shareholders (other than the Rollover Investors and RTS
non-executive employees) will no longer benefit from any
increase in RTSs value, nor will they bear the risk of any
decrease in RTSs value. Following the merger, Vestar
Capital Fund, the Rollover Investors and certain other RTS
non-executive employees who have contributed RTS common stock
and/or
cash
in exchange for equity interests in Holdings will, through their
ownership of Holdings, benefit from any increase in the value of
RTS and also will bear the risk of any decrease in the value of
RTS.
Upon completion of the merger, each RTS shareholder (other than
Holdings, Parent, Merger Sub, RTS or any subsidiary of RTS or
any shareholder who perfects appraisal rights in accordance with
Florida law) will be entitled to receive $32.50 in cash for each
share of RTS common stock held. Except as otherwise agreed to in
writing by RTS, Parent, Merger Sub and certain members of RTS
management (including certain of the Rollover Investors)
(i) each outstanding option to purchase shares of RTS
common stock, whether vested or unvested, will be canceled and
converted into the right to receive a cash payment equal to the
excess (if any) of the $32.50 per share cash merger
consideration over the exercise price per share of the option,
multiplied by the number of shares subject to the option,
without interest and less any applicable withholding taxes and
39
(ii) each award of restricted stock will be converted into
the right to receive $32.50 per share in cash less any
applicable withholding taxes. The receipt of cash in the merger
will be a taxable transaction for U.S. federal income tax
purposes under the Internal Revenue Code of 1986 and may also be
a taxable transaction under applicable state, local, foreign and
other tax laws.
Following the merger, shares of RTS common stock will no longer
be traded on the NASDAQ or any other public market.
Our common stock constitutes margin securities under
the regulations of the Board of Governors of the Federal Reserve
System, which has the effect, among other things, of allowing
brokers to extend credit on collateral of our common stock. As a
result of the merger, our common stock will no longer constitute
margin securities for purposes of the margin
regulations of such Board of Governors and therefore will no
longer constitute eligible collateral for credit extended by
brokers.
Our common stock is currently registered as a class of equity
security under the Exchange Act. Registration of our common
stock under the Exchange Act may be terminated upon application
of RTS to the SEC if our common stock is not listed on the
NASDAQ or another national securities exchange and there are
fewer than 300 record holders of the outstanding shares.
Termination of registration of our common stock under the
Exchange Act will substantially reduce the information required
to be furnished by RTS to its shareholders and the SEC, and
would make certain provisions of the Exchange Act, such as the
short-swing trading provisions of Section 16(b) of the
Exchange Act and the requirement of furnishing a proxy statement
in connection with any shareholder meeting pursuant to
Section 14(a) of the Exchange Act, no longer applicable to
RTS. If RTS (as the entity surviving the merger) completed a
registered exchange or public offering of debt securities,
however, it would be required to file periodic reports with the
SEC under the Exchange Act for a period of time following that
transaction.
Parent and the Rollover Investors expect that following
completion of the merger, RTSs operations will be
conducted substantially as they are currently being conducted.
Parent and the Rollover Investors have informed us that they
have no current plans or proposals or negotiations which relate
to or would result in an extraordinary corporate transaction
involving our corporate structure, business or management, such
as a merger, reorganization, liquidation, relocation of any
operations, or sale or transfer of a material amount of assets
except as described in this proxy statement. Parent and the
Rollover Investors may initiate from time to time reviews of us
and our assets, corporate structure, capitalization, operations,
properties, management and personnel to determine what changes,
if any, would be desirable following the merger. They expressly
reserve the right to make any changes that they deem necessary
or appropriate in light of their review or in light of future
developments.
Following consummation of the merger, Holdings through Parent
will own directly or indirectly 100% of our outstanding common
stock and will therefore have a corresponding interest in
RTSs net book value and net earnings. It is currently
expected that immediately following the closing,
Messrs. Sheridan, Dosoretz, Rubenstein and Katin will each
own (excluding the units they may receive under the management
equity incentive plan) approximately 1.8%, 7.2%, 3.5% and 2.6%
of the outstanding units of Holdings (excluding incentive
units). Messrs. Sheridan, Dosoretz, Rubenstein and Katin,
currently beneficially own approximately 9.3%, 16.0%, 10.8% and
4.2%, respectively, of our outstanding shares of common stock.
Each holder of Holdings units will have an interest in
RTSs net book value and net earnings in proportion to his
ownership interest. An equity investment in Holdings in
connection with the merger will involve substantial risk
resulting from the limited liquidity of such an investment.
Nonetheless, if RTS successfully executes its business
strategies, the value of such an equity investment could be
considerably greater than the original cost. In addition,
Holdings will have substantially more debt outstanding after the
merger and this may adversely affect the equity value of
Holdings. In general, higher levels of debt can have the effect
of increasing the risk to equity holders of losing the entire
value of their investment. It is expected that
Messrs. Sheridan, Dosoretz and Rubenstein will serve on the
board of managers of Holdings as of the closing of the merger.
However, Vestar Capital Fund will own a majority of the equity
interests in Holdings, will control the board of managers of
Holdings and exert substantial influence over the governance and
operations of Holdings, Parent and RTS (as the surviving
corporation in the merger) following the completion of the
merger.
40
The following table sets forth for each member of the Rollover
Investors (1) such persons interest in the
stockholders equity (net book value) of RTS at
September 30, 2007, (2) such persons interest in
the net income of RTS for the quarter ended September 30,
2007 (in the case of (1) and (2), such persons
interest has been calculated to give pro forma effect to the
exercise of all stock options (vested or unvested) and unvested
restricted stock that were outstanding on October 19,
2007) and (3) the approximate percentage interest
expected to be held by each such person in the limited liability
company interests in Holdings (and accordingly the net book
value and net income) of the surviving corporation, without
giving effect to incentive unit awards, immediately following
the merger.
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Percentage
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Net Income for the
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Interest in
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Net Book Value at
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Quarter Ended
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Net Book Value
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September 30, 2007(1)
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September 30, 2007(2)
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and Net Income
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Percentage
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Percentage
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Following the
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Interest
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Amount
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Interest
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Amount
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Merger(3)
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(Dollars in thousands)
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Daniel E. Dosoretz
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16.0
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%
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26,206,644
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16.0
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%
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735,511
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7.2
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%
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James H. Rubenstein
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10.8
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%
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17,650,829
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10.8
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%
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495,385
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3.5
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%
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Howard M. Sheridan
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9.3
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%
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15,205,794
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9.3
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%
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426,763
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1.8
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%
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Michael J. Katin
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4.2
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%
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6,914,478
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4.2
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%
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194,061
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2.6
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%
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Total
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40.3
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%
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65,977,745
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40.3
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%
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1,851,720
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15.1
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%
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(1)
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Total net book value of RTS at September 30, 2007 was
$163.4 million.
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(2)
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Net income of RTS for the quarter ended September 30, 2007
was $4.6 million.
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(3)
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Amounts represent anticipated beneficial ownership of units of
limited liability company interests in Holdings following the
closing of the merger. Excludes amounts that may be granted
pursuant to incentive unit awards under Holdings new
incentive award plan. Following the merger, RTS will have
substantially more indebtedness than RTS presently has and,
therefore, lower stockholders equity.
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Plans
for RTS After the Merger
After the effective time of the merger, and excluding the
transactions contemplated in connection with the merger as
described in this proxy statement, Parent and the Rollover
Investors anticipate that RTSs operations will be
conducted substantially as they are currently being conducted,
except that it will cease to be an independent public company
and will instead be a direct or indirect wholly owned subsidiary
of Parent. After the effective time of the merger, the directors
of Merger Sub immediately prior to the effective time of the
merger will become the directors of RTS, and the officers of RTS
immediately prior to the effective time of the merger will
remain the officers of RTS, in each case until the earlier of
their resignation or removal or until their respective
successors are duly elected or appointed and qualified, as the
case may be.
Conduct
of RTSs Business if the Merger is Not Completed
In the event that the Merger Agreement is not approved by
RTSs shareholders or if the merger is not completed for
any other reason, RTS shareholders will not receive any payment
for their shares of RTS common stock. Instead, RTS will remain
an independent public company, its common stock will continue to
be listed and traded on the NASDAQ, and RTS shareholders will
continue to be subject to the same risks and opportunities as
they currently face with respect to their ownership of RTS
common stock. If the merger is not completed, there can be no
assurance as to the effect of these risks and opportunities on
the future value of your RTS shares, including the risk that the
market price of our common stock may decline, due to factors
including but not limited to the fact that the current market
price of our stock may reflect a market assumption that the
merger will be completed. From time to time, our board of
directors will evaluate and review the business operations,
properties, dividend policy and capitalization of RTS, and,
among other things, make such changes as are deemed appropriate
and continue to seek to maximize shareholder value. If the
Merger Agreement is not approved by our shareholders or if the
merger is not consummated for any other reason,
41
there can be no assurance that any other transaction acceptable
to RTS will be offered or that the business, prospects or
results of operations of RTS will not be adversely impacted.
Pursuant to the Merger Agreement, under certain circumstances,
RTS is permitted to terminate the Merger Agreement and recommend
an alternative transaction. See The Merger
Agreement Termination beginning on
page 81.
However, under certain circumstances, if the merger is not
completed, RTS may be obligated to pay Parent or its designee a
termination fee
and/or
to
reimburse Parent or its designee for out-of-pocket fees and
expenses in connection with the merger. See The Merger
Agreement Termination Fees and Expenses
beginning on page 83.
The total amount of funds necessary for Vestar to complete the
merger and the related transactions is anticipated to be
approximately $1.1 billion, consisting of
(1) approximately $700 million to be paid out to our
shareholders and holders of other equity-based interests in RTS,
(2) approximately $240 million to refinance our
existing indebtedness (assuming the Companys existing
capital leases remain in place after the closing of the merger
and there is no change to the terms and conditions of such
leases), (3) approximately $45 million to pay fees and
expenses in connection with the transaction and
(4) approximately $100 million under the revolving
credit facility and the delayed draw term loan facility, which
will provide a source of funds for general corporate needs,
including acquisitions by the Company, post-closing.
These funds are anticipated to come from the following sources:
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cash equity contributions by Vestar Capital Fund
and/or
its
respective assignees (as described below under
Equity Financing) of up to
$560 million in the aggregate, pursuant to an equity
commitment letter;
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borrowings by Merger Sub of up to $310 million under a new
$410 million senior secured credit facility; and
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the issuance by Merger Sub of $165 million in aggregate
principal amount of senior subordinated unsecured notes
(collectively, the notes) in a public offering or
Rule 144A or other private offering, or if and to the
extent Merger Sub does not, or is unable to, issue the notes in
at least $165 million in aggregate principal amount on or
prior to the closing date, borrowings by RTS, as the surviving
corporation, under a new senior subordinated unsecured credit
facility in the amount of at least $165 million less the
amount of the notes issued on or prior to the closing date.
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Equity
Financing
Vestar Capital Funds V, L.P. delivered an equity commitment
letter for a maximum aggregate amount of $560 million in
equity contribution to Parent and RTS. This commitment
constitutes all of the equity portion of the merger financing,
other than shares of RTS common stock to be contributed by the
Rollover Investors and certain other RTS non-executive employees
in exchange for units of limited liability company interests in
Holdings.
The equity commitment letter provides that in the event the
merger is consummated, equity funds will be contributed to the
extent necessary up to the maximum aggregate commitment amount
to fund the consideration payable in connection with the merger
and the other transactions contemplated by the Merger Agreement.
In the event the merger does not close, the equity commitment
letter provides that equity funds will be funded in the amount
(i) up to $28 million with respect to any termination
fee or expense reimbursement payable by Holdings or (ii) up
to $40 million (inclusive of any termination fee or expense
reimbursement payable by Holdings) with respect to damages
arising from failures of Parent or Merger Sub to comply with the
Merger Agreement and for no other purpose. The obligation to
fund any portion of the equity commitment is subject to the
terms and conditions of the equity commitment letter, including
the satisfaction or waiver at the closing of the conditions
precedent to the obligations of Parent to consummate the merger.
42
The terms of the equity commitment letter will expire
automatically upon the earlier to occur of
(i) contemporaneously with the closing of the Merger
Agreement; or (ii) the termination of the Merger Agreement
in accordance with its terms.
In addition, Vestar Capital Fund may allocate a portion of its
equity commitment to limited partners of Vestar Capital Fund and
certain other co-investors, provided that such allocation will
not limit the obligations of Vestar Capital Fund under the
equity commitment letter to the extent any such co-investor
fails to purchase the equity allocated to it. The terms and
conditions of any such investments would be subject to
negotiations and discussions among Vestar Capital and the
potential investors.
Debt
Financing
Merger Sub has entered into a debt financing commitment letter
with Wachovia Bank, National Association, Wachovia Investment
Holdings, LLC and Wachovia Capital Markets, LLC providing Merger
Sub with committed financing for (i) $410 million in
senior secured credit facilities and (ii) $165 million
under a new senior subordinated unsecured bridge facility.
Merger Sub has additionally engaged Wachovia Securities to place
or underwrite the issuance and sale of $165 million in
aggregate principal amount of notes in a public offering or in a
Rule 144A or other private placement. In connection with
strategic alternative process undertaken by the board of
directors of RTS, RTS had arranged for Wachovia Bank and its
affiliates to provide stapled financing for potential bidders in
a sale of RTS. While Vestar and its affiliates did not have
significant business relationships with Wachovia Bank or its
affiliates, Vestar decided to retain Wachovia Bank and its
affiliates to provide debt financing for the merger.
The documentation governing the senior secured credit facilities
and the bridge facility has not been finalized and, accordingly,
their actual terms may differ materially from those described in
this proxy statement in which event we will update such
information through a supplement to the proxy statement and
amend the
Schedule 13E-3
filed in connection with the merger to the extent required by
applicable law. Except as described herein, there is no current
plan or arrangement to finance or repay the debt financing
arrangements.
Senior
Secured Credit Facilities
The senior secured credit facilities are expected to be
comprised of (i) a senior secured term loan facility of up
to $350 million (of which $40 million shall consist of
a delayed draw term loan facility) and (ii) a senior
secured revolving credit facility of $60 million. As a
result of the merger, Merger Sub will be merged with and into
RTS, and RTS, as the surviving corporation, will be the borrower
under the senior secured credit facilities. All obligations of
RTS under the senior secured credit facilities will be
guaranteed by Parent and each existing and future direct and
indirect wholly owned domestic subsidiary and certain non-wholly
owned subsidiaries of RTS, subject to certain exceptions. The
obligations of RTS and the guarantors under the senior secured
credit facilities will be secured by substantially all of the
assets of RTS and the guarantors, including the equity interests
in certain subsidiaries.
The full amount of the term loans is expected to be used to fund
a portion of the merger consideration, to refinance our existing
indebtedness and to pay related fees and expenses. The term
loans are expected to bear interest based on either the adjusted
London inter-bank offered rate (Adjusted LIBOR) plus
an initial spread, or the alternate base rate (ABR)
plus an initial spread, at the option of RTS. The term loans
will mature six years after the closing date of the merger and
will also require quarterly interim amortization payments, with
the balance payable at the final maturity date of the term
loans. The borrower may, subject to prepayment penalties as
applicable, make voluntary prepayments of the term loans at any
time. In addition, the term loans are required to be prepaid in
certain circumstances, including with the net cash proceeds of
debt issuances (other than debt otherwise permitted), the net
cash proceeds from any issuance of public equity securities, the
net cash proceeds of certain asset sales (subject to
reinvestment rights and other exceptions) and specified
percentages of certain cash flows subject to step down based on
maximum leverage ratio.
The revolving credit facilities will be used to fund a portion
of the merger consideration, to refinance our existing
indebtedness, to pay related fees and expenses and for ongoing
working capital and for other general
43
corporate purposes (including, without limitation, permitted
acquisitions). The revolving credit facilities will mature five
years after the closing of the merger and are expected to bear
interest based on either Adjusted LIBOR plus an initial spread,
or ABR plus an initial spread, at the option of RTS.
The senior secured credit facilities will contain customary
representations and warranties and customary affirmative and
negative covenants, including, among other things, restrictions
on indebtedness, capital expenditures, liens, investments, asset
sales, mergers and consolidations, dividends and other
distributions, redemptions, prepayments of certain indebtedness,
and a maximum leverage ratio and minimum interest coverage
ratio. The senior secured facilities will also include customary
events of default, including upon a change of control.
High
Yield Notes
Wachovia Capital Markets, LLC has been engaged by Merger Sub to
place or underwrite the issuance and sale of $165 million
in aggregate principal amount of notes in a public offering or
in a Rule 144A or other private placement. Although the
interest rate, maturity and other material terms of the notes
have not been finalized, we expect that the notes will have
terms and conditions customary for unsecured senior subordinated
note offerings of issuers that are affiliates of Vestar Capital
Partners.
High
Yield Bridge Facility
If and to the extent the offering or placement of the notes is
not completed on or prior to the closing of the merger, Wachovia
Capital Markets, LLC has committed to provide Merger Sub with
$165 million of loans under a senior subordinated unsecured
bridge facility. The obligations of RTS, as successor to Merger
Sub pursuant to the merger, under the senior subordinated
unsecured bridge facility will be guaranteed on a senior
subordinated basis by each of its subsidiaries that is a
guarantor of the senior secured credit facilities.
The loans under the senior subordinated unsecured bridge
facility will be increasing rate bridge loans. For the initial
six-month period under the senior unsecured bridge facility,
interest on the bridge loans is expected to accrue at a rate per
annum based on three-month Adjusted LIBOR, as determined on the
effective date of the merger, plus an initial spread, subject to
a maximum overall interest cap. The bridge loans will have an
initial maturity of one year after the effective date of the
merger, but the maturity of any bridge loans outstanding at that
time will automatically be extended to the seventh anniversary
of the effective date of the merger. Holders of the extended
term loans will have the right (subject to certain minimum
amount requirements) to exchange such loans for exchange notes
maturing on the seventh anniversary of the effective date of the
merger.
The borrower will be required to prepay the bridge loans or to
make an offer to prepay or repurchase the extended term loans
and the exchange notes under certain circumstances, typical for
a high yield bridge facility, subject to certain exceptions and
others to be agreed, and upon a change of control.
The senior subordinated unsecured bridge facility will contain
customary representations and warranties and covenants
substantially similar to those in the senior secured credit
facilities, provided that there will be no financial maintenance
or capital expenditure covenants. The unsecured senior
subordinated bridge facility will also include customary events
of default, including a change of control.
Conditions
to the Debt Financing
The debt financing commitments will expire if not drawn on or
prior to April 21, 2008. The facilities contemplated by the
debt financing commitments are subject to customary closing
conditions, including:
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there not having occurred any debt issuance, other than the
credit facilities and notes and other than debt incurred in the
ordinary course of business;
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since October 19, 2007, no change, circumstance or effect
shall have occurred that has had, or would reasonably expected
to have a Company Material Adverse Effect as defined
as in the Merger Agreement;
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44
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the truth and accuracy of the representations and warranties by
us in the Merger Agreement that since December 31, 2006
through October 19, 2007 there has not been any event,
development or state of circumstances that has had or is
reasonably expected to have, individually or in the aggregate, a
Company Material Adverse Effect, the breach of which such
representation by us would cause or would have a Company
Material Adverse Effect;
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receipt of executed financing documents consistent with the
terms of the commitment letter and customary legal opinions,
corporate documents and other instruments as are customary for
such financing transactions;
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delivery of certain specified audited consolidated financial
statements and pro forma consolidated financial statements
giving effect to the transaction (reflecting a ratio of total
debt to EBITDA not exceeding 5.00 to 1.00 on the closing date
for the latest four quarters period prior to the closing date
calculated on a pro forma basis) of RTS;
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the merger and all related transactions must have been
consummated in accordance with the terms of the Merger
Agreement; and
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receipt of equity contributions in an amount not less than
$650 million required to consummate the merger from one or
more of Vestar Capital and co-investors reasonably acceptable to
the lead arrangers for the debt financing.
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Since the final terms of the debt financing facilities have not
been agreed upon, such terms and amounts may differ from those
set forth above and, in certain cases, such differences may be
significant.
As of the date of this proxy statement, no alternative financing
arrangements or alternative financing plans have been made in
the event the debt financing described herein is not available
as anticipated.
Interests
of Our Directors and Executive Officers in the Merger
General
In considering the recommendation of the special committee and
our board of directors with respect to the Merger Agreement, RTS
shareholders should be aware that some of the RTS directors and
executive officers have interests in the merger and have
arrangements that are different from, or in addition to, those
of RTS shareholders generally. These interests and arrangements
may create potential conflicts of interest. The special
committee and our board of directors were aware of these
potential conflicts of interest and considered them, among other
matters, in reaching their decisions to approve and adopt the
Merger Agreement and to recommend that RTS shareholders vote in
favor of approval of the Merger Agreement.
Stock
Options, Restricted Stock and Other Equity-Based
Awards
As of the effective time of the merger:
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each outstanding option to purchase shares of our common stock
held by a director or executive officer, whether vested or
unvested, will be canceled and converted into the right to
receive a cash payment equal to the excess (if any) of the
$32.50 per share cash merger consideration over the exercise
price per share of the option, multiplied by the number of
shares subject to the option, without interest and less any
applicable withholding taxes; and
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each award of restricted stock held by an executive officer or
director that is not exchanged for units of limited liability
company interests in Holdings will be converted into the right
to receive $32.50 per share in cash, less any applicable
withholding taxes.
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We estimate the amounts that will be payable to each RTS named
executive officer in settlement of stock options as follows:
Sheridan, $0, Dosoretz, $7,860,000, Rubenstein, $3,900,000,
Katin, $0, Watson, $0 and Biscardi, $0. We estimate the
aggregate amount that will be payable to all directors and
executive officers in settlement of stock options and restricted
stock awards to be approximately $12,238,109. No member of the
special committee has any stock options or restricted stock
awards.
45
Current
Employment Agreements of Management
Each of Messrs. Dosoretz and Rubenstein is currently a
party to an employment agreement with RTS entered into in 2004
that would provide benefits to the executive in the event of
specified triggering events in connection with a change of
control of RTS such as the proposed merger.
Pursuant to our agreements with Messrs. Dosoretz and
Rubenstein, in the event of a separation of service of the
executive by RTS without cause or by the executive for good
reason within 12 months prior to or 6 months after a
change of control of RTS, Messrs. Dosoretz and Rubenstein
will receive a lump sum severance payment equal to 250% the sum
of:
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his annual base salary at the rate in effect immediately prior
to the change of control; and
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the aggregate cash bonus compensation paid to him for the
previous fiscal year.
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In addition, if a change of control occurs and such executives
continued in his position, such executives then current
annual base salary and bonus will automatically be increased by
150% for the greater of the remaining term of his employment
agreement or 2 to 3 years in lieu of the severance payment
described above.
Each of Messrs. Dosoretzs and Rubensteins
agreements provide a conditional
gross-up
for excise and related taxes in the event the severance
compensation and other payments or distributions to an executive
pursuant to an employment agreement, stock option agreement,
restricted stock agreement or otherwise would constitute
excess parachute payments, as defined in
Section 280G of the Internal Revenue Code. The tax
gross-up
will be provided if the aggregate parachute value of all
severance and other change in control payments to the executive
is greater than 110% of the maximum amount that may be paid
under Section 280G of the Internal Revenue Code without
imposition of an excise tax. If the parachute value of an
executives payments does not exceed the 110% threshold,
the executives payments under the change in control
agreement will be reduced to the extent necessary to avoid
imposition of the excise tax on excess parachute
payments.
Assuming hypothetically that the merger occurred on
December 1, 2007 and there was a termination of employment
without cause or for good reason in connection therewith,
Dosoretz and Rubenstein would have been entitled to receive lump
sum payments of $3,554,000 and $2,436,000 under their respective
employment agreement, plus any applicable tax
gross-up
payments. However, Parent and each of Dosoretz and Rubenstein
have agreed that if the merger closes, the current employment
agreements described above will be replaced by new employment
agreements effective upon the closing of the Merger as described
below, in which event the amounts described in the immediately
preceding paragraph would not become payable.
Support
and Voting Agreement
Holdings and Parent have entered into separate Support and
Voting Agreements (Support Agreements) with each of
Sheridan, Dosoretz, Rubenstein and Katin. As of the date of the
Support Agreements, the Rollover Investors were the beneficial
owners of 9,811,140 shares of RTS common stock. We refer to
the RTS shares beneficially owned by the Rollover Investors,
together with any shares of common stock issued upon exercise of
any of their options and any other RTS shares over which the
Rollover Investors acquire beneficial ownership after the date
of the Support Agreements as the Subject Shares.
The following is a summary of the material terms of the Support
Agreements among Parent, Holdings and the Rollover Investors.
Pursuant to the Support Agreement, the Rollover Investors have
agreed that, during the period from and including
October 19, 2007 through and including the earliest to
occur of (a) the closing of the merger and (b) the
termination of the Merger Agreement in accordance with its terms
(the voting period), they will vote or execute
consents with respect to the Subject Shares beneficially owned
by them on the applicable record date, at any meeting or in
connection with any proposed action by written consent of the
Companys shareholders, with respect to any of the
following matters:
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in favor of the approval of the Merger Agreement and any other
action of RTSs shareholders requested in furtherance
thereof; and
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46
against:
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any action or agreement submitted for approval by RTSs
shareholders that would reasonably be expected to, result in a
breach of any covenant, representation or warranty or any other
obligation or agreement of RTSs in the Merger Agreement;
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any amendment to RTSs articles of incorporation or bylaws
or other proposal, action or transaction involving RTS or any of
its subsidiaries which would reasonably be expected to
(a) nullify, interfere with, or be inconsistent with the
Merger Agreement or (b) otherwise impede, delay, postpone,
prevent, frustrate the purposes of or attempt to discourage or
materially adversely affect the timely consummation of the
merger or the transactions contemplated by the Merger
Agreement; and
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any other action, agreement or transaction submitted for
approval to the shareholder of RTS that would constitute an
alternative proposal under the Merger Agreement.
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In connection with the performance of the obligations of the
Rollover Investors under the Support Agreement, each Rollover
Investor irrevocably appointed Holdings as his attorney-in-fact
and proxy to vote or execute consents with respect to his
Subject Shares to the extent described above and agreed not to
grant any other proxy or take any actions that are inconsistent
with or that would impede such holders performance of the
Support Agreement. The proxy and power of attorney granted by
the Rollover Investors pursuant to the Support Agreements will
terminate only upon the expiration of the voting period.
Under the Support Agreement, each Rollover Investor has agreed
not to transfer his or her Subject Shares or interfere with the
voting agreement set forth in the Support Agreements, including
by:
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granting any proxies or entering into any voting trust or other
agreement or arrangement with respect to the voting of or
consent with respect to any Subject Shares in a manner
inconsistent with the terms of the Support Agreements;
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voluntarily taking any action that would or is reasonably likely
to make any representation or warranty contained in the Support
Agreements untrue or incorrect in any material respect or have
the effect in any material respect of preventing such Rollover
Investors from performing their respective obligations under the
Support Agreements; or
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voluntarily selling, assigning, transferring, pledging,
encumbering, distributing, gifting or otherwise disposing of, or
entering into any contract or other arrangement with respect to
the direct or indirect sale, assignment, transfer, pledge,
encumbrance, distribution, gift or other disposition of, any
Subject Shares during the term of the Support Agreements, except
for transfers to any Rollover Investor or person who becomes
bound by the terms of the Support Agreements or upon death
pursuant to the terms of any trust or will or by the laws of
intestate succession provided that the Subject Shares remain
subject to the terms of the Support Agreements.
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In addition, the Rollover Investors have agreed that during the
voting period, they will not solicit or knowingly encourage any
alternative acquisition proposal or engage in any negotiations
with or furnish any nonpublic information relating to the
Company to any person with respect to any alternative
acquisition proposal and will provide Holdings with prompt
notice of receipt of any alternative acquisition proposal or
request for information from any such person.
The Rollover Investors have further agreed to waive any enhanced
severance, compensation, tax
gross-up
or
other change of control payments that would become
payable to such person as a result of the consummation of the
merger.
The Support Agreements will terminate on the earliest to occur
of (i) the effective time of the merger and (ii) the
termination of the Merger Agreement in accordance with its terms.
In connection with, and as part of, the Support Agreements,
Holdings and each of Messrs. Sheridan, Dosoretz, Rubenstein
and Katin have agreed to enter into concurrently with the
closing of the merger, new Executive Employment Agreements (as
applicable), Physician Employment Agreements (as applicable),
Management Stock Contribution and Unit Subscription Agreements,
Securityholders Agreement, an
47
Amended and Restated Limited Liability Company Agreement and
Incentive Unit Subscription Agreement each of which are
summarized below.
New
Employment Agreements of Management
Effective as of the closing, each of Messrs. Sheridan,
Dosoretz and Rubenstein has agreed to enter into a new executive
employment agreement with us and Parent and each of
Messrs. Dosoretz, Rubenstein and Katin has agreed to enter
into a new physician employment agreement, with our operating
subsidiary, 21st Century Oncology. These new agreements
would replace the current executive employment agreements and
physician agreements, respectively, described above. Principal
terms of the new agreements include the following:
Term:
Dosoretz will have a five-year term, subject to
automatic two-year renewals absent notice to the contrary and
each of Sheridan, Rubenstein and Katin will have three-year
terms with two year renewals.
Base Salary:
The base salary for Dosoretz in connection
with his services to us as an executive will be
$1.5 million and in connection with his services to us as a
physician will be $500,000. Rubensteins base salary in
connection with his services to us as an executive will be
$400,000 and in connection with his services to us as a
physician will be $300,000. Sheridan and Katin will receive base
salaries of $300,000 and $700,000 respectively.
Target Bonus:
Target bonus opportunity for
Messrs. Dosoretz and Rubenstein of not less than
$1.5 million and $400,000 respectively, based upon factors
including earnings before interest, taxes, depreciation and
amortization and net debt plans. Sheridan is expected to be
eligible to receive a performance incentive bonus at the
discretion of the board.
Benefits; Perquisites:
Benefits and perquisites at least
as favorable as in effect immediately prior to the closing,
including airplane usage (for Dosoretz and Rubenstein).
Severance:
In the event of a termination of employment
without cause or a termination by the executive for good reason:
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Dosoretz will be entitled to (i) accrued compensation
through the date of termination and (ii) 24 monthly
payments (or if termination occurs prior to the second
anniversary of the employment agreement, 36 monthly
payments) each of which should be equal to 1/12th of the
sum of (x) annual base salary plus (y) bonus for prior
three years divided by three (assuming a bonus of $1,500,000 for
2006 and 2007);
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Rubenstein will be entitled to (i) accrued compensation
through the date of termination and (ii) 24 monthly
payments each of which should be equal to 1/12th of the sum
of (x) annual base salary plus (y) bonus for the prior
year divided by two (assuming a bonus of $200,000 for 2006 and
2007);
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Sheridan will be entitled to (i) accrued compensation
through the date of termination and (ii) 12 monthly
payments each of which should be equal to 1/12th of the sum
of (x) annual base salary plus (y) bonus for prior
year; and
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Katin will be entitled to (i) accrued compensation through
the date of termination and (ii) 12 monthly payments
each of which should be equal to 1/12th of the annual base
salary.
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Restrictive Covenants:
Each of Messrs. Sheridan,
Dosoretz, Rubenstein and Katin will be subject to
confidentiality obligations, and non-competition and
non-solicitation covenants, for a period beginning upon the
consummation of the merger and ending on the later of the fifth
anniversary of the consummation of the merger and three years
following the executives termination of employment.
Dosoretzs and Rubensteins non-competition provisions
are subject to an exception for owning an interest or
participation on the board of directors in activities related to
imaging initiatives (Dosoretz only), pharmacies, banks or health
care related insurance companies, PPOs and HMOs as well as the
48
practice of medicine individually or as part of a group of five
or less radiation oncologists in a single geographic location.
Non-Compete Payment:
The new employment agreement with
Dosoretz will provide for a $6,000,000 non-compete payment in
consideration of Dosoretzs agreement not to compete with
RTS during his employment and for a period of three years after
the termination of his employment. The non-compete payment will
be paid in three equal installments on the closing date of the
merger and the first and second anniversaries of the closing
date.
Legal Fees:
RTS will pay all reasonable legal fees
incurred by Sheridan, Dosoretz, Rubenstein and Katin arising out
of the negotiation and drafting of the Support Agreements and
the related agreements.
Management
Stock Contribution and Unit Subscription Agreement
Each of Messrs. Sheridan, Dosoretz, Rubenstein and Katin
have agreed to enter into a Management Stock Contribution and
Unit Subscription Agreement with Holdings pursuant to which they
will be contributing 338,462, 1,384,616, 676,923 and 492,308 in
shares of RTS common stock, respectively, immediately prior to
the effective time of the merger in exchange for units
(Preferred and Class A) of limited liability company
interests of Holdings. Following the completion of the merger,
it is currently expected that Sheridan, Dosoretz, Rubenstein and
Katin will own (excluding the units they may receive under the
management equity incentive plan) approximately 1.8%, 7.2%, 3.5%
and 2.6% of the outstanding units of Holdings (excluding
incentive units), respectively. Holdings will have certain call
option rights to repurchase the Preferred Units and Class A
Units upon certain termination of employment events. Dosoretz
will also have certain put option rights to require Holdings to
repurchase his Preferred Units and Class A Units up to an
amount equal to his rollover investment value if his employment
is terminated without cause or he terminates his employment for
good reason and at such time the Company has met certain
performance targets.
Securityholders
Agreement
Each of Messrs. Sheridan, Dosoretz, Rubenstein and Katin
has agreed to enter into a Securityholders Agreement with
Holdings which will govern their rights as holders of limited
liability company interests in Holdings following completion of
the merger. Among other rights and obligations, the
Securityholders Agreement provides them with certain board
representation rights, supermajority voting provisions with
respect to certain corporate actions, right of first refusal,
registration rights and participation rights as well as
take-along obligations. It also sets forth restrictions on
transfer of the units they own in Holdings. Pursuant to the
Securityholder Agreement, immediately following the closing of
the merger, Messrs. Dosoretz, Rubenstein and Sheridan will serve
on the board of managers of Holdings, which will initially
consist of nine members (four managers to be designated by
Vestar Capital Fund and two independent managers). The number of
managers to be designated by the Rollover Investors may be
reduced if their ownership interest in Holdings decreases or if
RTS fails to achieve certain performance targets. The
Securityholders Agreement also provides for a management
agreement to be entered into among RTS, Holdings, Parent and
Vestar Capital Partners which is described below.
Management
Agreement
In connection with the merger RTS, Holdings and Parent have
agreed to enter into a management agreement with Vestar Capital
Partners relating to certain advisory and consulting services
Vestar Capital Partners will render to RTS, Holdings and Parent.
Under the management agreement, Vestar Capital Partners will
receive a $10 million transaction fee upon the closing of
the merger for services rendered in connection with the
consummation of merger and be reimbursed for its reasonable out
of pocket expenses. The management agreement also provides for
Vestar Capital Partners to receive an annual management fee
equal to the greater of (i) $850,000 or (ii) an amount
equal to 1.0% of the RTSs consolidated EBITDA which fee
will be payable quarterly. Holdings, Parent and RTS will
indemnify Vestar Capital Partners and its affiliates against all
losses, claims, damages and liabilities arising out of the
performance by Vestar Capital Partners of
49
its services pursuant to the management agreement, other than
those that have resulted primarily from the gross negligence or
willful misconduct of Vestar Capital Partners
and/or
its
affiliates.
Incentive
Unit Subscription Agreement and Management Incentive Equity
Plan
In connection with the closing of the merger Holdings will adopt
a management incentive equity plan pursuant to which certain
employees will be eligible to receive incentive unit awards from
an equity pool representing up to 13% (as of immediately
following the closing of the merger) of the Common Equity Value
of Holdings. Each of Messrs. Sheridan, Dosoretz, Rubenstein
and Katin is expected to enter into an Incentive Unit
Subscription Agreement relating to equity incentive awards of
Class B Units and Class C Units of Holdings under the
plan. The Class B Units will comprise 38.5% of the units
reserved for issuance under the plan and will be time vesting
over a four year period. The Class C Units will comprise
61.5% of the units reserved for issuance under the plan and will
be vesting over a three year period upon the achievement of
certain interval rate of return or multiple of investment
hurdle. The Class B Units and Class C Units are
subject to forfeiture upon certain termination of employment
events. If the Class B Units and Class C Units fully
vest, the aggregate amount of Class B units and
Class C units owned by each of Sheridan, Dosoretz,
Rubenstein and Katin will represent 0.13%, 6.5%, 0.52% and
0.13%, respectively (as of immediately following the closing of
the merger), of Common Equity Value of Holdings.
Amended
and Restated Limited Liability Company Agreement
The current limited liability company agreement of Holdings will
be amended and restated upon the closing of the merger. Each of
Sheridan, Dosoretz, Rubenstein and Katin has agreed to become
party to the Amended and Restated Limited Liability Company
Agreement, which would govern the affairs of Holdings and the
conduct of its business following completion of the merger. It
also sets forth certain terms of the limited liability interests
of members of Holdings including, without limitation, the right
of members to receive distributions. A board of managers will
have the exclusive authority to manage and control the business
and affairs of Holdings. The composition of the board of
managers will be determined in accordance with the provisions of
the Securityholders Agreement described above.
Indemnification
of Directors and Officers; Directors and Officers
Insurance
The RTS directors and officers are entitled under the Merger
Agreement to continued indemnification and insurance coverage
for a period of six years following the closing of the merger.
50
Consideration
to be Received by Directors and Executive Officers
The following table reflects the approximate amounts received or
estimated to be received by each of our directors and executive
officers in connection with the merger:
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Cash Merger
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Consideration
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RTS Common
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to be Received
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Stock
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from the
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to be
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Cash to be
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Conversion of
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Exchanged
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Received
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Non
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RTS
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for
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from RTS
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Compete
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Total
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Common Stock(1)
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Holding Units
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Options
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Bonus(2)
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Payment(3)
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Consideration
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Howard Sheridan
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$
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62,487,650
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$
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11,000,000
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$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
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$
|
73,487,650
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Daniel E. Dosoretz
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$
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68,553,350
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$
|
45,000,000
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$
|
7,860,000
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$
|
0
|
|
|
$
|
6,000,000
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|
$
|
127,413,350
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James H. Rubenstein
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$
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56,804,210
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$
|
22,000,000
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|
$
|
3,900,000
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|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
82,704,210
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Michael J. Katin
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$
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17,416,780
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$
|
15,902,000
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$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
33,318,780
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Ronald E. Inge
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$
|
162,500
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
162,500
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Solomon Agin
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$
|
3,900
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,900
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Herbert F. Dorsett
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$
|
6,500
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|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,500
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Leo R. Doerr
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$
|
81,250
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|
$
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|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
81,250
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Janet Watermeier
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|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
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David N.T. Watson
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$
|
478,100
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$
|
0
|
|
|
$
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0
|
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|
$
|
110,000
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|
|
$
|
0
|
|
|
$
|
588,100
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Joseph Biscardi
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$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
|
205,994,240
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$
|
93,902,000
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|
$
|
11,760,000
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|
|
$
|
110,000
|
|
|
$
|
6,000,000
|
|
|
$
|
317,766,240
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|
|
|
|
|
|
|
|
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(1)
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Includes the restricted stock award to Mr. Watson in the
amount of 14,711 shares of our common stock in connection
with his commencement of employment with us in April, 2007.
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(2)
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Amount was paid at the time the Merger Agreement was executed in
consideration of services related to the transaction.
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(3)
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The new employment agreement for Dr. Dosoretz that is
expected to take effect at the closing of the merger provides
for $6,000,000 to be paid to Dr. Dosoretz in three equal
annual installments in consideration of his non-competition
covenant.
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Each of Dosoretz, Rubenstein, Sheridan and Parent has agreed
that the existing employment agreements will be amended and
restated based upon the terms described above, in which event
the severance amounts discussed under
Interests of our Directors and Executive Officers in the
Merger Current Employment Agreements of
Management would not become payable. Sheridan, Dosoretz,
Rubenstein and Katin and our other management also will receive
time vesting and performance vesting additional units of
Holdings as described under Interests of Our
Directors and Executive Officers in the Merger
Management Equity Incentive Plan.
Related
Party Transactions
In addition to the arrangements in connection with the merger
discussed elsewhere, we had the following transactions with
related parties:
Transactions
Related to Common Stock
We did not purchase any shares of our common stock during the
past two years. The following table provides information with
respect to all purchases of our common stock by Sheridan,
Dosoretz, Rubenstein, Katin and Watson during the past two years:
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Quarter
|
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No. of Shares
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Price of
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Name
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Ending
|
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Purchased(1)
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Shares
|
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Daniel Dosoretz
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September 30, 2007
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76,923
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$
|
13.00
|
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Howard Sheridan
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September 30, 2007
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50,000
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$
|
13.00
|
|
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(1)
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pursuant to exercise of stock options
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51
The following table provides information with respect to all
grants of restricted stock or stock options to Sheridan,
Dosoretz, Rubenstein, Katin and Watson during the past two years:
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Date of
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|
Number of
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Type of
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Exercise Price
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Name
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Grant
|
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Shares Granted
|
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Grant
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of Stock Option
|
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David N. T. Watson
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|
|
04/09/2007
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|
|
14,711
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restricted stock
|
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N/A
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Administrative
Services Agreements
In California, Maryland, Massachusetts, Michigan, Nevada, New
York and North Carolina, we have administrative services
agreements with professional corporations owned by certain of
our directors, officers and principal shareholders, who are
licensed to practice medicine in such states. We have entered
into these administrative services agreements in order to comply
with the laws of such states which prohibit us from employing
physicians. Our administrative services agreements generally
obligate us to provide treatment center facilities, staff and
equipment, accounting services, billing and collection services,
management and administrative personnel, assistance in managed
care contracting and assistance in marketing services. Terms of
the agreements are typically
20-25 years.
Monthly fees for such services may be computed on a fixed basis,
percentage of net collections basis, or on a per treatment
basis, depending on the particular state requirements. Our
Chairman, Howard M. Sheridan, M.D., our Chief Executive
Officer and President, Daniel E. Dosoretz, M.D., our
Medical Director, James H. Rubenstein, M.D., and a
director, Michael J. Katin, M.D., own interests in these
professional corporations ranging from 0% to 100%. The
administrative services fees paid to us by such professional
corporations under the administrative services agreements were
approximately $24,753,000, $35,023,000 and $38,030,000 for the
years ended December 31, 2005 and 2006 and for the nine
months ended September 30, 2007, respectively. We engaged
an independent consultant to complete a fair market value review
of the fees paid by related party professional service
corporations to the Company under the terms of these agreements,
except for the administrative services agreement related to our
Michigan centers, which were newly acquired in 2006. The
consulting firm completed a review of 2006 fees under the
California, Maryland, Nevada, Massachusetts, New York and North
Carolina agreements and determined that the fees are at fair
market value. With respect to the acquisition of all of the
equity interests in the Michigan centers, of which the
management companies were acquired by a wholly-owned affiliate
of the Company and the professional service corporations were
acquired by a director, the audit committee approved the
continuation of the use of existing administrative service
agreements between the management companies and the professional
corporations. With respect to any new centers to date in 2007
which required an administrative services agreement, the audit
committee approved the utilization by management of the same
underlying fee methodology used in the California, Maryland,
Nevada, Massachusetts, New York and North Carolina
administrative services agreements based on the fair market
value review completed by the independent consultant.
Lease
Arrangements with Entities Owned by Related
Parties
We lease certain of our treatment centers and other properties
from related parties. We have entered into various lease
arrangements with entities owned by Drs. Sheridan,
Dosoretz, Rubenstein and Katin, and certain of our shareholders
and employees. Their ownership interests in these entities range
from 0% to 100%. These related party leases have expiration
dates through October 10, 2022, and provide for annual
lease payments ranging from approximately $30,000 to $595,000.
The aggregate lease payments we made to the entities owned by
these related parties were approximately $3,173,000, $3,843,000
and $3,464,000 for the years ended December 31, 2005 and
2006 and for nine months ended September 30, 2007,
respectively. The rents were determined on the basis of the debt
service incurred by the entities and a return on the equity
component of the projects funding. An independent
consultant is utilized to assist the Companys audit
committee in determining fair market rental for any renewal or
new rental arrangements with any affiliated party.
In October 1999, we entered into a sublease arrangement with a
partnership which is owned by certain of our shareholders to
lease space to the partnership for an MRI center in Mount Kisco,
New York. Sublease rentals paid by the partnership to the
landlord on our behalf were approximately $571,000, $658,000 and
52
$531,000 for the years ended December 31, 2005 and 2006 and
for nine months ended September 30, 2007, respectively.
Indebtedness
with Related Parties
At December 31, 2004, the Company had approximately
$310,000 payable to three land partnerships owned by certain of
the Companys directors, officers, principal shareholders,
shareholders and employees for construction in process and
building improvement costs related to the construction of a
medical facility. Dr. Dosoretz owned
15-30%
of
each of the three land partnerships while Drs. Sheridan,
Rubenstein and Katin each owned 8.8% of one land partnership,
10-15%
of a
second land partnership and 5.7% of the third land partnership,
respectively. These costs were reimbursed to the land
partnerships in 2005.
Indemnification
Agreements with Certain Officers and Directors
We have entered into indemnification agreements with each of our
executive officers and directors. The indemnification agreements
provide, among other things, that the Company will, to the
extent permitted by applicable law, indemnify and hold harmless
each indemnitee if, by reason of his or her status as a
director, officer, trustee, general partner, managing member,
fiduciary, employee or agent of the Company or of any other
enterprise which such person is or was serving at the request of
the Company, such indemnitee was, is or is threatened to be
made, a party to or a participant (as a witness or otherwise) in
any threatened, pending or completed proceeding, whether brought
in the right of the Company or otherwise and whether of a civil,
criminal, administrative or investigative nature, against all
expenses, judgments, fines, penalties and amounts paid in
settlement actually and reasonably incurred by him or her or on
his or her behalf in connection with such proceeding. In
addition, the indemnification agreements provide for the
advancement of expenses incurred by the indemnitee in connection
with any such proceeding to the fullest extent permitted by
applicable law. The indemnification agreements do not exclude
any other rights to indemnification or advancement of expenses
to which the indemnitee may be entitled, including any rights
arising under the Articles of Incorporation or Bylaws of the
Company, or the Florida Business Corporation Act.
Other
Related Party Transactions
We provide billing and collection services to Riverhill MRI
Specialists, P.C. (Riverhill MRI), a provider
of medical services in New York which is owned by certain of our
directors, officers, principal shareholders, shareholders and
employees. In addition, the Company charges Riverhill MRI for
certain allocated costs of certain staff that perform services
on behalf of Riverhill MRI. Drs. Sheridan, Dosoretz, Katin
and Rubenstein each own a 10.4% interest in Riverhill MRI
Specialists, P.C. The fees received by the Company for the
billing and collection services and for reimbursement of certain
allocated costs were approximately $332,000, $368,000 and
$284,000 for the years ended December 31, 2005 and 2006 and
for nine months ended September 30, 2007, respectively. The
balance due from Riverhill MRI was approximately $71,000 at
September 30, 2007.
The Company is a participating provider in an oncology network,
of which Dr. Dosoretz has an ownership interest. The
Company provides oncology services to members of the network.
Payments received by the Company for services rendered in 2005,
2006 and the nine months ended September 30, 2007
approximated $384,000, $619,000, and $429,000, respectively.
In October 2003, we contracted with Batan Insurance Company SPC,
LTD, a newly-formed entity, which is owned by Drs. Katin,
Dosoretz, Rubenstein and Sheridan to provide us with malpractice
insurance coverage. We paid premium payments to Batan Insurance
Company SPC, LTD of approximately $4,096,000, $7,981,000 and
$1,009,000 for the years ended December 31, 2005 and 2006
and for the nine months ended September 30, 2007,
respectively.
During the years ended December 31, 2005, 2006 and the nine
months ended September 30, 2007, we employed certain family
members of certain of our directors, officers and shareholders.
The total compensation paid to such family members in 2005, 2006
and the nine months ended September 30, 2007 was $515,745,
$327,870 and $247,713, respectively.
53
Dr. Katin is employed by us pursuant to a physician
agreement. Compensation paid by us to Dr. Katin was
$1,136,478, $1,007,692 and $511,539 for the years ended
December 31, 2005 and 2006 and for the nine months ended
September 30, 2007, respectively.
The Company maintains a construction company which provides
remodeling and real property improvements at its facilities. In
addition, the construction company builds and constructs
facilities on behalf of certain land partnerships which are
owned by certain of the Companys shareholders (including,
Dr. Sheridan, Dr. Dosoretz, Dr. Rubenstein and
Dr. Katin). Payments received by the Company for building
and construction fees were approximately $0, $1,310,000 and
$2,823,000 for the years ended December 31, 2005 and 2006
and for the nine months ended September 30, 2007,
respectively. Amounts due to the Company for the construction
services were approximately $1,381,000 at September 30,
2007. In connection with the Companys plans with respect
to future development of new treatment centers on land owned by
or contemplated to be acquired by land partnerships owned by
certain of the Companys shareholders, the terms and
conditions of the transactions, including leases of such
property and in some instances (buildout and equipment
reimbursements) by the Company are expected to be on terms and
conditions as those of similar historical transactions.
Whether or not the merger is completed, in general, all fees and
expenses incurred in connection with the merger will be paid by
the party incurring those fees and expenses. The fees and
expenses incurred or to be incurred by RTS in connection with
the merger are estimated at this time to be as follows:
|
|
|
|
|
Description
|
|
Amount
|
|
|
Legal and accounting fees and expenses
|
|
$
|
5,000,000
|
|
Vestar Transaction fee
|
|
$
|
10,000,000
|
|
Financial advisory fees(1)
|
|
$
|
7,000,000
|
|
Financing fees and expenses(2)
|
|
$
|
14,500,000
|
|
Special Committee meeting fees(3)
|
|
$
|
550,000
|
|
Printing, proxy solicitation and mailing costs
|
|
$
|
100,000
|
|
Filing fees
|
|
$
|
24,543
|
|
Miscellaneous
|
|
$
|
1,500,000
|
|
|
|
|
|
|
Total
|
|
$
|
39,124,543
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents financial advisory fees of Morgan Joseph and Wachovia
Securities. The financial advisory fees payable to Wachovia
Securities are discussed below and the financial advisory fees
payable to Morgan Joseph are discussed under Special
Factors Opinion of Morgan Joseph & Co.
Inc.
|
|
(2)
|
|
Represents financing fees and expenses payable by Vestar Capital
Partners in connection with the debt financing.
|
|
(3)
|
|
Represents regular meeting fees, the special committee members
were not paid any additional amounts for their service on the
special committee except that special committee members received
the regular meeting fee for all meetings regardless of whether
such meetings were held telephonically.
|
In addition, if the Merger Agreement is terminated, RTS will, in
specified circumstances, be required to reimburse Parent and
Merger Sub for up to $3.0 million of documented
out-of-pocket
fees and expenses. See The Merger Agreement
Termination Fees and Expenses on page 83.
RTS retained Wachovia Securities to act as its financial advisor
in connection with the merger. RTS selected Wachovia Securities
as its financial advisor based on Wachovia Securities
reputation, experience and familiarity with RTS and its
business. Wachovia Securities and certain of its affiliates will
be participating in the financing relating to the merger. The
estimated fees and expenses payable in connection with the
financing are described above. Given Wachovia Securities
participation in such financing, Wachovia Securities was not
requested to, and it did not, deliver an opinion in connection
with the merger. Pursuant to the terms of
54
Wachovia Securities engagement, RTS has agreed to pay
Wachovia Securities for its financial advisory services an
aggregate fee of approximately $5.6 million. RTS also has
agreed to reimburse Wachovia Securities for reasonable expenses,
including reasonable fees and expenses of its legal counsel, and
to indemnify Wachovia Securities and related parties against
certain liabilities, including liabilities under the federal
securities laws, arising out of Wachovia Securities
engagement. In connection with unrelated matters, Wachovia
Securities or its affiliates in the past have provided
investment banking and other financial services to RTS and
certain of its affiliates, for which Wachovia Securities and its
affiliates have received fees, including acting as
(i) financial advisor to RTS and certain of its affiliates
in connection with certain acquisition transactions and
(ii) administrative agent, lead arranger and sole
bookrunner for, and a lender under, certain credit facilities of
RTS and certain of its affiliates. Also in connection with
unrelated matters, Wachovia Securities or its affiliates in the
past have provided and currently are providing investment
banking and other financial services to Vestar Capital Partners
and certain of its affiliates, including in connection with
certain securities offerings and credit facilities of Vestar
Capital Partners
and/or
certain of its affiliates, for which Wachovia Securities and its
affiliates have received and expect to receive fees, but these
services and fees are not expected to be material for either
Wachovia or Vestar Capital Partners and its affiliates. Wachovia
Securities and its affiliates also may provide similar or other
such services to, and maintain relationships with, RTS, Vestar
Capital Partners and their respective affiliates in the future.
In addition, Wachovia Securities and certain affiliates and
employees of Wachovia Securities and its affiliates have
investments in Vestar Capital Partners and certain of its
affiliates.
We have concluded that our shareholders are entitled to assert
appraisal rights in the event of the consummation of the merger,
and, in the event such rights are perfected, to obtain payment
in cash of the fair value of their shares of our common stock as
determined pursuant to Florida law. The fair value of shares of
our common stock, as determined in accordance with Florida law,
could be more or less than the merger consideration that our
shareholders are entitled to receive pursuant to the Merger
Agreement. To preserve their appraisal rights, shareholders must
not vote, or cause or permit to be voted, any of their shares of
our common stock in favor of the approval of the Merger
Agreement and must follow specific procedures. Shareholders who
wish to exercise appraisal rights must precisely follow these
specific procedures or their appraisal rights may be lost. These
procedures are described in this proxy statement, and the
provisions of Florida law that provide for appraisal rights and
govern such procedures are attached as Annex C to this
proxy statement. See Appraisal Rights beginning on
page 86.
Material
United States Federal Income Tax Consequences of the
Merger
The following is a discussion of the material United States
federal income tax consequences of the merger to
U.S. holders (as defined below) whose shares of our common
stock are converted into the right to receive cash in the
merger. The discussion is based upon the Internal Revenue Code,
Treasury regulations, Internal Revenue Service published rulings
and judicial and administrative decisions in effect as of the
date of this proxy statement, all of which are subject to change
(possibly with retroactive effect) and to differing
interpretations. The following discussion does not purport to
consider all aspects of U.S. federal income taxation that
might be relevant to our shareholders. This discussion applies
only to shareholders who, on the date on which the merger is
completed, hold shares of our common stock as a capital asset
within the meaning of section 1221 of the Internal Revenue
Code. The following discussion does not address taxpayers
subject to special treatment under U.S. federal income tax
laws, such as insurance companies, financial institutions,
dealers in securities or currencies, traders of securities that
elect the mark-to-market method of accounting for their
securities, persons that have a functional currency other than
the U.S. dollar, tax-exempt organizations, mutual funds,
real estate investment trusts, S corporations or other
pass-through entities (or investors in an S corporation or
other pass-through entity) and taxpayers subject to the
alternative minimum tax. In addition, the following discussion
may not apply to shareholders who acquired their shares of our
common stock upon the exercise of employee stock options or
otherwise as compensation for services or through a
tax-qualified retirement plan or who hold their shares as part
of a hedge, straddle, conversion transaction or other integrated
transaction. The following discussion does not address the
U.S. federal income
55
tax consequences of the merger to the Rollover Investors. If our
common stock is held through a partnership, the
U.S. federal income tax treatment of a partner in the
partnership will generally depend upon the status of the partner
and the activities of the partnership. It is recommended that
partnerships that are holders of our common stock and partners
in such partnerships consult their own tax advisors regarding
the tax consequences to them of the merger.
The following discussion also does not address potential
alternative minimum tax, foreign, state, local and other tax
consequences of the merger. All shareholders should consult
their own tax advisors regarding the U.S. federal income
tax consequences, as well as the foreign, state and local tax
consequences of the disposition of their shares in the merger.
For purposes of this summary, a U.S. holder is
a beneficial owner of shares of our common stock, who or that
is, for U.S. federal income tax purposes:
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|
|
|
|
an individual who is a citizen or resident of the United States;
|
|
|
|
a corporation (or other entity taxable as a corporation) created
or organized in or under the laws of the United States, any
state of the United States or the District of Columbia;
|
|
|
|
an estate the income of which is subject to U.S. federal
income tax regardless of its source;
|
|
|
|
a trust if (1) a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more U.S. persons are authorized to control all
substantial decisions of the trust; or (2) it was in
existence on August 20, 1996 and has a valid election in
place to be treated as a domestic trust for U.S. federal
income tax purposes; or
|
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|
|
otherwise is subject to U.S. federal income taxation on a
net income basis.
|
Except with respect to the backup withholding discussion below,
this discussion is confined to the tax consequences to a
shareholder who or that, for U.S. federal income tax
purposes, is a U.S. holder.
For U.S. federal income tax purposes, the disposition of
RTS common stock pursuant to the merger generally will be
treated as a sale of our common stock for cash by each of our
shareholders. Accordingly, in general, the U.S. federal
income tax consequences to a shareholder receiving cash in the
merger will be as follows:
|
|
|
|
|
The shareholder will recognize a capital gain or loss for
U.S. federal income tax purposes upon the disposition of
the shareholders shares of our common stock pursuant to
the merger.
|
|
|
|
The amount of capital gain or loss recognized by each
shareholder will be measured by the difference, if any, between
the amount of cash received by the shareholder in the merger
(other than, in the case of a dissenting shareholder, amounts,
if any, which are deemed to be interest for U.S. federal
income tax purposes, which amounts will be taxed as ordinary
income) and the shareholders adjusted tax basis in the
shares of our common stock surrendered in the merger. Gain or
loss will be determined separately for each block of shares
(i.e., shares acquired at the same cost in a single transaction)
surrendered for cash in the merger.
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|
|
|
The capital gain or loss, if any, will be long-term with respect
to shares of our common stock that have a holding period for tax
purposes in excess of one year at the effective time of the
merger. Long-term capital gains of individuals are eligible for
reduced rates of taxation. There are limitations on the
deductibility of capital losses. A dissenting shareholder may be
required to recognize any gain or loss in the year the merger
closes, irrespective of whether the dissenting shareholder
actually receives payment in that year.
|
Cash payments made pursuant to the merger will be reported to
our shareholders and the Internal Revenue Service to the extent
required by the Internal Revenue Code and applicable Treasury
regulations. Non-corporate shareholders may be subject to
back-up
withholding at a rate of 28% on any cash payments they receive.
Shareholders who are U.S. holders generally will not be
subject to backup withholding if they: (1) furnish a
correct taxpayer identification number and certify that they are
not subject to backup withholding
56
on the substitute
Form W-9
included in the election form/letter of transmittal they are to
receive or (2) are otherwise exempt from backup
withholding. Shareholders who are not U.S. holders should
complete and sign a
Form W-8BEN
(or other applicable tax form) and return it to the paying agent
in order to provide the information and certification necessary
to avoid backup withholding tax or otherwise establish an
exemption from backup withholding tax. Certain of our
shareholders will be asked to provide additional tax information
in the letter of transmittal for the shares of our common stock.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules generally will be
allowed as a refund or a credit against your U.S. federal
income tax liability provided the required information is timely
furnished to the Internal Revenue Service.
As contemplated under the Merger Agreement, each of
Dr. Sheridan, Dr. Dosoretz, Dr. Rubenstein and
Dr. Katin will acquire, and Holdings will issue and
transfer to such person, a number of units of limited liability
company interests in Holdings, in exchange for the contribution
of such persons shares of RTS common stock to Holdings.
This exchange is intended to qualify as a tax-free exchange with
respect to each such shareholder under Section 721 of the
Internal Revenue Code.
With respect to their shares of RTS common stock not contributed
to Holdings, each of Dr. Sheridan, Dr. Dosoretz,
Dr. Rubenstein and Dr. Katin will receive cash equal
to the per share merger consideration to be received by
RTSs other shareholders in the merger. For
U.S. federal income tax purposes, the disposition of these
shares of RTS common stock pursuant to the merger generally is
expected to be treated as a sale of RTS common stock for cash by
each Rollover Investor. Accordingly, the U.S. federal
income tax consequences are expected to be the same as those
described above.
The foregoing is a general discussion of certain material
U.S. federal income tax consequences. We recommend that you
consult your own tax advisor to determine the particular tax
consequences to you (including the application and effect of any
foreign, state or local income and other tax laws) of the
receipt of cash in exchange for shares of our common stock
pursuant to the merger.
We are aware of two lawsuits filed in connection with the
proposed merger. Shareholder complaints were filed on
October 24, 2007 and November 16, 2007, respectively,
against RTS, each of RTSs directors and Vestar Capital
Partners as purported class actions on behalf of the public
shareholders of RTS in the Circuit Court of Lee County, Florida.
The first case (Case
No. 07-CA-013398)
under the caption
Jeffrey Schwartz, individually and on
behalf of all others similarly situated, Plaintiff against
Howard M. Sheridan, Daniel E. Dosoretz, Solomon Agin, Michael J.
Katin, Ronald E. Inge, James H,. Rubenstein, Herbert F. Dorsett,
Leo R. Doerr, Janet Watermeier, Radiation Therapy Services, Inc.
and Vestar Capital Partners, Defendant
and the second case
(Case No. 07-CA-051293)
was filed under the caption
Wayne County Employees
Retirement System, on behalf of itself and all others similarly
situated vs. Radiation Therapy Services, Inc., Howard M.
Sheridan, M.D., Daniel E. Dosoretz, M.D., James H. Rubenstein,
M.D., Michael J. Katin, M.D., Herbert F. Dorsett, Ronald E.
Inge, Leo K. Doerr, Rabbi Solomon Agin, D.D., Janet Watermeier
and Vestar Capital Partners.
On January 3, 2008, the
plaintiff in the Schwartz case voluntarily dismissed his claims.
The Wayne County complaint has been amended and the amended
complaint alleges, among other things, that the directors of RTS
breached their fiduciary duties in connection with the proposed
transaction by failing to maximize shareholder value, by
approving a transaction that purportedly benefits the defendants
at the expense of RTSs public shareholders, and by
allegedly violating duties of disclosure in connection with this
proxy statement. Among other things, the complaint seeks to
enjoin RTS, its directors, RTS MergerCo, Inc., and Vestar
Capital from proceeding with or consummating the merger. Vestar
Capital and RTS are alleged to have aided and abetted the
individual defendants in breaching their fiduciary duties. The
plaintiff filed motions for preliminary injunction, to
consolidate, and to expedite discovery. The parties have agreed
on a discovery schedule. The court has not yet ruled on any
other motions, and no preliminary injunction hearing date has
been set. Based on the facts known to date, and the allegations
in the complaint, we believe that the claims asserted in the
complaint are without merit and we intend to vigorously defend
against the complaint. There can be no assurance that additional
lawsuits pertaining to the proposed merger will not be filed or
that defendants will successfully oppose an injunction.
57
The absence of an injunction prohibiting the consummation of the
merger is a condition to the closing of the merger.
Accounting
Treatment of The Merger
We expect the merger to be accounted for as a business
combination for financial accounting purposes, whereby the
purchase price would be allocated to the Companys assets
and liabilities based on their relative fair values as of the
date of the merger in accordance with Financial Accounting
Standards No. 141,
Business Combinations.
Under the Merger Agreement, we and the other parties to the
Merger Agreement have agreed to use our commercially reasonable
efforts to complete the transactions contemplated by the Merger
Agreement as promptly as practicable, including obtaining all
necessary governmental approvals and all necessary consents,
approvals or waivers from third parties. The
Hart-Scott-Rodino
Act provides that transactions such as the merger may not be
completed until certain information has been submitted to the
Federal Trade Commission and the Antitrust Division of the
U.S. Department of Justice and certain waiting period
requirements have been satisfied. RTS and Parent filed
notification reports with the Department of Justice and the
Federal Trade Commission under the
Hart-Scott-Rodino
Act on November 9, 2007. The Federal Trade Commission
granted early termination of the applicable waiting period on
November 20, 2007.
At any time before or after consummation of the merger, the
Federal Trade Commission and Department of Justice may, however,
challenge the merger on antitrust grounds. Private parties could
take antitrust action under the antitrust laws, including
seeking an injunction prohibiting or delaying the merger,
divestiture or damages under certain circumstances.
Additionally, at any time before or after consummation of the
merger, notwithstanding the termination of the applicable
waiting period, any state could take action under its antitrust
laws as it deems necessary or desirable in the public interest.
It is a condition to closing under the Merger Agreement that
certain health care related governmental approvals, consents or
licenses specified by the parties shall have been obtained
except where the failure to obtain such consents or approvals
would not reasonably be expected to have an adverse affect equal
to or greater than 2.5% of the revenues, EBITDA or assets of the
Company and it subsidiaries or give rise to a violation of
criminal law. It is also a condition to closing under the Merger
Agreement that certain third party consents related to
indebtedness and leases specified by the parties shall have been
obtained.
58
IDENTITY
AND BACKGROUND OF FILING PERSONS
Radiation
Therapy Services, Inc.
Radiation Therapy Services, Inc., a Florida corporation, owns,
operates and manages treatment centers focused principally on
providing radiation treatment alternatives ranging from
conventional external beam radiation to newer,
technologically-advanced options. RTS is one of the largest
companies in the United States focused principally on providing
radiation therapy. RTS opened its first radiation treatment
center in 1983 and as of September 30, 2007 provides
radiation therapy services in 83 treatment centers. RTSs
treatment centers are clustered into 27 local markets in
16 states, including Alabama, Arizona, California,
Delaware, Florida, Kentucky, Maryland, Massachusetts, Michigan,
Nevada, New Jersey, New York, North Carolina, Pennsylvania,
Rhode Island, and West Virginia. Of these 83 treatment centers,
25 treatment centers were internally developed, 48 were acquired
and 10 involve hospital-based treatment centers. RTS has
continued to expand its affiliation with physician specialties
in other areas including gynecological and surgical oncology and
urology in a limited number of local markets to strengthen its
clinical working relationships.
RTSs principal executive offices are located at 2234
Colonial Boulevard, Ft. Myers, Florida 33907, and its
telephone number is
(239) 931-7275.
Daniel E. Dosoretz, M.D., F.A.C.R., F.A.C.R.O.,
is
one of our founders and has served as a director since 1988 and
as our President and Chief Executive Officer since April 1997.
Dr. Dosoretz is also employed as a physician by our
wholly-owned subsidiary, 21st Century Oncology, Inc. Prior
to joining us, Dr. Dosoretz served as attending physician
at the Massachusetts General Hospital. He also was an Instructor
and Assistant Professor of Radiation Medicine at Harvard Medical
School and Research Fellow of the American Cancer Society. Upon
moving to Fort Myers, Florida, he was appointed to the
Clinical Faculty as Associate Professor at the University of
Miami School of Medicine. He also has been a visiting Professor
at Duke University Medical School. Dr. Dosoretz graduated
from the University of Buenos Aires School of Medicine and
served his residency in Radiation Oncology at the Department of
Radiation Medicine at the Massachusetts General Hospital,
Harvard Medical School, where he was selected Chief Resident of
the department. Dr. Dosoretz is board certified in
Therapeutic Radiology by the American Board of Radiology. He is
a Fellow of the American College of Radiation Oncology and of
the American College of Radiology and is a member of the
International Stereotactic Radiosurgery Society, the American
Society for Therapeutic Radiology and Oncology and the American
Society of Clinical Oncology.
James H. Rubenstein, M.D.,
joined us in 1989 as a
physician and has served as a director since 1993, as our
Secretary since May 1998 and as our Medical Director since
January 2004. Dr. Rubenstein is also employed as a
physician by our wholly-owned subsidiary, 21st Century
Oncology, Inc. Prior to joining us, Dr. Rubenstein was an
Assistant Professor of Radiation Oncology at the University of
Pennsylvania and later became
Co-Director
of the Radiation Oncology Residency Program. He also served as
Chairman of the Department of Medicine for Columbia Regional
Medical Center in Southwest Florida and became a Clinical
Assistant Professor at the University of Miami School of
Medicines Department of Radiology. He graduated from New
York University School of Medicine and completed his internship
and residency in internal medicine at Beth Israel Hospital in
Boston, at the same time working as an Assistant Instructor in
internal medicine for Harvard Universitys School of
Medicine. He is board certified in Internal Medicine by the
American Board of Internal Medicine and in Radiation Oncology by
the American Board of Radiology.
David N. T. Watson
has served as Chief Financial Officer
of RTS since July 1, 2007. Mr. Watson joined us in
April 2007 as Executive Vice President-Finance. Prior to joining
us, Mr. Watson worked for The GEO Group, Inc., a New York
Stock Exchange-listed world leader in the delivery of
correctional, detention and residential treatment services to
federal, state, and local government agencies around the globe.
From 1994 to 2007, he held various management and executive
positions covering all areas of finance, including
Treasurer & Vice President-Finance, Chief Accounting
Officer, Corporate Controller, Assistant Secretary, and
Assistant Treasurer. Prior to joining The GEO Group,
Mr. Watson held several positions at Arthur Andersen LLP,
most
59
recently as Manager, Audit and Business Advisory Services. Prior
to joining Arthur Andersen, he was with Arthur Young &
Co. Mr. Watson holds an MBA in accounting from Rutgers, The
State University of New Jersey and a BA in economics from
University of Virginia.
Joseph Biscardi
joined us in 1997 as our Corporate
Controller and Chief Accounting Officer. Prior to joining us,
Mr. Biscardi worked for PricewaterhouseCoopers, LLP from
1993 to 1997. He is a Certified Public Accountant in New York.
Howard M. Sheridan, M.D.,
is one of our founders and
has served as a director since 1988 and as Chairman of the Board
since April 2004. Dr. Sheridan planned and developed our
first radiation treatment center. Prior to joining us,
Dr. Sheridan served as President of the medical staff at
Southwest Florida Regional Medical Center as well as chairman of
the Department of Radiology. Dr. Sheridan currently serves
as Chairman of Edison Bancshares, Inc. He previously served on
the Advisory Board of Southeast Bank, N.A., and also served as a
founding Director and member of the Executive Compensation and
Loan Committee of Heritage National Bank from 1989 until
September 1996, when Heritage was acquired by SouthTrust
Corporation. Dr. Sheridan has practiced interventional
radiology and diagnostic radiology in Fort Myers, Florida
from 1975 until accepting the chairmanship in April 2004.
Dr. Sheridan is a member of the American Medical
Association, the Florida Medical Association, and the American
College of Radiology. He graduated from Tulane Medical School
and completed his residency at the University of Colorado
Medical Center. Dr. Sheridan is board certified by the
American Board of Radiology and the American Board of Nuclear
Medicine.
Michael J. Katin, M.D., F.A.C.P., F.A.C.R., F.A.C.R.O.,
is one of our founders and has served as a director since
1988. Dr. Katin is also employed as a physician by our
wholly-owned subsidiary, 21st Century Oncology, Inc. Prior
to joining us, Dr. Katin served as a clinical instructor in
medicine at the State University of New York, Buffalo, School of
Medicine and as a clinical fellow in Radiation Therapy at
Harvard Medical School. He graduated from the University of
Pennsylvania Medical School. He completed an internal medicine
residency at Lankenau Hospital in Philadelphia, subspecialized
in Medical Oncology and Hematology with fellowships at Roswell
Park Memorial Institute in Buffalo, New York, and the National
Cancer Institute of the National Institutes of Health, Bethesda,
Maryland and later completed a residency in Radiation Medicine
at the Massachusetts General Hospital. Dr. Katin is board
certified in Therapeutic Radiology by the American Board of
Radiology and is board certified by the American Board of
Medicine in Internal Medicine and in the subspecialties of
Medical Oncology, Hematology and Geriatric Medicine.
Ronald E. Inge
, has served as an independent member of
our board of directors since the completion of our June 2004
initial public offering. Since September 2003, Mr. Inge has
served as Chief Operations Officer of Land Solutions, Inc. and
President of Development Solutions, Inc., two related real
estate entities engaged in real estate development.
Mr. Inge has also served as President of Inge &
Associates, Inc., a mining and real estate consulting firm,
since February 2002. From June 1999 to November 2002
Mr. Inge served as Vice President Business
Development, South Florida for Florida Rock Industries, Inc., a
NYSE-listed construction materials company. From October 1981 to
November 2002 he served as Executive Vice President of Harper
Bros., Inc., which was acquired by Florida Rock Industries, Inc.
in June 1999. Mr. Inge served as Tax and Audit Supervisor
for Coopers & Lybrand, Certified Public Accountants,
from July 1978 to September 1981. Mr. Inge is a Certified
Public Accountant in Florida and received his Bachelor of
Business Administration degree from Stetson University.
Solomon Agin D.D
., has served as an independent member of
our board of directors since January 2005. Rabbi Agin brings
over 30 years of community and congregational leadership in
humanitarian, healthcare, and religious activities to the board.
He has numerous certifications in grief and trauma counseling,
and has served as chaplain, guest lecturer, and staff instructor
at hospitals in Florida and Missouri. His distinguished record
of healthcare service continues with the Southwest Florida AIDS
Task Force, Institutional Review Board and Cancer Committee of
Southwest Regional Medical Center, the National Association of
Jewish Chaplains Board and as chaplain and consultant for
Hospice of Southwest Florida and Sarasota, Florida. Rabbi Agin
was
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committee member and chairperson of the Florida Advisory
Committee, United States Commission on Civil Rights for many
years. He is past president of the Southeast Association Central
Conference of American Rabbis. Degrees and awards throughout his
career include an honorary doctorate of divinity from Hebrew
Union College.
Herbert F. Dorsett
has served as an independent member of
our board of directors since the completion of our June 2004
initial public offering. Since 2001 Mr. Dorsett has served
as Director of Development of Harry Chapin Food Banks of
Southwest Florida. From 1995 to 2001, Mr. Dorsett was a
hospital consultant for Organizational Dimensions.
Mr. Dorsett served as Chief Executive Officer of Kirskville
Osteopathic Medical Center from 1993 to 1995 and from 1992 to
1993 he was Vice President, Corporate Development for Basic
American Medical, Inc. Prior to such time he served as President
of Southwest Florida Regional Medical Center for more than
10 years. Mr. Dorsett is a Diplomate of the American
College of Healthcare Executives and was past chairperson of the
Florida Hospital Association and the Florida League of
Hospitals. Mr. Dorsett holds a Masters of Hospital
Administration from Baylor University and a Bachelor of Music
from Stetson University.
Leo R. Doerr
has served as an independent member of our
board of directors since January 2005. Mr. Doerr brings
40 years of banking and financial services experience to
the board. He has served as Senior Vice President of Marketing
and Support at SouthTrust Bank and Senior Vice President of
Lending at the Banc of the Islands. Mr. Doerr was President
and CEO of Heritage National Bank, as well as a founder and
director of the bank. He has been a Director of the Florida
Bankers Association, President of Community Bankers Association
and a member of American Bankers Association.
Mr. Doerrs active involvement in his community
includes service as Director of the National Multiple Sclerosis
Society.
Janet Watermeier
has served as an independent member of
our board of directors since May 2007. Ms. Watermeier is
currently the President of Watermeier Property Services, LLC, a
Ft. Myers, FL-based consulting and real estate resources
firm that provides market information, project feasibility
analysis, economic and development consulting services and
property management services. She also currently serves as the
Vice Chair of the Florida Transportation Commission, the
Chairwoman of the Airport Special Management Committee at
Southwest Florida International Airport and is a member of the
Southwest Florida Regional Planning Council. Ms. Watermeier
brings over 20 years experience in economic development and
real estate to the board. She has previously served as Director
of Economic Development for Lee County, FL and as Vice President
of WCI Communities, Inc., a community development subsidiary of
Westinghouse Electric Corporation. Ms. Watermeier received
a B.A. in economics from Old Dominion University School of
Business and attended the University of Buffalo School of Law.
Each person identified above is a United States citizen. None of
RTS or any of RTSs executive officers or directors has,
during the past five years, been convicted in a criminal
proceeding (excluding traffic violations or similar
misdemeanors). None of RTS or any of RTSs executive
officers, directors has, during the past five years, been a
party to any judicial or administrative proceeding that resulted
in a judgment, decree or final order enjoining the person from
future violations of, or prohibiting activities subject to,
federal or state securities laws, or a finding of any violation
of federal or state securities laws. Except as set forth above,
the business address of each person identified above is
c/o RTS
at 2234 Colonial Boulevard, Ft. Myers, Florida 33907.
Radiation
Therapy Investments, LLC
Radiation Therapy Investments, LLC is a Delaware limited
liability company formed by Vestar Capital in anticipation of
the merger.
Radiation
Therapy Services Holdings, Inc.
Radiation Therapy Services Holdings, Inc. is a Delaware
corporation formed by Vestar Capital in anticipation of the
merger. The Rollover Investors are expected to exchange shares
of RTS common stock for units of limited liability company
interests in Holdings which controls 100% of Parent, in
connection with the merger. Upon completion of the merger, RTS
will be a direct or indirect wholly owned subsidiary of Parent
and Holdings. Parent and Holdings currently have
de minimis
assets and no operations. Parents principal
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executive offices are
c/o Vestar
Capital Partners, V, L.P., 245 Park Avenue,
41st Floor, New York, NY 10167, and its telephone number is
(212) 351-1600.
Vestar Capital Partners is a leading international private
equity firm specializing in management buyout and growth capital
investment. The firms investment strategy is targeted
towards companies in the U.S., Europe and Japan with valuations
in the $100 million to $4 billion range. Since the
firms founding in 1988, the Vestar Capital Partners funds
have completed over 60 investments in companies with a total
value of approximately $20 billion. These companies have
varied in size and geography and span a broad range of
industries. The firms strategy is to invest behind
incumbent management teams, family owners or corporations in a
creative, flexible and entrepreneurial way with the overriding
goal to build long-term franchise value. Vestar currently
manages funds with committed capital totaling approximately
$7 billion and has offices or affiliates operating in New
York, Denver, Boston, Paris, Milan, Munich and Tokyo. More
information about Vestar Capital Partners is available at
http://www.vestarcapital.com
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RTS MergerCo, Inc. is a Florida corporation formed by Parent in
anticipation of the merger. Subject to the terms and conditions
of the Merger Agreement and in accordance with Florida law, at
the effective time of the merger, Merger Sub will merge with and
into RTS and RTS will continue as the surviving corporation.
Merger Sub currently has
de minimis
assets and no
operations. The address for Merger Subs principal
executive offices is
c/o Vestar
Capital Partners, V, L.P. 245 Park Avenue, 41st Floor,
New York, NY 10167, and Merger Subs telephone number is
(212) 351-1600.
Vestar
Capital Partners V, L.P.
Vestar Capital Fund V, L.P. is a Cayman Islands exempted
limited partnership engaged in the business of making private
equity and other types of investments.
Additional information concerning Holdings, Parent, Merger Sub
and Vestar Capital Fund is set forth on Annex D to this
proxy statement.
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Date,
Time, Place and Purpose of the Special Meeting
This proxy statement is being furnished to our shareholders as
part of the solicitation of proxies by our board of directors
for use at the special meeting to be held on Wednesday,
February 6, 2008, beginning at 10:00 a.m., Eastern
Time, at the Hyatt Regency Coconut Point Resort & Spa, 5001
Coconut Road, Bonita Springs, Florida, 34134, or at any
postponement or adjournment thereof. The purpose of the special
meeting is for our shareholders to consider and vote upon the
approval of the Merger Agreement, to approve the adjournment or
postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies and to transact such
other business that may properly come before the special meeting
or any adjournment or postponement thereof. Our shareholders
must approve the Merger Agreement for the merger to occur. If
our shareholders do not approve the Merger Agreement, the merger
will not occur. A copy of the Merger Agreement is attached to
this proxy statement as Annex A. This proxy statement and
the enclosed form of proxy are first being mailed to our
shareholders on or about January 15, 2008.
The holders of record of our common stock as of the close of
business on January 10, 2008, the record date for the
special meeting, are entitled to receive notice of, and to vote
at, the special meeting. On the record date, there were
23,704,917 shares of our common stock outstanding.
The holders of a majority of the outstanding shares of our
common stock at the close of business on the record date
represented in person or by proxy will constitute a quorum for
purposes of the special meeting. A quorum is necessary to hold
the special meeting. Once a share is represented at the special
meeting, it will be counted for the purpose of determining
whether a quorum is present at the special meeting and any
postponement or adjournment of the special meeting. However, if
a new record date is set for the adjourned or postponed special
meeting, then a new quorum must be established.
Under Florida law, the merger cannot be completed unless the
holders of a majority of the outstanding shares of our common
stock entitled to vote at the close of business on the record
date for the special meeting vote for the approval of the Merger
Agreement. Each outstanding share of our common stock is
entitled to one vote. The merger does not require the approval
of at least a majority of the Companys unaffiliated
shareholders.
Approval of the proposal to adjourn or postpone the special
meeting, if necessary or appropriate, to solicit additional
proxies requires the affirmative vote of holders representing a
majority of the shares present in person or by proxy at the
special meeting.
As of the record date for the special meeting, the directors and
executive officers of RTS beneficially owned, in the aggregate,
9,833,671 shares of our common stock (which includes an
aggregate of 7,820 shares of common stock owned by our
independent directors), or approximately 40.5% of our
outstanding common stock. Persons other than the Rollover
Investors held 14,486,856 shares of our common stock,
representing approximately 61.1% of our outstanding common
stock, as of such date. Directors and executive officers
Dosoretz, Sheridan, Rubenstein and Katin who collectively
beneficially own approximately 40.4% of our outstanding common
stock have each entered into a Support and Voting Agreement
obligating them to vote all of their shares of our common stock
FOR
the approval of the Merger
Agreement and
FOR
any adjournment or
postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies.
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If you are a shareholder of record and submit a proxy by
returning a signed proxy card by mail, your shares will be voted
at the special meeting as you indicate on your proxy card. If no
instructions are indicated on your proxy card, your shares of
RTS common stock will be voted
FOR
the
approval of the Merger Agreement and
FOR
any adjournment or postponement of the special meeting, if
necessary or appropriate, to solicit additional proxies.
The persons named as proxies may propose and vote for one or
more postponements or adjournments of the special meeting to
solicit additional proxies.
If your shares are held in street name by your
broker, you should instruct your broker how to vote your shares
using the instructions provided by your broker. If you have not
received such voting instructions or require further information
regarding such voting instructions, contact your broker and they
can give you directions on how to vote your shares. Under the
rules of the NYSE, brokers who hold shares in street
name for customers may not exercise their voting
discretion with respect to the approval of non-routine matters
such as the approval of the Merger Agreement or approval of any
adjournment or postponement of the special meeting. Therefore,
absent specific instructions from the beneficial owner of the
shares, brokers are not empowered to vote the shares with
respect to the approval of the Merger Agreement or approval of
any adjournment or postponement of the special meeting (i.e.,
broker non-votes). Shares of our common stock held
by persons attending the special meeting but not voting, or
shares for which we have received proxies with respect to which
holders have abstained from voting, will be considered
abstentions. Abstentions and properly executed broker non-votes,
if any, will be treated as shares that are present and entitled
to vote at the special meeting for purposes of determining
whether a quorum exists but will have the same effect as a vote
Against the approval of the Merger Agreement and any
adjournment or postponement of the special meeting.
You may revoke your proxy at any time before the vote is taken
at the special meeting. To revoke your proxy, you must
(i) advise the Corporate Secretary of RTS of the revocation
in writing, (ii) submit by mail a new proxy card dated
after the date of the proxy you wish to revoke or
(iii) attend the special meeting and vote your shares in
person. Attendance at the special meeting will not by itself
constitute revocation of a proxy.
Please note that if you hold your shares in street
name and you have instructed your broker to vote your
shares, the options for revoking your proxy described in the
paragraph above do not apply and instead you must follow the
directions provided by your broker to change your vote.
RTS does not expect that any matter other than the approval of
the Merger Agreement (and approval of the adjournment or
postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies) will be brought
before the special meeting. The persons appointed as proxies
will have discretionary authority to vote upon other business
unknown by RTS a reasonable time prior to the solicitation of
proxies, if any, that properly comes before the special meeting
and any adjournments or postponements of the special meeting.
Adjournments
and Postponements
The special meeting may be adjourned or postponed for the
purpose of soliciting additional proxies. Any adjournment may be
made without notice (if the adjournment is not for more than
120 days from the date fixed for the original meeting),
other than by an announcement made at the special meeting of the
time, date and place of the adjourned meeting. Whether or not a
quorum exists, the holders of a majority of the shares of our
common stock present in person or represented by proxy at the
special meeting and entitled to vote thereat may adjourn the
special meeting. If no instructions are indicated on your proxy
card, your shares of our common stock will be voted
FOR any adjournment or postponement of the special
meeting, if necessary or appropriate, to solicit additional
proxies. Any adjournment or postponement of the special meeting
for the
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purpose of soliciting additional proxies will allow our
shareholders who have already sent in their proxies to revoke
them at any time prior to their use at the special meeting as
adjourned or postponed.
RTS will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of
RTS may solicit proxies personally and by telephone, facsimile
or other electronic means of communication. These persons will
not receive additional or special compensation for such
solicitation services.
RTS will, upon request, reimburse brokers, banks and other
nominees for their expenses in sending proxy materials to their
customers who are beneficial owners and obtaining their voting
instructions. RTS has retained Georgeson Inc. to assist it in
the solicitation of proxies for the special meeting. RTS has
paid Georgeson Inc. a retainer of $8,000 toward a final fee to
be agreed upon based on customary fees for the services
provided, which fee will include the reimbursement of
out-of-pocket fees and expenses.
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This section of the proxy statement describes the material
provisions of the Merger Agreement but it may not contain all of
the information about the Merger Agreement that is important to
you. The Merger Agreement is attached as Annex A to this
proxy statement and is incorporated into this proxy statement by
reference. We encourage you to read the Merger Agreement in its
entirety. The Merger Agreement is a document that establishes
and governs the legal relations among us, Parent, Merger Sub and
Holdings with respect to the transactions described in this
proxy statement. We do not intend for the text of the Merger
Agreement to be a source of factual, business or operational
information about RTS, its subsidiaries or any of its managed
practices. The Merger Agreement contains representations,
warranties and covenants that are qualified and limited,
including by information in the schedules referenced in the
Merger Agreement that the parties delivered in connection with
the execution of the Merger Agreement. Representations and
warranties are used as a tool to allocate risks between the
respective parties to the Merger Agreement, including where the
parties do not have complete knowledge of all facts, instead of
to establish such matters as facts. Furthermore, the
representations and warranties may be subject to different
standards of materiality applicable to the parties, which may
differ from what may be viewed as material to shareholders or
under the federal securities laws. These representations may or
may not have been accurate as of any specific date and do not
purport to be accurate as of the date of this proxy statement.
Moreover, information concerning the subject matter of the
representations and warranties may have changed since the date
of the Merger Agreement and subsequent developments or new
information qualifying a representation or warranty may not have
been included in this proxy statement.
Effective
Time; The Marketing Period
The effective time of the merger will occur at the time that we
file the articles of merger with the Department of State of the
State of Florida on the closing date of the merger (or such
later time as provided in such articles of merger). The closing
date will occur no later than the third business day after all
of the conditions to the merger set forth in the Merger
Agreement have been satisfied or waived (other than conditions
that by their nature are to be satisfied on the closing date),
or at such other date as we and Parent may agree; provided that
the parties will not be required to effect the closing until the
earliest to occur of:
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a date during the Marketing Period (as defined below) specified
by Parent on no less than three business days notice to
RTS;
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the final day of the Marketing Period; and
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April 21, 2008 (the End Date), subject in each
case to the satisfaction and waiver of all of the conditions to
closing
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The Marketing Period is defined in the Merger
Agreement as the period of 25 consecutive business days after
the date of the Merger Agreement, during which:
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Parent shall have such financial and other pertinent information
of RTS as may be reasonably requested by Parent to consummate
the debt financing, including all financial statements and
financial data customarily included in private placements
pursuant to Rule 144A promulgated under the Securities
Act; and
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the conditions to closing concerning the absence of a judgment
or order issued by any court or tribunal that prohibits
consummation of the merger, the termination or expiration of the
waiting period under the
Hart-Scott-Rodino
Act and the receipt of required approvals shall have been
satisfied and no condition exists that would cause any of the
conditions to Parents obligations to close not to be
satisfied, assuming the closing were to be scheduled for any
time during such consecutive
25-day
period.
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The purpose of the marketing period is to provide Parent with a
reasonable and appropriate period of time during which it can
market and place the permanent debt financing contemplated by
the debt financing commitments for the purposes of financing the
merger. The marketing period will not be deemed to have
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commenced if, prior to the completion of the marketing period,
Ernst & Young LLP shall have withdrawn its audit
opinion with respect to any financial statements contained in
our reports filed with the SEC, or if any required financial
statements available to Parent on the first day of any such 25
consecutive business day period would not be sufficiently
current on any day during such 25 consecutive business day
period to permit a registration statement using such financial
statements to be declared effective by the SEC on the last day
of such 25 consecutive business day period.
Throughout the Marketing Period Parent and Merger Sub have
agreed:
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to use commercially reasonable efforts to satisfy on a timely
basis the conditions to obtaining the financing set forth in the
debt financing commitments obtained in connection with the
merger; and
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in the event that any portion of the debt financing becomes
unavailable on the terms and conditions contemplated in such
commitments, to use commercially reasonable efforts to obtain as
promptly as practicable alternative financing on terms and
conditions, taken as a whole, no less favorable to Parent or
Merger Sub as determined by Parent and Merger Sub in their
reasonable judgment.
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See Financing Commitments; Cooperation of RTS below
for a further discussion of Parent and Merger Subs
covenants relating to the financing commitments.
Subject to the terms and conditions of the Merger Agreement and
in accordance with Florida law, at the effective time of the
merger, Merger Sub will merge with and into RTS. The separate
corporate existence of Merger Sub will cease, and RTS will
continue as the surviving corporation and a direct or indirect
wholly owned subsidiary of Parent. The surviving corporation
will be a privately held corporation and our current
shareholders, other than the Rollover Investors and the
Additional Management Investors, will cease to have any
ownership interest in the surviving corporation or rights as our
shareholders. Therefore, such current shareholders will not
participate in any future earnings or growth of the surviving
corporation and will not benefit from any appreciation in value
of the surviving corporation.
Treatment
of Stock, Stock Options and Other Stock-Based Awards
Common
Stock
At the effective time of the merger, each share of our common
stock issued and outstanding immediately prior to the effective
time of the merger will automatically be canceled and will cease
to exist and will be converted into the right to receive $32.50
in cash, without interest and less applicable withholding taxes,
other than:
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shares of our common stock held in our treasury or by any of our
subsidiaries immediately prior to the effective time of the
merger, which shares will be canceled without conversion or
consideration;
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shares of our common stock owned by Parent or Merger Sub
immediately prior to the effective time of the merger, which
shares will be canceled without conversion or consideration;
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shares of our common stock held by shareholders who have
properly demanded and perfected their appraisal rights in
accordance with Florida law, which shareholders will be entitled
to obtain payment of the fair value of such shares as determined
in accordance with Florida law; and
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certain shares of our common stock owned by Rollover Investors,
that will be contributed to Holdings immediately prior to the
effective time in return for a number of preferred and common
units of limited liability company interests in Holdings.
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After the effective time of the merger, each stock certificate
representing shares of common stock converted into the right to
receive the merger consideration will be canceled and cease to
exist and the holder of such certificate will have only the
right to receive the merger consideration of $32.50 in cash per
share, without any interest and less applicable withholding
taxes.
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Stock
Options and Other Stock-Based Awards
Except as we otherwise agreed to in writing with Parent, Merger
Sub and the Rollover Investors:
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each unexercised option to purchase shares of our common stock,
whether vested or unvested, that is outstanding immediately
prior to the effective time, will, as of the effective time,
become fully vested and be converted into the right to receive
at the effective time an amount in cash equal to the excess (if
any) of the $32.50 per share cash merger consideration over the
exercise price per share of the option, multiplied by the number
of shares subject to the option (such amount, the option
amount), without interest and less any applicable
withholding taxes; and
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immediately prior to the effective time, each award of
restricted stock will be converted into the right to receive
$32.50 per share in cash less any applicable withholding taxes.
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Exchange
and Payment Procedures
Substantially contemporaneous with the effective time of the
merger, Parent will deposit, or will cause to be deposited, cash
in an amount sufficient to pay the merger consideration and the
amount required by the Merger Agreement to be so deposited with
respect to stock options and restricted stock with a bank or
trust company (the paying agent) reasonably
acceptable to us. As soon as reasonably practicable after the
effective time of the merger and in any event not later than the
third business day after the effective time, the paying agent
will mail (i) a letter of transmittal and instructions to
each holder of our common stock (other than those seeking
appraisal rights) which will tell holders of our common stock
how to surrender their common stock certificates in exchange for
the merger consideration, and (ii) a check to each holder
of options to purchase shares of our common stock or awards of
restricted stock for the amount, if any, payable to them in
connection with the merger.
You should not return your stock certificates with the enclosed
proxy card, and you should not forward your stock certificates
to the paying agent without a letter of transmittal.
You will not be entitled to receive the merger consideration
until you surrender your stock certificate or certificates to
the paying agent, together with a duly completed and executed
letter of transmittal and any other documents as may reasonably
be required by the paying agent. The merger consideration may be
paid to a person other than the person in whose name the
corresponding certificate is registered if the certificate is
properly endorsed or is otherwise in the proper form for
transfer. In addition, the person who surrenders such
certificate must establish to the reasonable satisfaction of the
surviving corporation that any applicable stock transfer taxes
have been paid or are not applicable.
No interest will be paid or will accrue on the cash payable upon
surrender of the certificates. The paying agent will be entitled
to deduct and withhold, and pay to the appropriate taxing
authorities, any applicable taxes from the merger consideration
and the option consideration. Any sum which is withheld and paid
to a taxing authority by the paying agent will be deemed to have
been paid to the person with regard to whom it is withheld.
At the effective time of the merger, our stock transfer books
will be closed, and there will be no further registration of
transfers of outstanding shares of our common stock. If, after
the effective time of the merger, certificates for shares issued
and outstanding prior to the merger are presented to the
surviving corporation or Parent for transfer, they will be
canceled and exchanged for the merger consideration.
Any portion of the merger consideration deposited with the
paying agent that remains undistributed to the former holders of
shares for nine months after the effective time of the merger
will be delivered, upon demand, to the surviving corporation.
Holders of certificates who have not surrendered their
certificates prior to the delivery of such funds to the
surviving corporation may only look to the surviving corporation
for the payment of the merger consideration. None of RTS, the
surviving corporation, Parent, Merger Sub, the paying agent or
any other person will be liable to any former holder of shares
for any amount of property delivered to a public official
pursuant to any applicable abandoned property, escheat or
similar law. Any portion of the merger consideration deposited
with the paying agent that remains unclaimed as of a date that
is immediately
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prior to such time as such amounts would otherwise escheat to or
become property of any governmental authority will, to the
extent permitted by applicable law, become the property of
Parent, free and clear of any claims or interest of any person
previously entitled to the merger consideration.
If you have lost a certificate, or if it has been stolen or
destroyed, then before you will be entitled to receive the
merger consideration, you will have to make an affidavit of that
fact and, if required by the paying agent, post a bond in a
customary amount as indemnity against any claim that may be made
against it with respect to that certificate.
Representations
and Warranties
We make various representations and warranties in the Merger
Agreement with respect to RTS, our affiliates or subsidiaries,
and, in some cases, certain managed practices in which we
provide services pursuant to administrative services agreements
(Managed Practices). These include representations
and warranties regarding:
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organization, good standing and qualification to do business;
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capitalization, including in particular the number of shares of
our common stock, stock options and other equity-based interests;
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corporate power and authority to enter into the Merger Agreement
and to consummate the transactions contemplated by the Merger
Agreement;
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the approval and recommendation by our board of directors and
special committee of the Merger Agreement, the merger and the
other transactions contemplated by the Merger Agreement;
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the absence of violations of or conflicts with governing
documents, applicable law or certain agreements as a result of
entering into the Merger Agreement and consummating the merger;
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the required consents and approvals of governmental entities in
connection with the transactions contemplated by the Merger
Agreement;
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SEC filings since December 31, 2004, including the
financial statements contained therein, and compliance of such
reports and documents with applicable requirements of federal
securities laws and regulations;
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internal controls and procedures;
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the absence of undisclosed liabilities;
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compliance with laws since January 1, 2005;
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possession of permits necessary to conduct our business;
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health care law and regulatory compliance;
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environmental laws and regulations;
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employment and labor matters, including matters relating to
employee benefit plans;
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the absence of certain changes or events since December 31,
2006;
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litigation and investigations;
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the accuracy of this proxy statement and the related
Schedule 13E-3;
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tax matters;
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labor matters;
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intellectual property;
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real property;
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the receipt by the special committee of a fairness opinion from
Morgan Joseph & Co. Inc.
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the required vote of our shareholders in connection with the
approval of the Merger Agreement;
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material contracts to which we are a party;
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the absence of undisclosed brokers fees;
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insurance policies;
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the inapplicability of anti-takeover statutes to the merger and
the other transactions contemplated by the Merger Agreement and
the support and voting agreements;
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affiliate transactions;
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outstanding indebtedness; and
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disclosure of material information.
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Many of our representations and warranties are qualified by the
absence of a material adverse effect on RTS, which means, for
purposes of the Merger Agreement, any facts, circumstances,
events or changes that are or would reasonably be expected to
become materially adverse to the business, properties, assets,
results of operation, financial condition or profitability of
RTS, its affiliates and the Managed Practices (certain entities
in which the Company has entered into services agreements
defined in the Merger Agreement as Managed
Practices), taken as a whole, excluding facts,
circumstances, events or changes:
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generally affecting the industries in which the Company, its
subsidiaries and the Managed Practices operate in the United
States or the economy or the financial securities markets in the
United States or elsewhere in the world, including political
conditions or developments (including any outbreak or escalation
of hostilities or acts of war or terrorism) provided (and only
to the extent) such change, effect, development, event or
occurrence does not have a disproportionate impact on us and our
affiliates as compared to other persons in the industries in
which the Company, our affiliates and the Managed Practices
operate in the United States;
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to the extent resulting from (i) the announcement or the
existence of, or compliance with, the Merger Agreement or the
announcement of the merger and the other transactions
contemplated by the Merger Agreement, (ii) changes in
applicable laws, GAAP or accounting standards, provided (and
only to the extent) such change, effect, development, event or
occurrence does not have a disproportionate impact on us and our
affiliates as compared to other persons in the industries in
which the Company, our affiliates and the Managed Practices
operate in the United States; or (iii) any actions required
under the Merger Agreement to obtain antitrust approval for the
transactions contemplated by the Merger Agreement;
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In the event that we should fail to meet any expected financial
or operating performance targets, the fact of such failure alone
shall not constitute a Company material adverse effect; provided
that in each case the facts or occurrences giving rise to or
contributing to such failure will not be excluded to the extent
such facts, circumstances or events would otherwise constitute a
material adverse effect.
Certain of our representations and warranties relating to
governmental consents and approvals, permits, licenses,
compliance and regulatory matters are qualified by the absence
of an adverse affect equal to or greater than 2.5% of the
revenues, EBITDA or assets of the Company and its subsidiaries,
taken as a whole.
Parent and Merger Sub make various representations and
warranties in the Merger Agreement with respect to Parent and
Merger Sub. These include representations and warranties
regarding:
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organization, good standing and qualification to do business;
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corporate or other power and authority to enter into the Merger
Agreement and to consummate the transactions contemplated by the
Merger Agreement;
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the absence of any violation of or conflict with their governing
documents, applicable law or certain agreements as a result of
entering into the Merger Agreement and consummating the merger;
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the absence of litigation and investigations;
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the accuracy of information supplied for inclusion or
incorporation by reference in this proxy statement and the
related
Schedule 13E-3;
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financing;
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capitalization of Merger Sub;
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the absence of undisclosed brokers fees;
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lack of ownership of our common stock;
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ownership interest in our competitors;
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no additional representations;
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solvency; and
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agreements with our directors and management.
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The representations and warranties of each of the parties to the
Merger Agreement will expire upon the effective time of the
merger. The assertions embodied in those representations and
warranties were made solely for purposes of the Merger Agreement
and may be subject to important qualifications and limitations
agreed by the parties in connection with negotiating its terms.
Moreover, some of those representations and warranties may not
be accurate or complete as of any particular date because they
are subject to a contractual standard of materiality or material
adverse effect different from that generally applicable to
public disclosures to shareholders or used for the purpose of
allocating risk between the parties to the merger agreement
rather than establishing matters of fact. For the foregoing
reasons, you should not rely on the representations and
warranties contained in the Merger Agreement as statements of
factual information.
Conduct
of Our Business Pending the Merger
Under the Merger Agreement, RTS has agreed, subject to certain
exceptions, that unless required, permitted or expressly
contemplated by the Merger Agreement, required by applicable
law, Parent gives its written consent (which consent may not be
unreasonably withheld, delayed or conditioned), or as set forth
in the disclosure schedule, between the date of the Merger
Agreement and the effective time of the merger:
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the business of RTS and its affiliates will be conducted in, and
such entities will not take any action except in, the ordinary
course of business; and
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RTS will use commercially reasonable efforts to
(i) preserve its and its affiliates present business
organizations and capital structure (ii) maintain in effect
all permits required to carry on their respective businesses,
(iii) keep available the services of present officers and
key employees, (iv) maintain the current relationships with
lenders, suppliers and other persons with which the Company or
its affiliates have significant relationships and
(v) maintain real property and all improvements, ordinary
wear and tear excepted.
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RTS has also agreed, on behalf of RTS and its affiliates, that
during the same time period, and unless Parent gives its written
consent (which consent may not be unreasonably withheld, delayed
or conditioned), RTS:
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will not, authorize, declare or pay any dividends on, or make
any distribution with respect to its outstanding shares of
capital stock, except those made by subsidiaries to RTS in the
ordinary course of business;
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will not, and will not permit any of its affiliates to, split,
combine or reclassify any of its capital stock or other equity
securities or issue any other securities in respect of, in lieu
of or in substitution for
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shares of its capital stock or other equity securities, except
for any such transaction by a wholly owned subsidiary of RTS
which remains a wholly owned subsidiary after consummation of
such transaction;
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except as required by existing written agreements or RTS benefit
plans, or as otherwise required by applicable law, will not, and
will not permit any of its affiliates to:
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except in the ordinary course of business, increase or
accelerate the compensation or other benefits provided to
RTSs present or former directors, officers or employees;
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approve or enter into (and use its reasonable best efforts to
cause the Managed Practices not to approve or enter into) any
employment, change of control, severance or retention agreement
with any non-physician employee of RTS or the Managed Practices,
except for (i) employment agreements terminable on less
than thirty (30) days notice without penalty or severance
obligation or (ii) severance agreements entered into with
employees (other than officers) in the ordinary course of
business that do not involve payments in excess of $200,000;
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approve or enter into (and use its reasonable best efforts to
cause the Managed Practices not to approve or enter into) any
employment or retention agreement with any physician employee of
the Company or the Managed Practices that provides for potential
aggregate annual compensation, severance or change of control
payments in excess of $750,000; or
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establish, adopt, enter into, amend, terminate or waive any
rights with respect to any (i) collective bargaining
agreement, (ii) any plan, trust, fund, policy or
arrangement for the benefit of any current or former directors,
officers, employees or any of their beneficiaries, except, in
the case of clause (ii) only, as would not, individually or
in the aggregate, cause the accelerated payment of any
compensation or benefits or result in a material increase in
cost to RTS, or (iii) any RTS benefit plan;
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will not, and will not permit any of its affiliates to, change
in any material respects any financial accounting policies or
procedures or any of its methods of reporting income, deductions
or other material items for financial accounting purposes,
except as required by GAAP, SEC rule or policy or applicable law;
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will not, and will not permit any of its affiliates to, adopt
any amendments to its certificate of incorporation or bylaws or
similar applicable charter documents;
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except for transactions among RTS and its wholly owned
subsidiaries or among RTSs wholly owned subsidiaries, will
not, and will not permit any of its affiliates to, issue, sell,
pledge, dispose of or encumber, or authorize the issuance, sale,
pledge, disposition or encumbrance of, any shares of its capital
stock or other ownership interest in RTS or its affiliates or
any securities convertible into or exchangeable for any such
shares or ownership interest, or any rights, warrants or options
to acquire or with respect to any such shares of capital stock,
ownership interest or convertible or exchangeable securities or
take any action to cause to be exercisable any otherwise
unexercisable option under any existing stock option plan
(except as otherwise provided by the terms of the Merger
Agreement or the express terms of any unexercisable options
outstanding on the date of the Merger Agreement), other than
issuances of shares of RTS common stock in respect of any
exercise of RTS stock options in each case outstanding on
October 19, 2007;
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except for transactions among RTS and its wholly owned
subsidiaries or among RTSs wholly owned subsidiaries, will
not, and will not permit any of its affiliates to, directly or
indirectly, purchase, redeem or otherwise acquire any shares of
its capital stock or any rights, warrants or options to acquire
any such shares;
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will not, and will not permit any of its affiliates to, incur,
assume, guarantee, prepay or otherwise become liable for, modify
in any material respect the terms of, any indebtedness for
borrowed money
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or become responsible for the obligations of any person, other
than in the ordinary course of business consistent with past
practice and except for:
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any intercompany indebtedness for borrowed money among RTS and
its wholly owned subsidiaries or among RTSs wholly owned
subsidiaries;
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indebtedness for borrowed money incurred to replace, renew,
extend, refinance or refund certain existing indebtedness for
borrowed money without increasing the amount of such permitted
borrowings or incurring breakage costs and provided that,
subject to certain exceptions, any such indebtedness is
prepayable without premium or penalty, or with premium or
penalty that is no greater than applicable to the replaced
indebtedness;
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guarantees by RTS of indebtedness for borrowed money of RTS,
which indebtedness for borrowed money is incurred in compliance
with the Merger Agreement;
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indebtedness for borrowed money incurred pursuant to the terms
of agreements in effect prior to the date of the Merger
Agreement, including amounts available but not borrowed as of
the date of the Merger Agreement, to the extent such agreements
were disclosed to Parent; and
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indebtedness for borrowed money not to exceed $5,000,000
(excluding existing plans for capital expenditures and working
capital requirements of the Company for 2007 and the first
quarter of 2008 that have been disclosed to Parent) in aggregate
principal amount outstanding at any time incurred by RTS and its
subsidiaries other than in accordance with the above;
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except for transactions among RTS and its wholly owned
subsidiaries or among RTSs wholly owned subsidiaries, will
not, and will cause its affiliates not to, sell, lease, license,
transfer, exchange or swap, mortgage or otherwise encumber
(including securitizations), or subject to any lien (except
certain permitted liens) or otherwise dispose of (whether by
merger, consolidation or acquisition of stock or assets, license
or otherwise) any material portion of its or its
affiliates properties or assets, including the capital
stock of affiliates, other than in the ordinary course of
business consistent with past practice with an aggregate value
not to exceed $1,000,000 and other than (i) pursuant to
existing agreements in effect prior to the date of the Merger
Agreement, (ii) as may be required by applicable law or any
governmental entity in order to permit or facilitate the
consummation of the transactions contemplated by the Merger
Agreement or (iii) disposition of obsolete equipment in the
ordinary course of business consistent with past practices;
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will not, and will not permit any of its affiliates to, modify,
amend, terminate or waive any rights under any material
contract, or any contract that would be a material contract if
in effect on the date of the Merger Agreement, in any material
respect in a manner which is adverse to RTS;
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will not, and will not permit any of its affiliates to, enter
into any material contracts other than in the ordinary course of
business;
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will not, and will not permit any of its affiliates to, enter
into, amend, waive or terminate (other than terminations in
accordance with their terms) any affiliate transaction (other
than continuing any affiliate transactions pursuant to their
terms in existence on the date of the Merger Agreement);
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will not, and will not permit any of its affiliates to, without
prior written consent of Parent and except as required by
applicable law, adopt or change any accounting method or
accounting period for tax purposes, make any amendment in any
tax return or make or change any tax election, settle or
compromise any tax liability of RTS or any of its affiliates,
agree to any extension of a statute of limitations with respect
to the assessment or determination of material taxes of the
Company or any of its affiliates, enter into any closing
agreement with respect to any tax or surrender any right to a
claim of a tax refund;
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will not, and will not permit any of its affiliates to, adopt or
enter into a plan of complete or partial liquidation,
dissolution, restructuring, recapitalization or other
reorganization of RTS, or any of its affiliates (other than the
merger);
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will not, and will not permit any of its affiliates to, write
up, write down or write off the book value of any assets that
are, individually or in the aggregate, material to RTS and its
subsidiaries, taken as a whole, other than as may be required by
GAAP or applicable law;
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will not, and will not permit any of its affiliates to, pay,
discharge, waive, settle or satisfy any claim, liability or
obligation, other than (i) in the ordinary course of
business consistent with past practice, or (ii) any claim,
liability or obligation not in excess of $250,000 individually
or $750,000 in the aggregate, excluding any amounts that may be
paid under the Companys or its affiliates insurance
policies;
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will not, and will not permit any of its affiliates to enter
into any new line of business or discontinue any line of
business;
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will not and will not permit any of its affiliates to settle,
pay or discharge, any litigation, investigation, arbitration,
proceeding or other claims liability or obligation except in the
ordinary course not in excess of $250,000 individually or
$750,000 in the aggregate, excluding any amounts which may be
paid under existing insurance policies;
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except in the ordinary course of business and consistent with
the Companys historical practices and except as set forth
in the Company plans for 2007 and for the first quarter of 2008,
will not and will not permit any of its affiliates to amend,
modify, extend, renew or terminate any lease for any leased real
property, and will not enter into any new lease, sublease,
license or other agreement for the use or occupancy of any real
property; provided, however, that the above exceptions will not
apply to any transaction with any affiliates of the Company;
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will not take, or fail to take, any action that could reasonably
be expected to result in, any loss, lapse, abandonment,
invalidity or unenforceability of any material Company
intellectual property; or
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will not enter into any agreement with any other person that
materially limits or restricts the ability of the Company or any
of its affiliates to conduct certain activities or use certain
assets (including any Company intellectual property);
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will not and will not permit any of its affiliates to,
authorize, or make any commitment with respect to any capital
expenditure in excess of $1,000,000 individually or $3,000,000
in the aggregate (including, without limitation, expenditures
for acquisitions of assets or entities, joint ventures and the
establishment of de novo centers), except for capital
expenditures that are contemplated by the Companys
existing plan for capital expenditures for 2007 and the first
quarter of 2008 previously made available to Parent;
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will not and will cause its affiliates not to, fail to maintain
in full force and effect material insurance policies covering
the Company and its affiliates and their respective properties,
assets and businesses in a form and amount consistent with past
practice;
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will not and will not permit any of its affiliates to take any
action (including rescinding, amending or modifying any bylaw
amendment or previous authorization or approval of the board of
directors, special committee or disinterested directors) that
would or could reasonably be expected to cause any anti-takeover
statute to be or become applicable to the merger and the other
transactions contemplated by the Merger Agreement or to the
support and voting agreements and the agreements contemplated by
the support and voting agreements; or
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other than transactions between the Company and its subsidiaries
or transactions among the Companys subsidiaries, will not
and will not permit any of its affiliates to make any loan or
advances to any other person, except for (i) any loan or
advance to any employee of the Company in the ordinary course of
business not to exceed $10,000, or (ii) any loan or advance
to any other person not to exceed $50,000; or
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will not, and will not permit any of its affiliates to acquire
(including by merger, consolidation, or acquisition of stock or
assets) or make any investment in any interest in any
corporation, partnership,
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limited liability company, association, trust or any other
entity, group (as such term is used in Section 13 of the
Exchange Act) or organization (including, a governmental
entity), or any division thereof or any assets thereof, except
any such acquisitions or investments that are consistent with
past practice and are for consideration that is individually not
in excess of $1,500,000, or in the aggregate, not in excess of
$5,000,000 for all such acquisitions by the Company and the its
subsidiaries and except for such acquisitions or investments
that are contemplated by the Companys existing plan for
acquisitions and investments for 2007 and the first quarter of
2008 previously made available to Parent; or
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will not, and will not permit any of its affiliates to, agree,
or announce an intention, to take any of the foregoing actions.
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The Merger Agreement requires us to duly call, give notice of
and hold a meeting of our shareholders to approve the Merger
Agreement as promptly as reasonably practicable after the
mailing of this proxy statement. Subject to limited
circumstances contemplated by the Merger Agreement, our board of
directors is required to recommend that our shareholders vote in
favor of approval of the Merger Agreement. Notwithstanding, the
foregoing, the Company will not be required to hold the
Shareholders meeting if, prior to the meeting, the Company
receives a superior proposal that was not solicited in violation
of the Merger Agreement and the special committee or the board
of directors has concluded in good faith, after consultation
with legal counsel and the special committees financial
advisor, that the failure to terminate the Merger Agreement,
would be inconsistent with the directors exercise of their
fiduciary obligations under applicable law, the Company has
complied in all material respects with the Merger Agreement and
the Company enters into a definitive agreement with respect to
the superior proposal.
Solicitation
of Transactions; Recommendation to Shareholders
Solicitation
of Transactions
From the date of the Merger Agreement and continuing until the
earlier of the receipt of the shareholder approval and the
termination date, RTS has agreed, subject to certain exceptions,
that RTS, its subsidiaries and their respective representatives
will not directly or indirectly (i) initiate, solicit or
knowingly encourage the submission of any inquiries, proposals
or offers or any other efforts or attempts that constitute or
may reasonably be expected to lead to, any alternative proposal
or engage in any discussions or negotiations with respect
thereto or otherwise knowingly cooperate with or knowingly
assist or participate in, or knowingly facilitate any such
inquiries, proposals, discussions or negotiations,
(ii) participate in any way in any negotiations or
discussions regarding, or furnish or disclose to any third party
any information with respect to, or which could reasonably be
expected to lead to, any alternative proposal,
(iii) approve or recommend, or publicly propose to approve
or recommend any alternative proposal or make a change of
recommendation, or (iv) enter into any merger agreement,
letter of intent, agreement in principle, share purchase
agreement, asset purchase agreement or share exchange agreement,
option agreement or other similar agreement or arrangement
providing for or relating to or which could reasonably be
expected to lead to an alternative proposal or enter into any
agreement or agreement in principle requiring the Company to
abandon, terminate or fail to consummate the transactions
contemplated hereby or breach its obligations hereunder or
propose or agree to do any of the foregoing.
An alternative proposal means any bona fide proposal
or offer made by any person or group of persons, other than
Parent or its subsidiaries, for:
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a merger, reorganization, share exchange, consolidation,
business combination, recapitalization, dissolution, liquidation
or similar transaction involving RTS or any of its subsidiaries
whose business constitutes 10% or more of net revenues, net
income or assets of RTS and its subsidiaries take as a whole;
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the direct or indirect acquisition in a single transaction or
series of related transactions by any person of the assets of
RTS and its subsidiaries that constitutes 10% or more of the net
revenues, net income or assets of RTS and its subsidiaries taken
as a whole;
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the direct or indirect acquisition in a single transaction or
series of related transactions by any person of 10% or more of
the outstanding shares of RTS common stock; or
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any tender offer or exchange offer that if consummated would
result in any person beneficially owning 10% or more of RTS
common stock then outstanding.
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In addition, subject to the following paragraph, RTS was
required to immediately cease and cause to be terminated any
ongoing discussions or negotiations with any parties with
respect to an alternative proposal.
Notwithstanding the restrictions on solicitation described
above, at any time from the date of the Merger Agreement and
continuing until the earlier of receipt of shareholder approval
with respect to the Merger Agreement and the date of termination
of the Merger Agreement, if RTS receives an unsolicited bona
fide written alternative proposal:
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which (i) constitutes a superior proposal or
(ii) which the special committee or the board of directors
determines in good faith could reasonably be expected to result
in a superior proposal; and
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the special committee or the board of directors determines in
good faith, after consultation with the special committees
or RTSs legal counsel and the special committees
financial advisor that the failure of the special committee or
the board of directors to take the actions set forth below with
respect to such alternative proposal would be inconsistent with
the directors exercise of their fiduciary obligations to
RTSs shareholders under applicable law, then RTS may take
the following actions:
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furnish non-public information to the third party making such
alternative proposal if (i) prior to so furnishing such
information, RTS receives from the third party a confidentiality
agreement with confidentiality and stand still provisions in
form no more favorable to such person than those confidentiality
provisions contained in the confidentiality agreement signed by
RTS and Vestar Capital Fund, and (ii) all information has
previously been made available to Parent or is made available to
Parent prior to or concurrently with the time it is provided to
such third party; and
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engage in discussions or negotiations with such third party with
respect to such alternative proposal.
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A superior proposal means an alternative proposal (with all
percentages in the definition of alternative proposal increased
to 50%) on terms that the special committee or the board of
directors determines in good faith, after consulting with its
financial advisors and legal counsel and considering matters it
determines appropriate (including the person making the
alternative proposal, timing, ability to finance, legal,
fiduciary, financial and regulatory aspects and likelihood of
consummation of such proposal, and any alterations to the Merger
Agreement), (i) is at least as likely to be consummated in
accordance with its terms as the transactions contemplated by
the Merger Agreement and (ii) if consummated, would result
in a transaction more favorable to the holders of RTS common
stock (other than the Rollover Investors).
The Merger Agreement does not prohibit RTS or its board of
directors from taking and disclosing to RTSs shareholders
a position with respect to a tender or exchange offer by a third
party pursuant to SEC rules or from making any other disclosure
required by applicable law.
Recommendation
to Shareholders
The Merger Agreement provides that, subject to the exceptions
described below, neither the special committee nor the board of
directors will:
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withdraw or modify, or propose publicly to withdraw or modify in
a manner adverse to Parent, the approval or recommendation by
the special committee or the board of directors of the Merger
Agreement or the transactions contemplated by the Merger
Agreement;
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approve, adopt or recommend, or propose publicly to approve,
adopt or recommend, any alternative proposal;
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make any recommendation in connection with a tender offer or
exchange offer other than a recommendation against such
offer; or
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other than in connection with the Merger Agreement and support
and voting agreements, and related agreements, exempt any
person, agreement or transaction from the restrictions contained
in any state takeover or similar laws, including
Sections 607.0901 and 607.0902 of the Florida Business
Corporation Act.
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We refer to each of the foregoing as a change of
recommendation. In response to the receipt of a superior
proposal that was not solicited in violation of the Merger
Agreement and that has not been withdrawn or abandoned, the
board of directors may, at any time prior to shareholder
approval of the Merger Agreement, make a change of
recommendation or enter into an agreement regarding a superior
proposal if (i) the special committee or the board of
directors has concluded in good faith, after consultation with
legal counsel and special committees financial advisor,
that the failure of the special committee or the board of
directors to take such action would be inconsistent with the
directors exercise of their fiduciary obligations under
applicable law, (ii) RTS gives five days prior written
notice to Parent, and (iii) the board of directors or the
special committee cause their representatives to negotiate with
Parent and Merger Sub in good faith to make adjustments to the
terms of the Merger Agreement so that the alternative proposal
ceases to constitute a superior proposal. No change of
recommendation may change the approval of the special committee
or our board of directors for purposes of causing any state
takeover statute or other state law to be inapplicable to the
transactions contemplated by the Merger Agreement or the support
and voting agreements.
Parent has agreed that it will honor all of our benefit plans
and compensation arrangements and agreements in accordance with
their terms in effect immediately before the effective time. For
a period of one year following the completion of the merger,
Parent will provide to each employee of RTS as of the effective
time and its subsidiaries total compensation and benefits that
are substantially comparable in the aggregate to the total
compensation and benefits to employees immediately before the
effective time (except that Parent is not required to provide
equity based compensation, equity-based benefits and
nonqualified deferred compensation programs). Parent has the
ability to amend or terminate a benefit plan in the event such
amendment or termination is necessary to conform with applicable
laws.
Subject to certain limitations, for purposes of new employee
benefit plans provided to employees after completion of the
merger, each of our employees will be credited with his or her
years of service with us and our subsidiaries to the same extent
as such employee was entitled, before the effective time, to
credit for such service under any similar benefit plan in which
the employee participated or was eligible to participate before
the effective time. Such credit for service will not apply with
respect to benefit accrual under any defined benefit pension
plan or any equity-based arrangement, or to the extent that such
credit would result in any duplication of benefits. In addition,
Parent must cause all preexisting condition exclusions and
actively-at-work requirements of each new employee benefit plan
providing medical, dental, pharmaceutical
and/or
vision benefits to be waived for such employees and their
covered dependents, unless such conditions would not have been
waived under the comparable prior plan of RTS or its
subsidiaries in which such employee participated immediately
prior to the effective time. Parent also must cause any eligible
expenses incurred by an employee and his or her covered
dependents during the portion of the plan year of the prior plan
of RTS ending on the date such employees participation in
the corresponding new employee benefit plan begins to be taken
into account under such new employee benefit plan for purposes
of satisfying all deductible, coinsurance and maximum
out-of-pocket requirements applicable to such employees and
their covered dependents for the applicable plan year.
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Indemnification
of Directors and Officers; Insurance
Parent has agreed that it will not, and it will cause the
surviving corporation not to, alter or impair any exculpatory or
indemnification provisions now existing in favor of our and our
subsidiaries current or former directors or officers as
provided in the articles of incorporation or bylaws of the
surviving corporation or as evidenced by indemnification
agreements with us. Furthermore, Parent has agreed that the
surviving corporation will, as permitted by law, comply with all
of our and our subsidiaries obligations to indemnify
(i) current and former officers and directors with respect
to any claims arising out of acts or omissions occurring on or
before the effective time, as provided in their respective
organizational documents or in any agreements in effect on the
date of the Merger Agreement, and (ii) such persons against
any claims arising out of acts or omissions in connection with
their service as officers, directors or other fiduciaries in any
entity if such service was at the request of or for the benefit
of us or our subsidiaries. This obligation will survive the
merger and will continue in full force and effect until the
expiration of the applicable statute of limitations with respect
to any claims against such directors, officers or employees
arising out of such acts or omissions.
For a period of six years after the effective time, the
surviving corporation must cause to be maintained in effect the
current policies of directors and officers liability
insurance, employment practice insurance and fiduciary liability
insurance maintained by us or our subsidiaries with respect to
matters arising on or before the effective time; provided that
the surviving corporation is not required to pay annual premiums
in excess of 300% of the last annual premium paid by us prior to
the date of the Merger Agreement, but in such case the surviving
corporation must purchase as much coverage as can be obtained
for such amount. The obligations described above will survive
the merger and are in addition to other rights of the
indemnified party.
Agreement
to Use Commercially Reasonable Efforts
Subject to the terms and conditions of the Merger Agreement,
each of the parties has agreed to use its commercially
reasonable efforts to complete the merger, including obtaining
all necessary approvals and consents from governmental entities
or third parties, defending any lawsuit challenging the merger,
and executing and delivering any additional instruments
necessary to consummate the merger. However, we are not required
to pay and cannot (without prior written consent of Parent) pay
any material fee, penalty, or other consideration to any
landlord or other third party to obtain any consent or approval
required for the completion of the merger.
Additionally, subject to the terms and conditions of the Merger
Agreement, RTS and Parent will (i) make their respective
filings under the
Hart-Scott-Rodino
Act within 15 business days of the date of the Merger Agreement;
(ii) use commercially reasonable efforts to cooperate in
determining whether filings or consents are necessary to
complete the merger and timely make such filings or seek such
consents; (iii) promptly inform the other party upon
receipt of any material communication from a governmental
entity; and (iv) keep each other apprised of the status of
matters relating to the merger.
Each of RTS and Parent have also agreed not to participate in
any substantive discussion with a governmental entity in
connection with the proposed transactions unless it notifies the
other party and gives the other party the opportunity to
participate in such discussion to the extent permitted by the
governmental entity. Neither RTS nor Parent is permitted to
extend any waiting period under the
Hart-Scott-Rodino
Act or enter into an agreement with a governmental entity
relating to the merger without the prior written consent of the
other party.
If any administrative or judicial action or proceeding,
including any proceeding by a private party, is instituted or
threatened to be instituted challenging the merger as violative
of any antitrust, competition or trade regulation law, each of
RTS and Parent will cooperate in all respects with each other
and will use their commercially reasonable efforts to contest
and resist any such action or proceeding and to have vacated,
lifted, reversed or overturned any decree, judgment, injunction
or other order, whether temporary, preliminary or permanent,
that is in effect and that prohibits, prevents or restricts
consummation of the transactions contemplated by the Merger
Agreement.
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Financing
Commitments; Cooperation of RTS
Parent and Merger Sub will use their commercially reasonable
efforts to obtain the equity and debt financing necessary to
consummate the merger, on the terms and conditions described in
the equity commitment letter and debt commitment letter pursuant
to which certain lenders have committed to provide the
financing, including using their commercially reasonable efforts
to:
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negotiate definitive agreements with respect thereto on the
terms and conditions contained in the financing commitments;
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satisfy on a timely basis all conditions to obtaining the
financing applicable to Parent and Merger Sub set forth in such
definitive agreements that are within its control; and
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comply with their obligations and enforce their rights under the
executed debt commitment letter.
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Parent shall give us prompt notice upon becoming aware of any
material breach by any party of any of the financing commitments
or any termination of the financing commitments. Parent must
keep us reasonably informed of the status of its efforts to
arrange the debt financing and must not permit any amendment or
modification to be made to, or any waiver of any material
provision or remedy under, the debt commitment letter, except as
expressly permitted under the Merger Agreement. Parent must
notify us immediately in the event that Parent becomes aware of
any circumstance that makes procurement of any portion of the
financing unlikely to occur in the manner or from the sources
contemplated in the financing commitments, and Parent and Merger
Sub must use their respective commercially reasonable efforts to
arrange any such portion from alternative sources on terms and
conditions, taken as a whole, no less favorable to Parent or
Merger Sub.
We have agreed to use commercially reasonable efforts to, and
have agreed to cause our affiliates to provide such reasonable
cooperation as may be reasonably requested by Parent in
connection with obtaining the financing contemplated by the debt
commitment letter, including to:
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participate in a reasonable number of meetings, presentations,
road shows, drafting and due diligence sessions, and
sessions with rating agencies;
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assist with the preparation of materials for rating agency
presentations, offering documents, private placement memoranda,
bank information memoranda, prospectuses, business projections
and similar documents required in connection with the financing
contemplated by the financing commitments; provided that any
private placement memoranda or prospectuses shall contain
disclosure and financial statements reflecting the surviving
corporation
and/or
its
affiliates as the obligor;
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use commercially reasonable efforts to cause our independent
accountants to provide assistance and cooperation to Parent
(including participating in a reasonable number of drafting
sessions and due diligence sessions);
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execute and deliver any pledge and security documents, currency
or interest hedging arrangements or other definitive financing
documents or other certificates, legal opinions and documents as
may be reasonably requested by Parent (including certificates of
the chief financial officer or any of the Companys
affiliates with respect to financing matters) or otherwise
facilitating the pledging of collateral as may be reasonably
requested by Parent; provided that any obligations contained in
such documents shall be effective no earlier than as of the
effective time,
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furnish Parent and Merger Sub and their financing sources as
promptly as practicable with such financial and other pertinent
information as may be reasonably requested by Parent, including
all financial statements and financial data of the type and
form, and for the periods, customarily included in private
placements under Rule 144A of the Securities Act to
consummate the offering debt securities contemplated by the debt
commitment letter;
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obtain accountants comfort letters, accountants
consents, legal opinions, surveys and title insurance as
reasonably requested by Parent.
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take all actions reasonably necessary to (i) permit the
lenders under the debt commitment letter to evaluate the
Companys and its affiliates current assets, cash
management and accounting systems, policies and procedures
relating thereto for the purpose of establishing collateral
arrangements, and (ii) establish bank and other accounts
and blocked account agreements and lock box arrangements in
connection with the foregoing, provided that such accounts,
agreements and arrangements will not become active or take
effect until the effective time;
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enter into one or more credit or other agreements on terms
reasonably satisfactory to Parent in connection with the
financing contemplated by the debt commitment letter; provided
that neither the Company nor any of its affiliates shall be
required to enter into any agreement that is not contingent upon
the closing (including the entry into any purchase
agreement); and
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take all corporate actions, subject to the occurrence of the
effective time, reasonably requested by Parent to permit the
consummation of the financing contemplated by the debt
commitment letter and the direct borrowing or incurrence of all
of the proceeds of the financing contemplated by the debt
commitment letter.
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We will not be required to pay any commitment or similar fee or
incur any other liability in connection with the financing
contemplated by the financing commitments prior to the effective
time, and Parent and Merger Sub will indemnify and hold us
harmless from and against any liability that we suffer or incur
in connection with the arrangement of the financing contemplated
by the financing commitments and any information utilized in
connection with the financing.
The respective obligations of the parties to effect the merger
are subject to the satisfaction (or waiver by all parties) at or
prior to the effective time of the following conditions:
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the approval of the Merger Agreement by our shareholders;
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no law, judgment, injunction, order or decree by any court or
other tribunal of competent jurisdiction which prohibits the
consummation of the merger has been entered and is in effect;
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the expiration or termination of any applicable waiting period
(and any extension thereof) under the
Hart-Scott-Rodino
Act; and
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any other approvals required for the consummation, as of the
effective time, of the merger, other than approvals consents or
waivers the failure to obtain which would not
(i) reasonably be expected, individually or in the
aggregate, to have an adverse effect equal to or greater than
2.5% of our revenues, EBITDA or assets taken as a whole, or
(ii) give rise to a violation of criminal law.
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Our obligation to effect the merger is further subject to the
fulfillment of the following conditions:
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the representations and warranties of Parent and Merger Sub must
be true and correct in all respects as of the date of the Merger
Agreement and as of the closing date, disregarding for these
purposes any materiality or Parent material adverse effect
qualifications, except for such failures to be true and correct
as would not have, individually or in the aggregate, a Parent
material adverse effect; provided that representations or
warranties that are made as of a particular date or period need
be true and correct only as of that date or period;
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Parent must have in all material respects performed all
obligations and complied with all the agreements required by the
Merger Agreement to be performed or complied with by it prior to
the effective time;
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Parent must have delivered to us a certificate with respect to
the satisfaction of the conditions relating to its
representations and warranties and obligations; and
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substantially contemporaneous with the effective time of the
merger, Parent must have caused to be deposited with the paying
agent cash in an aggregate amount sufficient to pay the merger
consideration and other amounts payable pursuant to the Merger
Agreement.
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The obligation of Parent to effect the merger is further subject
to the fulfillment of the following conditions:
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(i) our representations and warranties (other than our
representations and warranties concerning our capitalization,
the corporate authority to enter into and consummate the
transactions contemplated by Merger Agreement, the validity and
binding effect of the Merger Agreement, the Merger being fair
and in the best interest of our shareholders, submission of the
Merger Agreement to shareholders for approval and recommend the
shareholders approve the Merger Agreement, the Unqualified
Representation) must be true and correct in all respects
as of the date of the Merger Agreement and as of the closing
date, disregarding for these purposes any materiality or Company
material adverse effect qualifications therein, except for such
failures to be true and correct as would not have, individually
or in the aggregate, a Company material adverse effect,
(ii) the Unqualified Representations must be true and
correct in all respects at and as of the date of the Merger
Agreement and as of the closing date; provided that, with
respect to (i) and (ii) above, representations and
warranties that are made as of a particular date or period must
be true and correct (in the manner set forth in clauses (i)
or (ii), as applicable) only as of such date or period;
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we must have in all material respects performed all obligations
and complied with all the agreements required by the Merger
Agreement to be performed or complied with by us prior to the
effective time;
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we have delivered to Parent certificates (i) with respect
to the satisfaction of the conditions relating to our
representations and warranties and obligations and (ii) in
form and substance reasonably satisfactory to Parent regarding
any facts that would exempt the transactions contemplated by the
Merger Agreement from withholding under Section 1445 of the
Internal Revenue Code;
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since the date of the Merger Agreement, no change, circumstance
or effect shall have occurred that has or would reasonably be
expected to have a Company material adverse effect;
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the aggregate amount of dissenting shares will be less than 5%
of the total outstanding shares immediately prior to the
effective time; and
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certain required third party consents will have been obtained as
of the effective time; and
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our representation and warranty regarding disclosure of material
information must be true and correct in all respects as of the
date of the Merger agreement and as of the closing date.
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Neither RTS nor Parent may rely, either as a basis for not
consummating the merger or for terminating the Merger Agreement
and abandoning the merger, on the failure of any condition to be
satisfied if such failure was caused by such partys breach
of any provision of the Merger Agreement or failure to use its
commercially reasonable efforts to consummate the merger and the
other transactions contemplated by the Merger Agreement.
The Merger Agreement may be terminated and abandoned at any time
prior to the effective time of the merger, whether before or
after shareholder approval has been obtained (unless specified
otherwise), as follows:
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by the mutual written consent of RTS and Parent;
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by either RTS or Parent if:
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the merger has not been consummated on or before April 21,
2008; provided that the failure to consummate the merger on or
before such date cannot be the result of or caused by the
failure, by the party seeking to terminate the merger, to
perform any of its covenants or agreements in the
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Merger Agreement; provided, however, that if the marketing
period has commenced, but not ended, on or before April 21,
2008, the April 21, 2008 date for consummation of the
merger shall automatically be extended through the earlier of
(i) the final day of the marketing period or (ii) the
tenth business day after April 21, 2008; provided, further,
that if Parent shall not have obtained the financing by
April 21, 2008 (as such date may be extended pursuant to
the clause above) and the mutual conditions and conditions to
the obligation of Parent to close are satisfied, notwithstanding
the satisfaction of such conditions, Parent will have the right
to terminate the Merger Agreement, based on the failure to
consummate the merger by April 21, 2008 (or as such date
may be extended pursuant to the clauses above), but only if
Holdings pays the Parent termination fee to us (and such
termination shall not constitute a breach of Parents
obligation to close);
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an injunction, order, decree or ruling has been entered
permanently restraining, enjoining or otherwise prohibiting the
consummation of the merger and such injunction has become final
and non-appealable; provided that the party seeking to terminate
must have used its commercially reasonable efforts to remove
such injunction, order, decree or ruling; provided further, that
this right shall not be available to a party if the issuance of
such final non-appealable order, decree or ruling or the failure
to remove such order decree or ruling was primarily due to the
failure of such party to perform its obligations under the
Merger Agreement; or
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the company meeting (including any adjournments thereof) is
concluded and the shareholder approval contemplated by the
Merger Agreement was not obtained.
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Parent breaches or fails to perform in any material respect any
of its representations, warranties or agreements contained in
the Merger Agreement, which breach or failure to perform would
result in a failure of conditions to the obligations of the
Company to close the merger relating to representations,
warranties, or agreements of Parent, which cannot be cured by
April 21, 2008; provided that RTS is not then in material
breach of the Merger Agreement;
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prior to obtaining shareholder approval, (i) the special
committee or the board of directors has concluded in good faith,
after consultation with legal counsel and the special
committees financial advisor, that, in light of a superior
proposal, failure to terminate the Merger Agreement would be
inconsistent with the directors exercise of their
fiduciary obligations to the Companys shareholders (other
than the Rollover Investors) under applicable law, (ii) the
Company has complied in all material respects with the
requirements regarding non-solicitation of alternative proposals
and a change of recommendation, and (iii) concurrent with
such termination, the Company enters into a definitive agreement
with respect to such superior proposal; or
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Parent does not give effect to a closing within five business
days after notice by RTS to Parent that the mutual conditions
and the conditions to Parent closing the merger are satisfied
and Parent fails to effect the Merger within three business days
following the final day of the marketing period; provided, that
at the time of such notice and at the time of such termination,
the mutual conditions and the conditions to Parent closing the
merger shall in fact be and shall remain satisfied; provided,
further, that RTS will have no right to terminate the Merger
Agreement if at the time of such termination, there exists a
breach of any representation, warranty or covenant by RTS that
would result in a failure to satisfy the closing conditions
regarding RTSs representation and warranties and
performance of its obligations and agreements required by the
Merger Agreement.
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by Parent if:
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RTS, or any of its subsidiaries or representatives has failed to
comply in any material respects with the requirements regarding
non-solicitation of alternative proposals or a change of
recommendation with respect to the Merger Agreement or the board
of directors or special committee shall have resolved to do so;
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RTS has breached or failed to perform in any material respect
any of its representations, warranties or agreements contained
in the Merger Agreement, which breach or failure to perform
would result in a failure of a condition to the obligation of
Parent to close the merger and it cannot be cured by
April 21, 2008; provided that Parent is not then in
material breach of the Merger Agreement; or
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the RTS board of directors has effected a change of
recommendation with respect to the Merger Agreement or RTS has
failed to include in its proxy statement the board of directors
recommendation that RTSs shareholders approve the Merger
Agreement and the transactions contemplated by the Merger
Agreement.
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In the event of termination of the Merger Agreement based on the
foregoing provisions, the Merger Agreement will terminate
(except for the confidentiality agreement, the provisions
concerning payment of termination fees and certain miscellaneous
provisions), and there will be no other liability on the part of
us or Parent to the other except for any liability arising out
of fraud or an intentional breach of the Merger Agreement or as
provided for in the confidentiality agreement, or any liability
for termination fees, in which case the aggrieved party shall be
entitled to all rights and remedies available at law or in
equity and may seek to prove additional damages, in each case
subject to the limitations set forth in the Merger Agreement.
Termination
Fees and Expenses
Payable
by RTS
Under the Merger Agreement, we are required to pay to Holdings a
$25,000,000 termination fee in cash if the Merger Agreement is
terminated as follows:
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if (i) prior to the termination of the Merger Agreement,
any alternative proposal (substituting 50% for the 10% threshold
set forth in the definition of alternative proposal) which could
or could reasonably be expected to result in a transaction as
favorable or more favorable to shareholders (other than the
Rollover Investors) than the transaction provided in the Merger
Agreement at such time as the bona fide intention of any person
to make an alternative proposal is publicly proposed or publicly
disclosed or otherwise made known to us prior to the time of
such termination; (ii) the Merger Agreement is terminated
(A) by Parent or RTS if the effective time has not occurred
by April 21, 2008 or because shareholder approval was not
obtained at the special meeting, or (B) the Merger
Agreement is terminated by Parent because RTS, or any of its
subsidiaries or representatives has failed to comply in any
material respects with the requirements regarding
non-solicitation of alternative proposals and a change of
recommendation with respect to the Merger Agreement or the board
of directors or special committee shall have resolved to do so,
or RTS has breached or failed to perform any material agreements
that would result in the failure of a closing condition and
could not be cured by April 21, 2008; and
(iii) concurrently with or within nine months after such
termination, any definitive agreement providing for an
alternative acquisition transaction has been entered into;
provided that we will not be required to pay a termination fee
if Holdings has previously paid a termination fee to us in
connection with a failure to close the merger by April 21,
2008;
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if prior to obtaining shareholder approval, we terminate the
Merger Agreement because the board of directors or special
committee concludes it must withdraw or change its
recommendation of the Merger Agreement in light of a superior
proposal, in accordance with its fiduciary obligations under
law, and concurrently with such termination we enter into a
definitive agreement with respect to such superior
proposal; or
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if Parent terminates the Merger Agreement because RTSs
board of directors shall have effected a change of
recommendation with respect to the Merger Agreement or RTS fails
to include in its proxy statement the board of directors
recommendation that RTSs shareholders approve the Merger
Agreement and the transactions contemplated by the Merger
Agreement.
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Under the Merger Agreement, we are required to reimburse
Holdings for the documented out-of-pocket fees and expenses
reasonably incurred by Parent and Merger Sub in connection with
the Merger Agreement (not to exceed $3,000,000 in cash), if the
Merger Agreement is terminated as follows:
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if Parent terminates the Merger Agreement because (x) RTS,
or any of its subsidiaries or representatives has failed to
comply in any material respects with the requirements regarding
non-solicitation of alternative proposals and a change of
recommendation with respect to the Merger Agreement or the board
of directors or special committee shall have resolved to do so
or (y) RTS has breached or failed to perform any material
agreements that would result in the failure of a closing
condition or could not be cured by April 21, 2008;
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if Parent terminates the Merger Agreement because RTSs
board of directors shall have effected a change of
recommendation with respect to the Merger Agreement or RTS fails
to include in its proxy statement the board of directors
recommendation that RTSs shareholders approve the Merger
Agreement and the transactions contemplated by the Merger
Agreement;
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if prior to obtaining shareholder approval we terminate the
Merger Agreement because the board of directors or special
committee concludes it must withdraw or change its
recommendation of the Merger Agreement in light of a superior
proposal, in accordance with its fiduciary obligations under
law, and concurrently with such termination we enter into a
definitive agreement with respect to such superior
proposal; or
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if either we or Parent terminate the Merger Agreement because
after the special meeting (including any adjournments or
postponements thereof) RTSs shareholders have not approved
the Merger Agreement.
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Upon payment of the termination fee or expense reimbursement
amounts, as applicable, we will have no further liability with
respect to the Merger Agreement or the transactions contemplated
by the Merger Agreement to Parent or its shareholders except for
liability arising out of fraud or intentional breach of the
Merger Agreement. In no event will we be required to pay the
termination fee or expense reimbursement fees on more than one
occasion.
Payable
by Holdings
Under the Merger Agreement, Holdings is required to pay us a
$25,000,000 termination fee in cash, and reimburse us for our
documented out-of-pocket fees and expenses reasonably incurred
in connection with the Merger Agreement (not to exceed
$3,000,000 in cash), if the Merger Agreement is terminated as
follows:
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if either we or Parent terminate the Merger Agreement because
the mutual conditions to closing of the merger and the
conditions to Parent closing the merger would have been
satisfied had the closing been scheduled on April 21, 2008
(as such date may be extended by the Marketing Period) and the
merger has not occurred on or before such date;
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if we terminate because Parent breaches or fails to perform in
any material respect any of its representations, warranties or
agreements contained in the Merger Agreement, which breach or
failure to perform would result in a failure of a condition to
our closing of the merger which cannot be cured by
April 21, 2008; provided that RTS is not then in material
breach of the Merger Agreement;
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if we terminate because Parent does not give effect to the
closing of the merger within five business days after we notify
Parent that the mutual conditions to closing and Parents
conditions to closing of the merger have been satisfied and
Parent fails to effect the merger within three business days
following the final day of the Marketing Period, and we are not
in breach of any of our representations, warranties or covenants.
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We have agreed that (other than in the case of an intentional
breach of the Merger Agreement or fraud) our right to receive
payment of a termination fee and expense reimbursement fees from
Parent pursuant to the terms of the Merger Agreement will be the
sole and exclusive remedy available to us, our affiliates and
our subsidiaries against Parent, Merger Sub and any of their
respective former, current, and future direct or indirect equity
holders, controlling persons, general or limited partners,
shareholders, managers, members,
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directors, officers, affiliates, employees, agents or assignees
in the event that we have incurred any losses or damages, or
suffered any harm, if Parent and Merger Sub fail to effect the
closing or otherwise are in breach of the Merger Agreement and
upon payment of the termination fee and expense reimbursement
fees, none of Parent, Merger Sub, or any of their respective
former, current, or future general or limited partners,
shareholders, managers, members, directors, officers,
affiliates, controlling persons, employees, agents or assignees
will have any further monetary liability or obligation relating
to or arising out of the Merger Agreement or the transactions
contemplated by the Merger Agreement under any theory for any
reason (except for fraud or an intentional breach of the Merger
Agreement). In the case of fraud or any intentional breach of
the Merger Agreement, we shall be entitled to all rights and
remedies available at law or in equity solely with respect to
the recovery of monetary damages, provided that in no event
shall we seek to prove or recover damages that, together with
any Parent termination fee and Parent reimbursement received by
us, exceed $40,000,000.
The Company and Parent agreed that in the event either party
takes or fails to take any action or to perform any of its
obligations under the Merger Agreement or any related document
based on a good faith determination, with a reasonable basis,
that such action, inaction or non-performance is consistent with
the terms of the Merger Agreement or other related document, and
it is ultimately determined that such action, inaction or
non-performance was not consistent with the terms of the Merger
Agreement or of such other related document, then the resulting
breach by such party shall not constitute an intentional breach
or fraud for purposes of the Merger Agreement.
Any provision of the Merger Agreement may be amended or waived
at any time prior to the closing date of the merger, whether
before or after the approval of the Merger Agreement by our
shareholders, if such amendment or waiver is in writing and
signed, in the case of an amendment by RTS, Parent and Merger
Sub, or in the case of a waiver, by the party against whom the
waiver is effective. However, after the Merger Agreement has
been approved by our shareholders, there will be no amendment or
waiver that by law would require the further approval of our
shareholders without such approval having been obtained.
Parent and Merger Sub are entitled to an injunction or
injunctions to prevent breaches of the Merger Agreement and to
enforce specifically the terms and provisions of the Merger
Agreement. We are not entitled to an injunction or injunctions
to prevent breaches of the Merger Agreement and to enforce
specifically the terms and provisions of the Merger Agreement.
85
The discussion of the provisions set forth below is not a
complete summary regarding your appraisal rights under Florida
law and is qualified in its entirety by reference to
Sections 607.1301 through 607.1333 of the Florida Business
Corporation Act (FBCA), which are reproduced in full
in Annex C attached to this proxy statement. We urge each
shareholder to carefully review Annex C if it wishes to
assert appraisal rights with respect to the merger and, if such
shareholder deems appropriate, consult their legal advisor.
Failure to comply fully with the statutory procedures in
Annex C could result in a loss, termination or waiver of
appraisal rights.
We have concluded that our shareholders are entitled to assert
appraisal rights under the FBCA in the event of the consummation
of the merger. If the merger is consummated, holders of our
common stock asserting appraisal rights who follow the
procedures specified in Sections 607.1301 through 607.1333
of the FBCA within the required time periods will be entitled to
obtain payment in cash of the fair value of their shares of our
common stock as determined pursuant to such Sections of the FBCA
in lieu of the consideration that such shareholders would
otherwise be entitled to receive pursuant to the Merger
Agreement.
The following is a brief summary of Sections 607.1301
through 607.1333 of the FBCA, which set forth the procedures for
asserting and perfecting statutory appraisal rights. Failure to
follow the procedures set forth in Sections 607.1301
through 607.1333 of the FBCA precisely could result in the loss,
termination or waiver of appraisal rights. This proxy statement
constitutes notice to holders of our common stock concerning the
availability of appraisal rights under Section 607.1320 of
the FBCA. A shareholder of record wishing to assert appraisal
rights must hold the shares of stock on the date of making a
demand for appraisal rights with respect to such shares and must
continuously hold such shares through the effective time of the
merger.
Shareholders who desire to exercise their appraisal rights must:
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deliver to us, before the shareholders vote on the approval of
the Merger Agreement is taken at the special meeting, written
notice of intent to demand payment if the merger is
effectuated; and
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|
not vote, or cause or permit to be voted, any of their shares of
our common stock FOR the approval of the Merger
Agreement.
|
The written notice of intent to demand payment must be in
addition and separate from any proxy or vote. Any proxy or vote
against the approval of the Merger Agreement will not alone
constitute a written notice of intent to demand payment of the
fair value of shares pursuant to Sections 607.1301 through
607.1333 of the FBCA. Further, if the shareholder signs, dates
and mails the proxy card without indication how it wishes to
vote such shareholders proxy will be voted FOR
approval of the Merger Agreement in accordance with the
recommendation of the board of directors and such shareholder
would thereby lose the right to assert appraisal rights.
A written notice of intent to demand payment of the fair value
of shares must be executed by or for the shareholder of record,
fully and correctly, as such shareholders name appears on
the share certificate. If the shares are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian,
the written notice must be executed by or for the fiduciary. If
the shares are owned by or for more than one person, as in a
joint tenancy or tenancy in common, the written notice must be
executed by or for all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the
written notice for a shareholder of record; however, the agent
must identify the record owner or owners and expressly disclose
the fact that, in delivering the written notice, he is acting as
agent for the record owner or owners. A person having a
beneficial interest in our common stock held of record in the
name of another person, such as a broker or nominee, may assert
appraisal rights as to shares held on behalf of the shareholder
only if such shareholder submits to us the record
shareholders written consent to the assertion of such
rights in a timely manner to perfect whatever appraisal rights
the beneficial owner may have.
A shareholder who desires to deliver to us a written notice of
intent to demand payment of the fair value of shares pursuant to
Sections 607.1301 through 607.1333 of the FBCA should mail
or deliver the required written notice to us at our address at
2234 Colonial Boulevard, Ft. Myers, Florida 33907,
Attention: Chief
86
Financial Officer. The written notice should specify the
shareholders name and mailing address, and that the
shareholder is asserting appraisal rights and demanding payment
of the fair value of his shares of our common stock pursuant to
Sections 607.1301 through 607.1333 of the FBCA. Within ten
days after the effective time of the merger, we must provide a
written appraisal notice and form to all record shareholders who
have timely complied with the written notice requirement of
Section 607.1321 of the FBCA and have not voted, or caused
or permitted to be voted, any of their shares of our common
stock for the approval of the Merger Agreement. The written
appraisal notice must be accompanied by certain financial
statements of RTS for the fiscal year ended not more than
15 months prior to the appraisal notice and the latest
available interim financial statements, if any, and a copy of
Sections 607.1301 through 607.1333 of the FBCA. The form
accompanying the appraisal notice will require the shareholder
to state: the shareholders name and address; the number,
classes, and series of shares as to which the shareholder
asserts appraisal rights; that the shareholder did not vote for
the transaction; whether the shareholder accepts our offer to
pay our estimate of fair value of such shareholders shares
as stated in the appraisal notice; and if our offer is not
accepted, the shareholders estimated fair value of the
shares and a demand for payment of the shareholders
estimated value plus interest.
Our written appraisal notice will state:
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where the form must be sent and where certificates for
certificated shares must be deposited and the date by which
those certificates must be deposited, which date may not be
earlier than the date by which the form must be received by us
as described below;
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a date by which we must receive the form, which date may not be
fewer than 40 nor more than 60 days after the date the
appraisal notice and form are sent, and that the shareholder
shall have waived the right to demand appraisal with respect to
the shares unless the form is received by us by such specified
date;
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our estimate of the fair value of the shares and an offer to
each shareholder who is entitled to appraisal rights to be paid
our estimate of fair value;
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|
that, if requested in writing, we will provide to the
shareholder so requesting, within ten days after the date the
form must be received by us, the number of shareholders who
return the forms by the specified date and the total number of
shares owned by them; and
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|
the date by which the notice to withdraw under Section 607.1323
of the FBCA must be received, which date must be within
20 days after the date the form must be received by us.
|
If a shareholder who wishes to exercise appraisal rights does
not execute and return the form accompanying the appraisal
notice to us (and, in the case of certificated shares, deposit
the shareholders certificates in accordance with the terms
of, and by the date specified in, the appraisal notice) as
described above, such shareholder will not be entitled to
receive payment of the fair value of his shares pursuant to
Sections 607.1301 through 607.1333 of the FBCA. Once a
shareholder returns the executed appraisal form with his stock
certificates, that shareholder loses all rights as a holder of
RTS common stock unless he withdraws from the appraisal process
pursuant to Section 607.1323 of the FBCA. A shareholder who
has duly executed and returned the appraisal form to us with his
stock certificates may nevertheless decline to exercise
appraisal rights and withdraw from the appraisal process
pursuant to Section 607.1323 of the FBCA by so notifying us
in writing by the date set forth in the appraisal notice as the
due date for notices of withdrawal. A shareholder who fails to
so withdraw from the appraisal process may not thereafter
withdraw without our written consent.
If the shareholder states on the appraisal form that he accepts
our offer to pay our estimated fair value for his shares of our
common stock, we will make such payment to the shareholder
within 90 days after we receive the duly executed appraisal
form from the shareholder. Upon payment of the agreed value, the
shareholder will cease to have any interest in the shares.
A shareholder who is dissatisfied with our offer as set forth in
the appraisal notice must notify us on the appraisal form of
that shareholders estimate of the fair value of his shares
of our common stock and demand payment of that estimate plus
interest. A shareholder who fails to notify us in writing of his
demand to be
87
paid his stated estimate of the fair value plus interest within
the timeframe stated in the appraisal notice will have waived
his right to demand payment and will be entitled only to the
payment offered by us.
If a shareholder makes demand for payment as described in the
immediately preceding paragraph which remains unsettled and we
do not commence a proceeding within 60 days after receiving
the payment demand and petition the court to determine the fair
value of the shares and accrued interest, any shareholder who
has made such a demand for payment may commence such a
proceeding in the name of RTS. All shareholders whose demands
remain unsettled will be made parties to the proceeding and we
must serve a copy of the initial pleading upon each shareholder
party. Each shareholder made a party to the proceeding is
entitled to judgment for the amount of the fair value of such
shareholders shares, plus interest, as found by the court.
Shareholders considering asserting appraisal rights should note
that the fair value of their shares determined under
Sections 607.1301 through 607.1333 of the FBCA could be
more, the same or less than the consideration they would receive
pursuant to the Merger Agreement if they did not assert
appraisal rights. The court in an appraisal proceeding will
determine all costs of the proceeding, including the
compensation and expenses of appraisers appointed by the court.
The court additionally will assess the costs against us, except
that the court may assess costs against all or some of the
shareholders demanding appraisal, in amounts the court finds
equitable, to the extent the court finds such shareholders acted
arbitrarily, vexatiously or not in good faith. The court in an
appraisal proceeding may also assess the expenses of counsel and
experts for the respective parties , in amounts the court finds
equitable: (i) against us and in favor of any or all
shareholders demanding appraisal if the court finds that we did
not substantially comply with Sections 607.1320 and
607.1322 of the FBCA, or (ii) against either us or a
shareholder demanding appraisal, in favor of any other party, if
the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in
good faith. The exchange of shares for cash pursuant to the
exercise of appraisal rights generally will be a taxable
transaction for United States federal income tax purposes and
possibly state, local and foreign income tax purposes as well.
See Special Factors Material United States
Federal Income Tax Consequences of the Merger on
page 55.
Any shareholder who has duly demanded appraisal in compliance
with Sections 607.1301 through 607.1333 of the FBCA will
not, after the effective time of the merger, be entitled to vote
for any purpose the shares subject to demand or to receive
payment of dividends or other distributions on such shares,
except for dividends or distributions payable to shareholders of
record at a date prior to the effective time of the merger.
Failure by any shareholder to comply fully with the procedures
of Sections 607.1301 through 607.1333 of the FBCA (as
reproduced in Annex C to this proxy statement) may result
in loss, termination or waiver of such shareholders
appraisal rights. In view of the complexity of
Sections 607.1301 through 607.1333 of the FBCA, our
shareholders who may desire to assert appraisal rights should,
if they deem appropriate, consult their legal advisors.
88
The following information is provided about RTS or included in a
referenced Annex to this proxy statement.
Selected
Historical Financial Information
Set forth below is certain selected historical consolidated
financial data relating to RTS. The financial data has been
derived from the audited consolidated financial statements filed
and the related notes filed as part of our Annual Report on
Form 10-K
for the year ended December 31, 2006 and the unaudited
condensed consolidated financial statements and the related
notes filed as part of our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007. This financial
data should be read in conjunction with the financial statements
and the related notes contained in our
Form 10-K
and
Form 10-Q,
in Annex E and Annex F, respectively, of this proxy statement.
The following summary is qualified in its entirety by reference
to such other documents and all of the financial information and
notes contained in those documents. The historical results
presented below are not necessarily indicative of the results to
be expected for any future period.
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share amounts):
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
106,252
|
|
|
$
|
131,147
|
|
|
$
|
163,719
|
|
|
$
|
217,590
|
|
|
$
|
284,067
|
|
|
$
|
208,242
|
|
|
$
|
282,571
|
|
Other revenue
|
|
|
4,868
|
|
|
|
7,533
|
|
|
|
7,654
|
|
|
|
9,660
|
|
|
|
9,915
|
|
|
|
7,812
|
|
|
|
6,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
111,120
|
|
|
|
138,680
|
|
|
|
171,373
|
|
|
|
227,250
|
|
|
|
293,982
|
|
|
|
216,054
|
|
|
|
289,493
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
57,248
|
|
|
|
72,146
|
|
|
|
87,059
|
|
|
|
116,300
|
|
|
|
147,697
|
|
|
|
107,505
|
|
|
|
148,780
|
|
Medical Supplies
|
|
|
2,312
|
|
|
|
2,226
|
|
|
|
3,608
|
|
|
|
5,678
|
|
|
|
7,569
|
|
|
|
5,736
|
|
|
|
9,036
|
|
Facility rent expenses
|
|
|
3,744
|
|
|
|
4,656
|
|
|
|
5,347
|
|
|
|
7,720
|
|
|
|
9,432
|
|
|
|
6,824
|
|
|
|
9,814
|
|
Other operating expenses
|
|
|
7,194
|
|
|
|
8,690
|
|
|
|
7,561
|
|
|
|
9,748
|
|
|
|
12,761
|
|
|
|
9,227
|
|
|
|
13,164
|
|
General and administrative expenses
|
|
|
10,475
|
|
|
|
16,400
|
|
|
|
19,671
|
|
|
|
23,538
|
|
|
|
30,209
|
|
|
|
22,341
|
|
|
|
30,548
|
|
Depreciation and amortization
|
|
|
4,283
|
|
|
|
5,202
|
|
|
|
6,860
|
|
|
|
10,837
|
|
|
|
16,967
|
|
|
|
12,136
|
|
|
|
17,576
|
|
Provision for doubtful accounts
|
|
|
3,365
|
|
|
|
3,375
|
|
|
|
5,852
|
|
|
|
6,792
|
|
|
|
9,425
|
|
|
|
7,198
|
|
|
|
8,215
|
|
Interest expense, net
|
|
|
2,615
|
|
|
|
2,053
|
|
|
|
3,435
|
|
|
|
5,290
|
|
|
|
10,036
|
|
|
|
6,751
|
|
|
|
12,085
|
|
Impairment loss
|
|
|
|
|
|
|
284
|
|
|
|
|
|
|
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
91,236
|
|
|
|
115,032
|
|
|
|
139,393
|
|
|
|
187,129
|
|
|
|
244,096
|
|
|
|
177,718
|
|
|
|
249,218
|
|
Income before minority interests
|
|
|
19,884
|
|
|
|
23,648
|
|
|
|
31,980
|
|
|
|
40,121
|
|
|
|
49,886
|
|
|
|
38,336
|
|
|
|
40,275
|
|
Minority interests in net losses (earnings) of consolidated
entities
|
|
|
23
|
|
|
|
(7
|
)
|
|
|
55
|
|
|
|
480
|
|
|
|
(580
|
)
|
|
|
(744
|
)
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting
principle and income taxes
|
|
|
19,907
|
|
|
|
23,641
|
|
|
|
32,035
|
|
|
|
40,601
|
|
|
|
49,306
|
|
|
|
37,592
|
|
|
|
39,270
|
|
Cumulative effect of change in accounting principle
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share amounts):
|
|
|
Income before income taxes
|
|
|
18,944
|
|
|
|
23,641
|
|
|
|
32,035
|
|
|
|
40,601
|
|
|
|
49,306
|
|
|
|
37,592
|
|
|
|
39,270
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
22,847
|
|
|
|
15,631
|
|
|
|
18,983
|
|
|
|
14,473
|
|
|
|
15,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,944
|
|
|
$
|
23,641
|
|
|
$
|
9,188
|
|
|
$
|
24,970
|
|
|
$
|
30,323
|
|
|
$
|
23,119
|
|
|
$
|
24,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.14
|
|
|
$
|
1.39
|
|
|
$
|
0.45
|
|
|
$
|
1.10
|
|
|
$
|
1.31
|
|
|
$
|
1.00
|
|
|
$
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.04
|
|
|
$
|
1.28
|
|
|
$
|
0.44
|
|
|
$
|
1.05
|
|
|
$
|
1.26
|
|
|
$
|
0.97
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes, as reported
|
|
$
|
18,944
|
|
|
$
|
23,641
|
|
|
$
|
32,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma provision for income taxes(1)
|
|
|
7,966
|
|
|
|
9,456
|
|
|
|
12,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
10,978
|
|
|
$
|
14,185
|
|
|
$
|
19,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per common shares(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.84
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.60
|
|
|
$
|
0.77
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,653,542
|
|
|
|
16,974,471
|
|
|
|
20,292,117
|
|
|
|
22,725,819
|
|
|
|
23,137,966
|
|
|
|
23,100,425
|
|
|
|
23,489,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
18,265,182
|
|
|
|
18,470,880
|
|
|
|
21,031,968
|
|
|
|
23,703,653
|
|
|
|
23,993,341
|
|
|
|
23,957,564
|
|
|
|
24,171,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,294
|
|
|
$
|
2,606
|
|
|
$
|
5,019
|
|
|
$
|
8,980
|
|
|
$
|
15,413
|
|
|
$
|
12,672
|
|
|
$
|
12,409
|
|
Total Assets
|
|
|
102,783
|
|
|
|
128,036
|
|
|
|
168,177
|
|
|
|
263,345
|
|
|
|
399,094
|
|
|
|
327,139
|
|
|
|
533,454
|
|
Total debt
|
|
|
51,342
|
|
|
|
59,811
|
|
|
|
66,103
|
|
|
|
123,463
|
|
|
|
205,244
|
|
|
|
150,426
|
|
|
|
299,767
|
|
Total shareholders equity
|
|
|
37,208
|
|
|
|
49,578
|
|
|
|
66,321
|
|
|
|
95,383
|
|
|
|
134,808
|
|
|
|
123,876
|
|
|
|
163,399
|
|
|
|
|
(1)
|
|
Reflects combined federal and state income taxes on a pro forma
basis, as if we had been taxed as a C Corporation. See the
consolidated statements of income and comprehensive income and
note 18 Pro forma disclosure of the notes to
the consolidated financial statements in our Form 10-K provided
in Annex E.
|
Net
Book Value Per Share of RTS Common Stock
The net book value per diluted share of RTS common stock as of
September 30, 2007 was $6.76. This number was computed by
dividing Shareholders equity at the end of such period by
the weighted average number of shares of common stock plus the
weighted average dilutive effect of interests in stock options
and restricted stock units for the period then ended.
Our audited condensed consolidated financial statements as of
December 31, 2005 and 2006 and for the years ended
December 31, 2004, 2005 and 2006 and the related notes
thereto filed as part of our Annual
90
Report on
Form 10-K
are included in our Annual Report provided in Annex E to
this proxy statement. Our unaudited condensed consolidated
financial statements as of September 30, 2007 and for the
nine months ended September 30, 2007 and the related notes
thereto filed as part of our Quarterly Report on
Form 10-Q
are included in our Quarterly Report provided in Annex F to
this proxy statement.
Managements
Discussion and Analysis of Financial Condition and Results
ofOperations
Our managements discussion and analysis of financial
condition and results of operation is included in our
Form 10-K
for the years ended December 31, 2004, 2005 and 2006 and in
our
Form 10-Q
for the nine months ended September 30, 2007 as part of
Annex E and Annex F, respectively.
Quantitative
and Qualitative Disclosure About Market Risk
Our quantitative and qualitative disclosure about market risk is
included in our
Form 10-Q
provided in Annex F.
A description of our business is set forth in our
Form 10-K
included in Annex E.
A discussion of our properties is set forth in our
Form 10-K
included in Annex E.
A discussion of our legal proceedings other than the litigation
described elsewhere herein is included in our
Form 10-Q
included in Annex F.
91
MARKET
PRICE OF OUR COMMON STOCK
Our common stock is quoted on the NASDAQ Global Select Market
under the symbol RTSX. The following table sets
forth the high and low sale prices for our common stock for each
of the quarterly periods presented:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
19.84
|
|
|
$
|
14.31
|
|
Second Quarter
|
|
$
|
27.46
|
|
|
$
|
19.05
|
|
Third Quarter
|
|
$
|
31.86
|
|
|
$
|
25.08
|
|
Fourth Quarter
|
|
$
|
38.93
|
|
|
$
|
28.09
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
35.03
|
|
|
$
|
22.84
|
|
Second Quarter
|
|
$
|
30.13
|
|
|
$
|
23.00
|
|
Third Quarter
|
|
$
|
31.98
|
|
|
$
|
26.17
|
|
Fourth Quarter
|
|
$
|
34.47
|
|
|
$
|
28.83
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
32.89
|
|
|
$
|
28.77
|
|
Second Quarter
|
|
$
|
30.94
|
|
|
$
|
25.50
|
|
Third Quarter
|
|
$
|
31.01
|
|
|
$
|
20.58
|
|
Fourth Quarter
|
|
$
|
31.34
|
|
|
$
|
20.89
|
|
On October 19, 2007, which was the last trading day before
we announced the merger, the closing sales price for our common
stock on the NASDAQ Global Select Market was $21.56 per share.
On January 9, 2008, the last trading day before the record
date of this proxy statement, the closing price of our common
stock on NASDAQ was $29.24. You are encouraged to obtain current
market quotations for our common stock in connection with voting
your shares. As of January 10, 2008, there were
23,704,917 shares of our common stock held by approximately
2,800 beneficial owners and 56 holders of record as reported by
our transfer agent.
We have not declared or paid dividends on our common stock since
becoming a public company in June 2004. We intend to retain
future earnings to finance the growth and development of our
business and, accordingly, do not currently intend to declare or
pay any dividends on our common stock. Our board of directors
will evaluate our future earnings, results of operations,
financial condition and capital requirements in determining
whether to declare or pay cash dividends. In addition, our
credit facilities impose restrictions on our ability to pay
dividends.
92
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding the number of
shares of our common stock beneficially owned as of
January 10, 2008 (unless otherwise indicated), by:
|
|
|
|
|
each person who is known to us to be the beneficial owner of
more than five percent of our common stock;
|
|
|
|
each director;
|
|
|
|
our chief executive officer at the end of our last completed
fiscal year and our four most highly compensated executive
officers who were serving as executive officers at the end of
our last completed fiscal year; and
|
|
|
|
all current directors and executive officers as a group.
|
Unless otherwise indicated by footnote, the beneficial owner
exercises sole voting and investment power over the shares noted
below. The business address of each individual listed below is
c/o Radiation
Therapy Services, Inc. 2234 Colonial Boulevard, Ft. Myers,
Florida 33907. The beneficial ownership percentages reflected in
the table below are based on 23,704,917 shares of our
common stock outstanding as of January 10, 2008:
|
|
|
|
|
|
|
|
|
|
|
Name of Beneficial Owners
|
|
Position
|
|
Number of Shares
|
|
Percent
|
|
Howard M. Sheridan, M.D.(1)
|
|
Chairman of the Board of Directors
|
|
|
2,261,159
|
|
|
|
9.3
|
%
|
Daniel E. Dosoretz, M.D.(2)
|
|
Chief Executive Officer, President and Director
|
|
|
3,897,027
|
|
|
|
16.0
|
|
James H. Rubenstein, M.D.(3)
|
|
Secretary, Medical Director and Director
|
|
|
2,624,745
|
|
|
|
10.8
|
|
Michael J. Katin, M.D.(4)
|
|
Director
|
|
|
1,028,209
|
|
|
|
4.2
|
|
Herbert F. Dorsett(5)
|
|
Director
|
|
|
200
|
|
|
|
*
|
|
Ronald E. Inge(6)
|
|
Director
|
|
|
5,000
|
|
|
|
*
|
|
Leo Doerr
|
|
Director
|
|
|
2,500
|
|
|
|
*
|
|
Solomon Agin
|
|
Director
|
|
|
120
|
|
|
|
*
|
|
Janet Watermeier
|
|
Director
|
|
|
|
|
|
|
|
|
David N. T. Watson(7)
|
|
Chief Financial Officer
|
|
|
14,711
|
|
|
|
*
|
|
Joseph Biscardi
|
|
Chief Accounting Officer
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (10 persons)
|
|
|
|
|
9,833,671
|
|
|
|
40.5
|
%
|
|
|
|
*
|
|
Less than 1.0% of the outstanding common stock.
|
|
(1)
|
|
Represents 1,105,579 held in an irrevocable trust with
Dr. Sheridan as a trustee; 50,000 shares held by
Dr. Sheridan individually, and 1,105,580 shares which
Dr. Sheridans wife has sole voting and investment
power as a trustee of a revocable living trust.
|
|
(2)
|
|
Represents 1,779,811 share held in a revocable living trust
with Dr. Dosoretz as a trustee; 770,772 shares held in
a revocable living trust with Dr. Dosoretzs wife as a
trustee; 943,367 shares held in a 2007 Grantor Retained
Annuity Trust established by Dr. Dosoretzs wife;
403,077 shares able to be acquired from stock options
currently exercisable. Dr. Dosoretzs wife has sole
voting and investment power with respect to the shares held in
trust by his wife.
|
|
(3)
|
|
Represents 512,797 shares held in a revocable living trust
with Dr. Rubenstein as trustee; 512,798 held in a Grantor
retained annuity trust established by Dr. Rubenstein;
200,000 shares subject to stock option grants to
Dr. Rubenstein currently exercisable; 1,399,150 shares
held in several separate Grantor Retained Annuity Trusts
established by Dr. Rubensteins wife.
Dr. Rubensteins wife has voting and investment power
with respect to the shares in the trusts she established.
|
|
(4)
|
|
Represents 1,028,209 shares held by Dr. Katin, and
excludes 133,792 shares held by Dr. Katins adult
children.
|
93
|
|
|
(5)
|
|
Represents 200 shares held by Herbert F. Dorsett Trust and
which his wife has shared voting and investment power.
|
|
(6)
|
|
Shares held by Mr. Inge, as trustee of the Ronald Inge
Revocable Living Trust.
|
|
(7)
|
|
Represents restricted shares granted to Mr. Watson in
connection with his employment with the Company that will be
vested in connection with the proposed merger.
|
As a result of the Support and Voting Agreements entered into
among the Rollover Investors, Parent and Holdings, the Rollover
Investors, Holdings, Parent, Merger Sub and Vestar Fund and its
controlling persons may constitute a group for
purposes of
13d-5
under
the Exchange Act with respect to their beneficial ownership of
the common stock. Pursuant to the irrevocable proxies generated
by the Rollover Investors, Holdings shares beneficial
ownership of the right to vote 9,825,851 shares of our
common stock, including 603,077 shares issuable upon the
exercise of stock options currently exercisable.
MULTIPLE
SHAREHOLDERS SHARING ONE ADDRESS
In accordance with
Rule 14a-3(e)(1)
under the Exchange Act, we are sending only one copy of this
proxy statement to shareholders who share the same last name and
address unless they have notified us that they wish to continue
receiving multiple copies. This practice, known as
householding, is designed to reduce duplicate
mailings and save printing and postage costs as well as natural
resources.
If you received a householded mailing this year and you would
like to have additional copies mailed to you or you would like
to opt out of this practice for future mailings, please submit
your request (i) via
e-mail
to
RTSs website: www.rtsx.com under the heading Investor
Relations; (ii) in writing to RTS, Attention: Investor
Relations at 2234 Colonial Boulevard, Ft. Myers Florida
33907; or (iii) telephonically to
(239) 931-7275.
You may also contact us if you received multiple copies of the
proxy materials and would prefer to receive a single copy in the
future.
SUBMISSION
OF SHAREHOLDER PROPOSALS
If the merger is not completed, you will continue to be entitled
to attend and participate in our shareholder meetings. Any
shareholder who intends to present a proposal at the 2008 annual
meeting of shareholders is required to deliver that proposal to
RTS at its principal executive offices not later than
December 1, 2007 in order to have that proposal included in
RTSs proxy statement and form of proxy for that meeting.
RTS is not required to include in its proxy statement or form of
proxy a shareholder proposal that is received after
December 1, 2007 or that otherwise failed to meet
requirements for shareholder proposals established by
regulations of the SEC.
As to any proposal that a shareholder intends to present to
shareholders other than by inclusion in RTSs proxy
statement for the 2008 annual meeting of shareholders, the
proxies named in RTSs proxy for that meeting will be
entitled to exercise their discretionary voting authority on
that proposal unless RTS received notice of the matter to be
proposed not later than January 30, 2008. Even if proper
notice was received on or prior to January 30, 2008, the
proxies named in RTSs proxy for that meeting may
nevertheless exercise their discretionary authority with respect
to such matter by advising shareholders, in the proxy statement,
of that proposal and how they intend to exercise their
discretion to vote on such matter, unless the shareholder making
the proposal solicits proxies with respect to the proposal to
the extent required by
Rule 14a-4(c)(1)
under the Exchange Act.
Any shareholder who wishes to submit an individual for
consideration for nomination as a director may do so by writing
to our corporate secretary at 2234 Colonial Boulevard,
Ft. Myers, Florida 33907. Submissions must include your
name and address, the number of shares of RTS common stock you
own, the name, age, business and residence addresses, and
principal occupation of the individual and a written statement
of the individual that he or she is willing to be considered and
is willing to serve as a director if nominated and elected. You
must also include a description of any relationship, arrangement
and understanding between you and the individual, and any
relationship known to you between the individual and any
supplier or competitor
94
of RTS. The corporate secretary will review submissions for
completeness and forward complete submissions to the nominating
committee of the board of directors.
PROVISIONS
FOR UNAFFILIATED SHAREHOLDERS
No provision has been made to grant unaffiliated shareholders
access to the corporate files of RTS, any other party to the
proposed merger or any of their respective affiliates or to
obtain counsel or appraisal services at the expense of RTS or
any other such party or affiliate.
We do not as a matter of course make public forecasts as to
future financial performance other than periodic earnings
guidance. However, certain financial forecasts prepared by
senior management in connection with the process described in
SPECIAL FACTORS Background of the Merger
were made available to the special committee, Morgan Joseph,
Wachovia Securities, Vestar Capital Partners and other bidders.
The two forecasts, prepared in June, 2007 and August 2007,
respectively are referred to below as the Original
Forecast and the Revised Forecast. The
forecasts were developed from historical financial statements
and do not give effect to any changes or expenses or corporate
borrowings as a result of the merger or any other effects of the
merger.
The forecasts were not prepared with a view toward public
disclosure or compliance with published guidelines of the SEC or
the American Institute of Certified Public Accountants for
preparation and presentation of prospective financial
information or GAAP. The prospective financial information
included in this proxy statement has been prepared by, and is
the responsibility of, RTS management. Our independent
registered certified public accounting firm, Ernst &
Young has neither examined nor compiled this prospective
financial information and, accordingly, Ernst & Young
does not express an opinion or any other form of assurance with
respect thereto. The report of Ernst & Young included
in our Form 10-K as Annex E to this proxy statement relates to
our historical financial statement information. It does not
extend to the prospective financial information and should not
be read to do so. In addition, Wachovia Securities, Morgan
Joseph and Vestar Capital Partners did not prepare the included
forecasts and have no responsibility therefor. While these
forecasts were also provided to Vestar Capital Partners, some of
the assumptions underlying the forecasts may have been changed
by Vestar Capital Partners for purposes of its analyses.
95
The following table sets forth a summary of the Revised Forecast
used by the special committee for purposes of considering and
evaluating the merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Forecast
|
|
|
|
Fiscal Years Ending December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
405,050
|
|
|
$
|
491,691
|
|
|
$
|
555,411
|
|
|
$
|
622,632
|
|
|
$
|
678,669
|
|
|
$
|
726,176
|
|
Total Direct Expenses
|
|
|
186,105
|
|
|
|
224,743
|
|
|
|
252,194
|
|
|
|
282,956
|
|
|
|
308,422
|
|
|
|
330,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
218,945
|
|
|
|
266,948
|
|
|
|
303,217
|
|
|
|
339,676
|
|
|
|
370,247
|
|
|
|
396,165
|
|
Total Operating Expenses (excl D&A)
|
|
|
72,995
|
|
|
|
85,596
|
|
|
|
93,533
|
|
|
|
101,538
|
|
|
|
110,676
|
|
|
|
118,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated EBITDA
|
|
|
145,950
|
|
|
|
181,352
|
|
|
|
209,684
|
|
|
|
238,138
|
|
|
|
259,571
|
|
|
|
277,741
|
|
G&A
|
|
|
43,236
|
|
|
|
54,739
|
|
|
|
58,512
|
|
|
|
62,496
|
|
|
|
68,121
|
|
|
|
72,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
102,714
|
|
|
|
126,613
|
|
|
|
151,172
|
|
|
|
175,642
|
|
|
|
191,450
|
|
|
|
204,851
|
|
D&A
|
|
|
25,160
|
|
|
|
35,518
|
|
|
|
41,235
|
|
|
|
46,913
|
|
|
|
51,136
|
|
|
|
54,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
77,554
|
|
|
|
91,095
|
|
|
|
109,937
|
|
|
|
128,729
|
|
|
|
140,314
|
|
|
|
150,136
|
|
Interest Expense, Net
|
|
|
17,366
|
|
|
|
21,133
|
|
|
|
21,252
|
|
|
|
19,897
|
|
|
|
16,197
|
|
|
|
11,260
|
|
Minority Interest Expense/(Income)
|
|
|
1,283
|
|
|
|
1,800
|
|
|
|
2,184
|
|
|
|
2,271
|
|
|
|
2,362
|
|
|
|
2,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
58,905
|
|
|
|
68,162
|
|
|
|
86,501
|
|
|
|
106,561
|
|
|
|
121,755
|
|
|
|
136,419
|
|
Income taxes
|
|
|
22,679
|
|
|
|
26,242
|
|
|
|
33,303
|
|
|
|
41,026
|
|
|
|
46,876
|
|
|
|
52,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
36,226
|
|
|
$
|
41,920
|
|
|
$
|
53,198
|
|
|
$
|
65,535
|
|
|
$
|
74,879
|
|
|
$
|
83,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted E.P.S
|
|
$
|
1.50
|
|
|
$
|
1.73
|
|
|
$
|
2.18
|
|
|
$
|
2.66
|
|
|
$
|
3.02
|
|
|
$
|
3.35
|
|
Capital Expenditures
|
|
$
|
126,893
|
|
|
$
|
83,649
|
|
|
$
|
73,816
|
|
|
$
|
70,899
|
|
|
$
|
55,000
|
|
|
$
|
60,000
|
|
Increase in Net Working Capital
|
|
$
|
19,401
|
|
|
$
|
13,912
|
|
|
$
|
10,285
|
|
|
$
|
10,751
|
|
|
$
|
4,486
|
|
|
$
|
8,289
|
|
Revenue per treatment
|
|
$
|
729
|
|
|
$
|
777
|
|
|
$
|
787
|
|
|
$
|
796
|
|
|
|
|
|
|
|
|
|
% growth
|
|
|
|
|
|
|
6.6
|
%
|
|
|
1.3
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
# of treatment centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
|
|
3
|
|
Developed
|
|
|
4
|
|
|
|
9
|
|
|
|
5
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
Growth Rates and Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Growth in Revenue
|
|
|
37.8
|
%
|
|
|
21.4
|
%
|
|
|
13.0
|
%
|
|
|
12.1
|
%
|
|
|
9.0
|
%
|
|
|
7.0
|
%
|
Gross Profit Margin
|
|
|
54.1
|
%
|
|
|
54.3
|
%
|
|
|
54.6
|
%
|
|
|
54.6
|
%
|
|
|
54.6
|
%
|
|
|
54.6
|
%
|
Consolidated EBITDA Margin
|
|
|
36.0
|
%
|
|
|
36.9
|
%
|
|
|
37.8
|
%
|
|
|
38.2
|
%
|
|
|
38.2
|
%
|
|
|
38.2
|
%
|
EBITDA Margin
|
|
|
25.4
|
%
|
|
|
25.8
|
%
|
|
|
27.2
|
%
|
|
|
28.2
|
%
|
|
|
28.2
|
%
|
|
|
28.2
|
%
|
EBIT Margin
|
|
|
19.1
|
%
|
|
|
18.5
|
%
|
|
|
19.8
|
%
|
|
|
20.7
|
%
|
|
|
20.7
|
%
|
|
|
20.7
|
%
|
Net Income Margin
|
|
|
8.9
|
%
|
|
|
8.5
|
%
|
|
|
9.6
|
%
|
|
|
10.5
|
%
|
|
|
11.0
|
%
|
|
|
11.6
|
%
|
96
The following table sets forth a summary of the Original
Forecast:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Forecast
|
|
|
|
Fiscal Years Ending December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
423,590
|
|
|
$
|
543,019
|
|
|
$
|
643,737
|
|
|
$
|
727,963
|
|
Total Direct Expenses
|
|
|
191,399
|
|
|
|
242,382
|
|
|
|
285,436
|
|
|
|
322,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
232,191
|
|
|
|
300,637
|
|
|
|
358,301
|
|
|
|
405,827
|
|
Total Operating Expenses (excl D&A)
|
|
|
76,922
|
|
|
|
94,437
|
|
|
|
105,325
|
|
|
|
114,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated EBITDA
|
|
|
155,269
|
|
|
|
206,200
|
|
|
|
252,976
|
|
|
|
291,628
|
|
G&A
|
|
|
43,113
|
|
|
|
52,550
|
|
|
|
57,795
|
|
|
|
62,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
112,156
|
|
|
|
153,650
|
|
|
|
195,182
|
|
|
|
228,719
|
|
D&A
|
|
|
27,061
|
|
|
|
36,000
|
|
|
|
42,780
|
|
|
|
48,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
85,096
|
|
|
|
117,650
|
|
|
|
152,402
|
|
|
|
180,188
|
|
Interest Expense, Net
|
|
|
18,893
|
|
|
|
24,071
|
|
|
|
25,203
|
|
|
|
22,975
|
|
Minority Interest Expense/(Income)
|
|
|
1,132
|
|
|
|
1,500
|
|
|
|
1,872
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
65,070
|
|
|
|
92,079
|
|
|
|
125,326
|
|
|
|
155,265
|
|
Income taxes
|
|
|
25,052
|
|
|
|
35,451
|
|
|
|
48,251
|
|
|
|
59,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
40,018
|
|
|
$
|
56,629
|
|
|
$
|
77,076
|
|
|
$
|
95,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted E.P.S
|
|
$
|
1.66
|
|
|
$
|
2.34
|
|
|
$
|
3.16
|
|
|
$
|
3.88
|
|
Capital Expenditures
|
|
$
|
147.5
|
|
|
$
|
123.4
|
|
|
$
|
89.7
|
|
|
$
|
89.7
|
|
Increase in Net Working Capital
|
|
$
|
15,015
|
|
|
$
|
17,643
|
|
|
$
|
14,874
|
|
|
$
|
12,384
|
|
Revenue per Treatment
|
|
$
|
755
|
|
|
$
|
781
|
|
|
$
|
797
|
|
|
$
|
810
|
|
% growth
|
|
|
|
|
|
|
3.6
|
%
|
|
|
2.1
|
%
|
|
|
1.6
|
%
|
# of Treatment Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
5
|
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
Developed
|
|
|
5
|
|
|
|
14
|
|
|
|
1
|
|
|
|
1
|
|
Growth Rates and Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Growth in Revenue
|
|
|
44.1
|
%
|
|
|
28.2
|
%
|
|
|
18.5
|
%
|
|
|
13.1
|
%
|
Gross Profit Margin
|
|
|
54.8
|
%
|
|
|
55.4
|
%
|
|
|
55.7
|
%
|
|
|
55.7
|
%
|
Consolidated EBITDA Margin
|
|
|
36.7
|
%
|
|
|
38.0
|
%
|
|
|
39.3
|
%
|
|
|
40.1
|
%
|
EBITDA Margin
|
|
|
26.5
|
%
|
|
|
28.3
|
%
|
|
|
30.3
|
%
|
|
|
31.4
|
%
|
EBIT Margin
|
|
|
20.1
|
%
|
|
|
21.7
|
%
|
|
|
23.7
|
%
|
|
|
24.8
|
%
|
Net Income Margin
|
|
|
9.4
|
%
|
|
|
10.4
|
%
|
|
|
12.0
|
%
|
|
|
13.1
|
%
|
The additional material changes in assumptions and other factors
that led to the revisions to the Original Forecast were as
follows:
|
|
|
|
|
RVUs per Unit materially lowered for a number of items to more
closely align with values in Medicare fee schedule.
|
|
|
|
Shifted excess revenue into Other within each of the
individual markets.
|
|
|
|
Revenue per treatment decreased from $755 to $729 in 2007 and
from $781 to $777 in 2008.
|
|
|
|
Reduced overall treatment volume growth by approximately 1% to
base assumption of 3% per year.
|
|
|
|
De novo centers open with fewer patients and ramp up more slowly.
|
|
|
|
Openings of new de novo centers spread over
2007-2010,
with six centers pushed beyond 2008.
|
97
|
|
|
|
|
Corporate overhead of $43.2 million in 2007 (10.7% of
revenue) and $54.7 million in 2008 (11.1% of revenue).
|
|
|
|
2007 maintenance/new machine capital expenditures increased by
$22.4 million.
|
The foregoing Original Forecast and Revised Forecast:
|
|
|
|
|
necessarily make numerous assumptions, many of which are beyond
the control of RTS and may not prove to have been, or may no
longer be, accurate;
|
|
|
|
do not necessarily reflect revised prospects for RTSs
business, changes in general business or economic conditions, or
any other transaction or event that has occurred or that may
occur and that was not anticipated at the time the projections
were prepared;
|
|
|
|
are not necessarily indicative of current values or future
performance, which may be significantly more favorable or less
favorable than as set forth below; and
|
|
|
|
should not be regarded as a representation that either forecast
will be achieved.
|
RTS believes the assumptions its management used as a basis for
the forecasts were reasonable at the time the forecasts were
prepared, given the information its management had at the time.
Neither forecast is a guarantee of performance. They involve
risks, uncertainties and assumptions. The future financial
results and shareholder value of RTS may materially differ from
those expressed in the forecasts due to factors that are beyond
RTSs ability to control or predict. We cannot assure you
that either forecast will be realized or that RTSs future
financial results will not materially vary from the forecasts.
Since the forecasts cover multiple years, such information by
its nature becomes less reliable with each successive year. The
forecasts do not take into account any circumstances or events
occurring after the date they were prepared. We do not intend to
update or revise the forecasts.
The forecasts are forward-looking statements. For information on
factors which may cause RTSs future financial results to
materially vary, see Cautionary Statement Regarding
Forward-Looking Statements on page 15. The forecasts
have been prepared using accounting policies consistent with our
annual and interim financial statements, as well as any changes
to those policies known to be effective in future periods. The
forecasts do not reflect the effect of any proposed or other
changes in GAAP that may be made in the future. Any such changes
could have a material impact to the information shown below.
EBITDA and EBIT are not measures of performance under GAAP, and
should not be considered as alternatives to net income as a
measure of operating performance or cash flows or as a measure
of liquidity.
WHERE
YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. A copy of our Annual Report
on Form 10-K for the year ended December 31, 2006 is
attached as Annex E to this proxy statement and a copy of our
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007 is attached as Annex F to this proxy
statement. You may read and copy any reports, proxy statements
or other information that we file with the SEC at its Public
Reference Room, 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference rooms. You may
also obtain copies of this information by mail from the Public
Reference Section of the SEC, 100 F Street, N.E.,
Washington, D.C. 20549, at prescribed rates. Our public
filings are also available to the public from document retrieval
services and the Internet website maintained by the SEC at
www.sec.gov.
Any person, including any beneficial owner, to whom this proxy
statement is delivered may request copies of this proxy
statement, the reports, opinions or appraisals attached to this
proxy statement and any other information concerning us, without
charge, by written or telephonic request directed to us at
Radiation Therapy Services, Inc., 2234 Colonial Boulevard,
Ft. Myers Florida 33907, Attention: Investor Relations,
Telephone:
(239) 931-7275.
Information concerning us can also be obtained through our
website
98
(www.rts.com) or from the SEC through the SECs website at
the address provided above. The information contained on our
website is not part of, or incorporated into, this proxy
statement. If you would like to request documents, please do so
within five business days prior to the Special Meeting in order
to receive them before the special meeting.
Because the merger may be a going private
transaction, RTS, Parent, Merger Sub, Vestar and the Rollover
Investors have filed with the SEC a Transaction Statement on
Schedule 13E-3
with respect to the proposed merger. The
Schedule 13E-3,
including any amendments and exhibits filed or incorporated by
reference as a part of it, is available for inspection as set
forth above. The
Schedule 13E-3
will be amended to report promptly any material changes in the
information set forth in the most recent
Schedule 13E-3
filed with the SEC.
We have supplied information in this proxy statement relating to
us and our subsidiaries and each of the Rollover Investors has
supplied information in this proxy relating to such
individuals position concerning the transaction and his
relationship with Holdings and Parent. Holdings has supplied all
such information relating to Holdings, Parent and Merger Sub.
The SEC allows us to incorporate by reference, into
this proxy statement documents we file with the SEC. This means
that we can disclose important information to you by referring
you to those documents. The information incorporated by
reference is considered to be a part of this proxy statement,
and later information that we file with the SEC will update and
supersede that information. Although we have not incorporated by
reference any of our prior filings into this proxy statement as
of the date of this proxy statement, we incorporate by reference
any documents filed by us pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this proxy
statement and before the date of the special meeting.
This proxy statement does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any
person to whom it is not lawful to make any offer or
solicitation in that jurisdiction.
No persons have been authorized to give any information or to
make any representations other than those contained in this
proxy statement and, if given or made, such information or
representations must not be relied upon as having been
authorized by us or any other person. This proxy statement is
dated January 11, 2008. You should not assume that the
information contained in this proxy statement is accurate as of
any date other than that date, and the mailing of this proxy
statement to shareholders shall not create any implication to
the contrary.
99
EXECUTION COPY
AGREEMENT
AND PLAN OF MERGER
among
RADIATION
THERAPY SERVICES, INC.,
RADIATION
THERAPY SERVICES HOLDINGS, INC.,
RTS
MERGERCO, INC.,
and for
purposes of Section 7.2 only
RADIATION
THERAPY INVESTMENTS, LLC
dated as
of October 19, 2007
AGREEMENT
AND PLAN OF MERGER
among
RADIATION THERAPY SERVICES, INC.,
RADIATION THERAPY SERVICES HOLDINGS, INC.,
RTS MERGERCO, INC.,
and for purposes of Section 7.2 only
RADIATION THERAPY INVESTMENTS, LLC
dated as of October 19, 2007
TABLE OF
CONTENTS
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Page
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ARTICLE I THE MERGER
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A-2
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Section 1.1
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The Merger
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A-2
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Section 1.2
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Closing
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A-2
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Section 1.3
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Effective Time
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A-2
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Section 1.4
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Effects of the Merger
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A-3
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Section 1.5
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Articles of Incorporation and Bylaws of the Surviving Corporation
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A-3
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Section 1.6
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Directors
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A-3
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Section 1.7
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Officers
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A-3
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ARTICLE II CONVERSION OF SHARES; EXCHANGE OF
CERTIFICATES
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A-3
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Section 2.1
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Effect on Capital Stock
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A-3
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Section 2.2
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Exchange of Certificates
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A-5
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE
COMPANY
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A-6
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Section 3.1
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Qualification, Organization, Subsidiaries, etc
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A-7
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Section 3.2
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Capital Stock
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A-7
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Section 3.3
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Corporate Authority Relative to This Agreement; No Violation
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A-9
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Section 3.4
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Reports and Financial Statements
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A-10
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Section 3.5
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Internal Controls and Procedures
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A-11
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Section 3.6
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No Undisclosed Liabilities
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A-11
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Section 3.7
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Compliance with Law; Permits
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A-11
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Section 3.8
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Health Care Regulatory Compliance
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A-12
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Section 3.9
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Environmental Laws and Regulations
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A-13
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Section 3.10
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Employee Benefit Plans
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A-14
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Section 3.11
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Absence of Certain Changes or Events
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A-15
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Section 3.12
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Investigations; Litigation
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A-16
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Section 3.13
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Schedule 13E-3/Proxy
Statement; Other Information
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A-16
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Section 3.14
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Tax Matters
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A-16
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Section 3.15
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Labor Matters
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A-17
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Section 3.16
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Intellectual Property
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A-17
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Section 3.17
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Real Property
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A-18
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Section 3.18
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Opinion of Financial Advisor
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A-19
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Section 3.19
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Required Vote of the Company Shareholders
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A-19
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Page
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Section 3.20
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Material Contracts
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A-19
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Section 3.21
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Finders or Brokers
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A-20
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Section 3.22
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Insurance
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A-20
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Section 3.23
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Takeover Statutes
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A-21
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Section 3.24
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Affiliate Transactions
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A-21
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Section 3.25
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Indebtedness
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A-21
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Section 3.26
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Disclosure of Material Information
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A-22
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Section 3.27
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Disclaimer of Other Representation and Warranties
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A-22
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB
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A-22
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Section 4.1
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Qualification; Organization, Subsidiaries, etc.
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A-22
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Section 4.2
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Corporate Authority Relative to This Agreement; No Violation
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A-22
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Section 4.3
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Investigations; Litigation
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A-23
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Section 4.4
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Schedule 13E-3/Proxy
Statement; Other Information
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A-23
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Section 4.5
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Financing
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A-24
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Section 4.6
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Capitalization of Merger Sub
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A-24
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Section 4.7
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Finders or Brokers
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A-25
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Section 4.8
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Lack of Ownership of Company Common Stock
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A-25
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Section 4.9
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Interest in Competitors
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A-25
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Section 4.10
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No Additional Representations
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A-25
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Section 4.11
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Solvency
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A-25
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Section 4.12
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Management Agreements
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A-26
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Section 4.13
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Disclaimer of Other Representation and Warranties
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A-26
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ARTICLE V CERTAIN AGREEMENTS
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A-26
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Section 5.1
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Conduct of Business by the Company and Parent
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A-26
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Section 5.2
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Access
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A-30
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Section 5.3
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No Shop; Alternative and Superior Proposals
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A-30
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Section 5.4
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Filings; Other Actions
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A-33
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Section 5.5
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Stock Options and Restricted Shares; Employee Matters
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A-34
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Section 5.6
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Commercially Reasonable Efforts
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A-35
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Section 5.7
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Anti-Takeover Statutes
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A-36
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Section 5.8
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Public Announcements
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A-37
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Section 5.9
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Director and Officer Liability
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A-37
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Section 5.10
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Notice of Certain Events
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A-38
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Section 5.11
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Financing
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A-38
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Section 5.12
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Financing Cooperation
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A-39
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Section 5.13
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Transfer Tax
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A-40
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ARTICLE VI CONDITIONS TO THE MERGER
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A-40
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Section 6.1
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Conditions to Each Partys Obligation to Effect the Merger
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A-40
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Section 6.2
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Conditions to Obligation of the Company to Effect the Merger
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A-40
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Section 6.3
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Conditions to Obligation of Parent and Merger Sub to Effect and
the Merger
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A-41
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Section 6.4
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Frustration of Closing Conditions
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A-42
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ii
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Page
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ARTICLE VII TERMINATION
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A-42
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Section 7.1
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Termination or Abandonment
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A-42
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Section 7.2
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Termination Fees
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A-43
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Section 7.3
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Limitation of Liability of Parent, Merger Sub and Their
Affiliates
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A-45
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Section 7.4
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Limitation of Liability of the Company
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A-45
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ARTICLE VIII MISCELLANEOUS
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A-46
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Section 8.1
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No Survival of Representations and Warranties
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A-46
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Section 8.2
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Expenses
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A-46
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Section 8.3
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Counterparts; Effectiveness
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A-46
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Section 8.4
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Governing Law
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A-46
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Section 8.5
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Jurisdiction; Enforcement
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A-46
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Section 8.6
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WAIVER OF JURY TRIAL
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A-47
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Section 8.7
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Notices
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A-47
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Section 8.8
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Assignment; Binding Effect
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A-48
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Section 8.9
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Severability
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A-48
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Section 8.10
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Entire Agreement; No Third-Party Beneficiaries
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A-48
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Section 8.11
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Amendments; Waivers
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A-48
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Section 8.12
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Specific Performance
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A-49
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Section 8.13
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Headings
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A-49
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Section 8.14
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Interpretation
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A-49
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Section 8.15
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Definitions
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A-49
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iii
AGREEMENT
AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER
, dated as of
October 19, 2007 (this
Agreement
), among
Radiation Therapy Services, Inc., a Florida corporation (the
Company
), Radiation Therapy Services
Holdings, Inc., a Delaware corporation
(
Parent
), RTS MergerCo, Inc., a Florida
corporation and a direct wholly owned subsidiary of Parent
(
Merger Sub
), and for purposes of
Section 7.2 only, Radiation Therapy Investments, LLC, a
Delaware limited liability company (
Holdings
).
WITNESSETH:
WHEREAS,
a committee of independent and disinterested
members (the
Special Committee
) of the board
of directors of the Company (the
Board of
Directors
) formed for the purpose of, among other
matters, evaluating and making a recommendation to the full
Board of Directors with respect to the merger of Merger Sub with
and into the Company (the
Merger
) upon the
terms and subject to the conditions set forth in this Agreement
in accordance with the Florida Business Corporation Act (the
FBCA
) has unanimously determined, and the
Board of Directors (excluding any directors that are
Participating Holders) has unanimously determined, that it is in
the best interests of the Company and its shareholders, and
declared it advisable, to enter into this Agreement with Parent
and Merger Sub providing for the Merger, upon the terms and
subject to the conditions set forth in this Agreement, and each
of the Special Committee and the Board of Directors has, as of
the date of this Agreement, unanimously (excluding any directors
that are Participating Holders) approved and adopted this
Agreement in accordance with the FBCA, upon the terms and
subject to the conditions set forth in this Agreement, and
recommended its approval and adoption by the shareholders of the
Company;
WHEREAS,
prior to approving and adopting this Agreement
and the transactions contemplated hereby, on October 11,
2007, the Board of Directors unanimously approved an amendment,
effective immediately as of the date of such approval, to the
Bylaws of the Company, which amendment provides that
Section 607.0902 of the FBCA does not apply to any
control-share acquisition of any equity securities of the
Company;
WHEREAS,
the board of directors of Merger Sub has
unanimously approved and adopted this Agreement in accordance
with the FBCA and unanimously approved the Merger and the other
transactions contemplated by this Agreement, and recommended the
approval and adoption of this Agreement by Parent, as the sole
shareholder of Merger Sub;
WHEREAS
, the board of directors of Parent, and Parent, as
the sole shareholder of Merger Sub, in each case, have
unanimously approved and adopted this Agreement in accordance
with the FBCA and unanimously approved the Merger and the other
transactions contemplated by this Agreement;
WHEREAS,
concurrently with the execution of this
Agreement, and as a condition and inducement to Parents
and Merger Subs willingness to enter into this Agreement,
Parent, Ranger Investment, LLC, a Delaware limited liability
company and the sole stockholder of Parent
(
Investor
), and certain beneficial owners
(the
Participating Holders
) of Company Common
Stock entered into Support and Voting Agreements (the
Support and Voting
Agreements
),
pursuant to which the Participating Holders have agreed, among
other things, (a) to vote any shares of Company Common
Stock beneficially owned by them in favor of the approval of
this Agreement, (b) not to sell or otherwise transfer any
shares of Company Common Stock beneficially owned by them prior
to the termination of the applicable Support and Voting
Agreement in accordance with its terms, and (c) to
contribute a portion of their shares of Company Common Stock
(such shares, collectively, the
Rollover
Shares
) to Investor immediately prior to the Effective
Time of the Merger; and
WHEREAS,
concurrently with the execution of this
Agreement, and as a condition to the willingness of the Company
to enter into this Agreement, Vestar Capital Partners V,
L.P. has provided the Company with an executed copy of its
Equity Commitment Letter, pursuant to which Vestar Capital
Partners V, L.P. agrees to provide equity financing to
Parent in connection with the transactions contemplated hereby
and to fund certain obligations of Parent and Merger Sub in
connection with this Agreement, as provided therein; and
WHEREAS,
Parent, Merger Sub and the Company desire to
make certain representations, warranties and agreements
specified in this Agreement in connection with this Agreement.
NOW, THEREFORE,
in consideration of the foregoing and the
representations, warranties and agreements contained in this
Agreement, and intending to be legally bound hereby, Parent,
Merger Sub and the Company agree as follows:
ARTICLE I
THE MERGER
Section
1.1
The
Merger.
At the Effective Time, upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with
the applicable provisions of the FBCA, Merger Sub shall be
merged with and into the Company, whereupon the separate
corporate existence of Merger Sub shall cease and the Company
shall continue as the surviving corporation in the Merger (the
Surviving Corporation
) and a wholly owned
subsidiary of Parent.
Section
1.2
Closing.
The closing of the Merger (the
Closing
) to
the extent it cannot be conducted electronically shall take
place at the offices of Kirkland & Ellis LLP, 153 East
53rd Street, New York, New York 10022 (or at such other
place as agreed to by
(b) Each of the following terms is defined in the section
set forth opposite such term:
the parties) at 10:00 a.m. local time, on a date to be
specified by the parties (the
Closing Date
)
which shall be no later than the third business day after the
satisfaction or waiver (to the extent permitted by applicable
Law) of the conditions set forth in
Article VI
(other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or
waiver of such conditions), or at such other place, date and
time as the Company and Parent may agree in writing; provided
that notwithstanding the satisfaction or waiver of the
conditions set forth in
Article VI
, the parties
shall not be required to effect the Closing until the earlier of
(x) a date during the Marketing Period specified by Parent
on no less than three (3) business days notice to the
Company, (y) the final day of the Marketing Period and
(z) the End Date, subject in each case to the satisfaction
and waiver of all of the conditions set forth in
Article VI
as of the date determined pursuant to
this provision. For purposes of this Agreement, unless otherwise
agreed among the parties hereto,
Marketing
Period
shall mean the first period of twenty-five
(25) consecutive business days after the date hereof
(A) during which (1) Parent shall have the Required
Financial Information that the Company is required to provide to
Parent pursuant to
Section 5.12
and (2) no
event has occurred and no conditions exist that would cause any
of the conditions set forth in
Section 6.3
to fail
to be satisfied assuming the Closing were to be scheduled for
any time during such 25-consecutive-business-day period, and
(B) the conditions set forth in
Section 6.1
have been satisfied (other than conditions that by their nature
can be satisfied only at the Closing); provided that if the
Marketing Period would otherwise not end on or prior to
November 21, 2007, then the Marketing Period shall be
deemed to have commenced no earlier than November 26, 2007;
and provided further that if the Marketing Period would
otherwise not end on or prior to December 21, 2007, then
the Marketing Period shall be deemed to have commenced no
earlier than January 7, 2008; provided, further, that the
Marketing Period shall not be deemed to have commenced if,
(i) after the date hereof and prior to the completion of
the Marketing Period, Ernst & Young LLP shall have
withdrawn its audit opinion with respect to any of the financial
statements contained in the Company SEC Documents or
(ii) if the financial statements included in the Required
Financial Information that is available to Parent on the first
day of any such 25-consecutive-business day period would not be
sufficiently current on any day during such
25-consecutive-business-day period to permit a registration
statement using such financial statements to be declared
effective by the SEC on the last day of the
25-consecutive-business-day period.
Section
1.3
Effective
Time.
At the Closing, the parties shall cause the Merger to be
consummated by executing and delivering to the Department of
State of the State of Florida for filing articles of merger
satisfying the requirements of Sections 607.0120 and
607.1105 of the FBCA (the
Articles of Merger
)
and shall make all other filings or
A-2
recordings required under the FBCA in connection with the
Merger. The Merger shall become effective on such date and at
such time as the Articles of Merger are duly filed with the
Department of State of the State of Florida, or on such later
date (and at such later time if specified) as the parties shall
agree and as shall be set forth in the Articles of Merger (such
time as the Merger becomes effective, the
Effective
Time
).
Section
1.4
Effects
of the Merger.
The effects of the Merger shall be as provided in this Agreement
and in the applicable provisions of the FBCA. Without limiting
the generality of the foregoing, at the Effective Time, all the
property, rights, privileges and powers of the Company and
Merger Sub shall vest in the Surviving Corporation without
reversion or impairment, and all debts, liabilities and
obligations of the Company and Merger Sub shall become the
debts, liabilities and obligations of the Surviving Corporation,
all as provided under the FBCA and the other applicable Laws of
the State of Florida. At and after the Effective Time, any one
or more of the officers and directors of the Surviving
Corporation will be authorized to execute and deliver, in the
name and on behalf of the Company or Merger Sub, any deeds,
bills of sale, assignments or assurances and to take and do, in
the name and on behalf of the Company or Merger Sub, any other
actions and things to vest, perfect or confirm of record or
otherwise in the Surviving Corporation any and all right, title
and interest in, to and under any of the rights, properties or
assets of the Company.
Section
1.5
Articles
of Incorporation and Bylaws of the Surviving Corporation.
(a) The articles of incorporation of Merger Sub as in
effect immediately prior to the Effective Time, shall be the
articles of incorporation of the Surviving Corporation until
thereafter amended in accordance with the provisions thereof and
the provisions of this Agreement and applicable Law, in each
case consistent with the obligations set forth in
Section 5.9.
(b) The bylaws of Merger Sub as in effect immediately prior
to the Effective Time shall be the bylaws of the Surviving
Corporation until thereafter amended in accordance with the
provisions thereof and the provisions of this Agreement and
applicable Law, in each case consistent with the obligations set
forth in
Section 5.9.
Section
1.6
Directors.
Subject to applicable Law, directors of the Company shall resign
effective immediately prior to the Effective Time, and directors
of Merger Sub immediately prior to the Effective Time shall
become the initial directors of the Surviving Corporation and
shall hold office until their respective successors are duly
elected and qualified, or until their earlier death, resignation
or removal in accordance with the FBCA and the bylaws of the
Surviving Corporation.
Section
1.7
Officers.
The officers of the Company immediately prior to the Closing
Date shall be the initial officers of the Surviving Corporation
and shall hold office until their respective successors are duly
elected and qualified, or their earlier death, resignation or
removal.
ARTICLE II
CONVERSION
OF SHARES; EXCHANGE OF CERTIFICATES
Section
2.1
Effect
on Capital Stock.
At the Effective Time, by virtue of the Merger and without any
action on the part of the Company, Merger Sub or the holders of
any securities of the Company or Merger Sub:
(a)
Conversion of Company Common
Stock.
Subject to
Sections 2.1(b),
2.1(c)
,
2.1(e)
and
5.5(a)(ii)
, each share of
common stock, par value $0.0001 per share, of the Company (such
shares, collectively,
Company Common Stock
,
and each, a
Share
) outstanding immediately
prior to the Effective Time other than any Cancelled Shares (to
the extent provided in
Section 2.1(c)
) and any
Dissenting Shares (to the extent provided for in
Section 2.1(f)
) shall thereupon be converted
automatically into and shall thereafter represent
A-3
the right to receive $32.50 in cash (the
Merger
Consideration
). All Shares that have been converted
into the right to receive the Merger Consideration as provided
in this
Section 2.1
shall be automatically cancelled
and shall cease to exist, and the holders of certificates which
immediately prior to the Effective Time represented such Shares
shall cease to have any rights with respect to such Shares other
than the right to receive the Merger Consideration.
(b)
Rollover Shares.
Immediately prior to
the Effective Time, the Participating Holders shall contribute
the Rollover Shares to Investor pursuant to the Management Share
Contribution and Unit Subscription Agreements. Upon receipt of
the Rollover Shares from the Participating Holders, Investor
shall immediately contribute all of the Rollover Shares to
Parent, and such Rollover Shares shall be cancelled and retired
by virtue of the Merger in accordance with
Section 2.1(c)
below.
(c)
Company, Parent and Merger Sub-Owned
Shares.
Each Share that is owned by Parent or
Merger Sub immediately prior to the Effective Time or held by
the Company immediately prior to the Effective Time (in each
case, other than any such Shares held on behalf of third
parties) (the
Cancelled Shares
) shall, by
virtue of the Merger and without any action on the part of the
holder thereof, be cancelled and retired and shall cease to
exist, and no consideration shall be delivered in exchange
therefor.
(d)
Conversion of Merger Sub Common
Stock.
At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof,
each share of common stock, par value $0.01 per share, of Merger
Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and become one validly issued,
fully paid and nonassessable share of common stock, par value
$0.01 per share, of the Surviving Corporation with the same
rights, powers and privileges as the shares so converted and
shall constitute the only outstanding share of capital stock of
the Surviving Corporation. From and after the Effective Time,
all certificates representing the common stock of Merger Sub
shall be deemed for all purposes to represent the number of
shares of common stock of the Surviving Corporation into which
they were converted in accordance with the immediately preceding
sentence.
(e)
Adjustments.
If at any time during
the period between the date of this Agreement and the Effective
Time, any change in the outstanding shares of capital stock of
the Company shall occur as a result of any reclassification,
recapitalization, stock split (including a reverse stock split)
or combination, exchange or readjustment of shares, or any stock
dividend or stock distribution or otherwise with a record date
during such period, the Merger Consideration shall be equitably
adjusted to reflect such change and to provide to the holders of
Company Common Stock the same economic effect as contemplated by
this Agreement prior to such action.
(f)
Dissenting Shares.
(i) Notwithstanding anything contained in this Agreement to
the contrary, any Shares issued and outstanding immediately
prior to the Effective Time, the holder of which (A) has
not voted, or caused or permitted to be voted, in favor of the
Merger or consented thereto in writing, (B) has exercised
its rights to appraisal in accordance with
Section 607.1301, et seq., of the FBCA, and (C) has
not effectively withdrawn or lost (through failure to perfect or
otherwise) its rights to appraisal (the
Dissenting
Shares
), shall be converted into or represent a right
to receive the Merger Consideration pursuant to
Section 2.1(a)
, but instead, the holder thereof
shall be entitled to payment in cash from the Surviving
Corporation of the fair value of such Dissenting Shares in
accordance with Section 607.1301, et seq., of the FBCA. Any
portion of the Merger Consideration made available to the Paying
Agent pursuant to
Section 2.2
to pay for shares of
Company Common Stock for which appraisal rights have been
perfected shall be returned to Parent upon demand.
(ii) Notwithstanding the provisions of this
Section 2.1(f)
, if any holder of Shares who asserts
appraisal rights shall effectively withdraw or lose (through
failure to perfect or otherwise) its rights of appraisal, then,
as of the later of the Effective Time and the occurrence of such
event, such holders Shares shall no longer be Dissenting
Shares and shall automatically be converted into and represent
only the right to receive the Merger Consideration, without any
interest thereon and less any required withholding Taxes.
A-4
(iii) The Company shall give Parent (A) prompt notice
of any written assertion of appraisal rights by the holders of
any Shares, withdrawals of any such assertion, and any other
instruments, notices or other documents delivered to the Company
pursuant to the FBCA which relate to any such assertion of
appraisal rights and (B) the opportunity to direct all
negotiations, settlements
and/or
proceedings with respect to any assertion of appraisal rights
under the FBCA. The Company shall not, except with the prior
written consent of Parent, make or agree to make any payment
with respect to any assertion of appraisal rights or settle or
offer to settle any such assertion.
Section
2.2
Exchange
of Certificates.
(a)
Paying Agent.
Prior to the Effective
Time, Parent shall deposit, or shall cause to be deposited, with
a bank or trust company that is organized and doing business
under the Laws of the United States or any state thereof, that
shall be appointed to act as a paying agent hereunder and
approved (which approval shall not be unreasonably withheld) in
advance by the Company in writing (and pursuant to an agreement
in form and substance reasonably acceptable to Parent and the
Company) (the
Paying Agent
), in trust for the
benefit of holders of the Shares, the Company Stock Options, and
the Restricted Shares, cash in U.S. dollars sufficient to
pay (i) the aggregate Merger Consideration in exchange for
all of the Shares outstanding immediately prior to the Effective
Time (other than the Cancelled Shares, the Rollover Shares, the
Restricted Shares and the Dissenting Shares), payable upon due
surrender of the certificates that immediately prior to the
Effective Time represented Shares
(
Certificates
) (or effective affidavits of
loss in lieu thereof) or non-certificated Shares represented by
book-entry (
Book-Entry Shares
) pursuant to
the provisions of this
Article II
and (ii) the
aggregate payment payable pursuant to
Section 5.5
to
holders of Company Stock Options and Restricted Shares
(collectively, the
Option and Stock-Based Award
Consideration
and, together with the amount of cash
referred to in subsection (a)(i), the
Exchange
Fund
).
(b)
Payment Procedures.
(i) As soon as reasonably practicable after the Effective
Time and in any event not later than the third business day
following the Effective Time, the Paying Agent shall mail
(x) to each holder of record of Shares whose Shares were
converted into the Merger Consideration pursuant to
Section 2.1(a)
, (A) a letter of transmittal
(which shall specify that delivery shall be effected, and risk
of loss and title to Certificates shall pass, only upon delivery
of Certificates (or effective affidavits of loss in lieu
thereof) or Book-Entry Shares to the Paying Agent and shall be
in such form and have such other provisions as Parent and the
Company may mutually agree), and (B) instructions for use
in effecting the surrender of Certificates (or effective
affidavits of loss in lieu thereof) or Book-Entry Shares in
exchange for the Merger Consideration, (y) to each holder
of a Company Stock Option or Restricted Share, a check in an
amount, if any, due and payable to such holder pursuant to
Section 5.5(a)(i)
or
Section 5.5(a)(ii)
,
respectively, in respect of such Company Stock Option or
Restricted Share.
(ii) Upon surrender of Certificates (or effective
affidavits of loss in lieu thereof) or Book-Entry Shares to the
Paying Agent together with such letter of transmittal, duly
completed and validly executed in accordance with the
instructions thereto, and such other documents as may
customarily be required thereby or by the Paying Agent, the
holder of such Certificates or Book-Entry Shares shall be
entitled to receive in exchange therefor a check in an amount
equal to the product of (x) the number of Shares
represented by such holders properly surrendered
Certificates (or effective affidavits of loss in lieu thereof)
or Book-Entry Shares multiplied by (y) the Merger
Consideration, less any required withholding Taxes. No interest
will be paid or accrued on any amount payable upon due surrender
of Certificates or Book-Entry Shares. In the event of a transfer
of ownership of Shares that is not registered in the transfer
records of the Company, a check for any cash to be paid upon due
surrender of the Certificate may be paid to such a transferee if
the Certificate formerly representing such Shares is presented
to the Paying Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence to the
reasonable satisfaction of the Surviving Corporation that any
applicable stock transfer Taxes have been paid or are not
applicable. Until surrendered as contemplated by this
Section 2.2(b)
, each Certificate and each Book-Entry
Share shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the
applicable Merger Consideration as contemplated by this
Article II.
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(iii) The Company, Parent, Merger Sub and the Paying Agent
shall be entitled to deduct and withhold from the consideration
otherwise payable under this Agreement to any holder of Shares
(including Restricted Shares) or holder of Company Stock
Options, such amounts as it determines in good faith are
required to be withheld or deducted under the United States
Internal Revenue Code of 1986, as amended (the
Code
), or any provision of state, local or
foreign Tax Law with respect to the making of such payment. To
the extent that amounts are so withheld or deducted and paid
over to the applicable Governmental Entity, such withheld or
deducted amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the Shares
(including Restricted Shares) or holder of the Company Stock
Options, in respect of which such deduction and withholding was
made.
(c)
Closing of Transfer Books.
At the
Effective Time, the stock transfer books of the Company shall be
closed, and there shall be no further registration of transfers
on the stock transfer books of the Surviving Corporation of the
Shares that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, any Certificates or any
certificates representing any Rollover Shares are presented to
the Surviving Corporation or Parent for transfer, they shall be
cancelled and exchanged in accordance with and subject to the
procedures set forth in this
Article II.
(d)
Termination of Exchange Fund.
Any
portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains undistributed to the former
holders of Shares for nine (9) months after the Effective
Time shall be delivered to the Surviving Corporation upon
demand, and any former holders of Shares who have not
surrendered their Shares in accordance with this
Section 2.2
shall thereafter look only to the
Surviving Corporation for payment of their claim for the Merger
Consideration, without any interest thereon, upon due surrender
of their Shares.
(e)
No Liability.
Notwithstanding
anything herein to the contrary, none of the Company, Parent,
Merger Sub, the Surviving Corporation, the Paying Agent or any
other person shall be liable to any former holder of Shares for
any amount properly delivered to a public official pursuant to
any applicable abandoned property, escheat or similar Law. Any
portion of the Exchange Fund remaining unclaimed as of a date
which is immediately prior to such time as such amounts would
otherwise escheat to or become property of any Governmental
Entity shall, to the extent permitted by applicable Law, become
the property of Parent, free and clear of any claims or
interests of any person previously entitled thereto.
(f)
Investment of Exchange Fund.
The
Paying Agent shall invest all cash included in the Exchange Fund
as reasonably directed by Parent;
provided
,
however
, that any investment of such cash shall be
limited to direct short-term obligations of, or short-term
obligations fully guaranteed as to principal and interest by,
the U.S. government or in commercial paper obligations
rated
A-1
or
P-1
or
better by Moodys Investors Service, Inc. or
Standard & Poors Corporation, respectively, or
in certificates of deposit, bank repurchase agreements or
bankers acceptances of commercial banks with capital
exceeding $1 billion (based on the most recent financial
statements of such bank which are then publicly available). Any
interest and other income resulting from such investments shall
be paid to the Surviving Corporation pursuant to
Section 2.2(d).
(g)
Lost Certificates.
In the case of any
Certificate that has been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such
certificate to be lost, stolen or destroyed and if required by
the Paying Agent, the posting by such person of a bond in
customary amount as indemnity against any claim that may be made
against it with respect to such certificate, the Paying Agent
will issue in exchange for such lost, stolen or destroyed
Certificate a check in the amount of the number of Shares
represented by such lost, stolen or destroyed Certificate
multiplied by the Merger Consideration.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
Except as disclosed in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006, the Companys
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K
filed since January 1, 2007, in each case, filed with the
SEC by the Company prior to the date hereof (and excluding risk
factors and similarly cautionary and forward looking disclosure
under the headings Risk Factors, Forward
Looking
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Statements or Future Operating Results), or in
the disclosure schedule delivered by the Company to Parent
immediately prior to the execution of this Agreement (the
Company Disclosure Schedule
), the Company
represents and warrants to Parent and Merger Sub as follows:
Section
3.1
Qualification,
Organization, Subsidiaries, etc.
Section 3.1
of the Company Disclosure Schedule
contains a correct and complete list of all of the Subsidiaries
of the Company. Each of the Company and its Affiliates is a
legal entity duly organized, validly existing and in good
standing or with active status under the Laws of its respective
jurisdiction of organization and has all requisite corporate or
similar power and authority to own, lease and operate its
respective properties and assets and to carry on its business as
presently conducted and is qualified to do business and in good
standing or with active status as a foreign corporation in each
jurisdiction where the ownership, leasing or operation of its
assets or properties or conduct of its business requires such
qualification, except where the failure to be so organized,
validly existing, qualified, or in good standing or with active
status, or to have such power or authority, has not had and
would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. As used in this
Agreement, any reference to any facts, circumstances, events or
changes having a
Company Material Adverse
Effect
means any facts, circumstances, events or
changes that are materially adverse to the business, properties,
assets, results of operation, financial condition or
profitability of the Company, its Affiliates, and the Managed
Practices, taken as a whole, but shall not include facts,
circumstances, events or changes (a) generally affecting
the industries in which the Company and its Subsidiaries and
Managed Practices operate in the United States or the economy or
the financial or securities markets in the United States or
elsewhere in the world, including political conditions or
developments (including any outbreak or escalation of
hostilities or acts of war or terrorism) or (b) to the
extent resulting from (i) the announcement or the existence
of, or compliance with, this Agreement or the announcement of
the Merger or any of the other transactions contemplated by this
Agreement, (ii) changes in applicable Law, GAAP or
accounting standards, or (iii) any actions required under
this Agreement to obtain any antitrust approval for the
consummation of the transactions contemplated by this Agreement,
provided
,
however
, that any change, effect,
development, event or occurrence described in the foregoing
clause (a) or (b)(ii) above shall not constitute or give
rise to a Company Material Adverse Effect only if and to the
extent that such change, effect, development, event or
occurrence does not have a materially disproportionate effect on
the Company and its Affiliates as compared to other participants
in the industries in which the Company and its Affiliates and
Managed Practices operate in the United States;
provided
further
that in the event the Company should fail to meet
any expected financial or operating performance targets, the
fact of such failure, alone, would not constitute a Company
Material Adverse Effect, it being understood that the facts or
occurrences giving rise to or contributing to such failure, but
not otherwise excluded from the definition of a Company Material
Adverse Effect, may be taken into account in determining whether
there has been a Company Material Adverse Effect. The Company
has made available to Parent prior to the date of this Agreement
a true and complete copy of the Companys amended and
restated articles of incorporation and bylaws, each as amended
through the date of this Agreement. The Company has made
available to Parent prior to the date of this Agreement a true
and complete copy of the articles of incorporation and amended
and restated bylaws or similar organizational documents of each
Subsidiary of the Company, each as amended through the date of
this Agreement. Neither the Company nor any Subsidiary is in
violation of any provisions of its articles of incorporation or
bylaws or similar organizational documents, other than such vi
olations as would not have, individually or in the aggregate, a
Company Material Adverse Effect.
Section
3.2
Capital
Stock.
(a) The authorized capital stock of the Company consists of
75,000,000 shares of Company Common Stock and
10,000,000 shares of preferred stock, par value $0.0001 per
share (
Company Preferred Stock
). As of
September 30, 2007, (i) 23,694,919 shares of
Company Common Stock were issued and outstanding (which number
includes 20,711 shares of Company Common Stock subject to
transfer restrictions or subject to forfeiture back to the
Company or repurchase by the Company), (ii) no shares of
Company Common Stock were held in treasury, (iii) a maximum
of 3,368,101 shares of Company Common Stock were reserved
for issuance under the employee and director stock plans of the
Company (the
Company Stock Plans
), and
(iv) no shares of Company Preferred Stock were issued or
outstanding or held as treasury shares. All
A-7
outstanding shares of Company Common Stock, and all shares of
Company Common Stock reserved for issuance as noted in clause
(iii), when issued in accordance with the respective terms
thereof, are or will be duly authorized, validly issued, fully
paid and non-assessable and free of pre-emptive or similar
rights.
(b) Except as set forth in subsection (a) above, as of
the date of this Agreement, (i) the Company does not have
any shares of its capital stock or other voting securities
issued or outstanding other than shares of Company Common Stock
that have become outstanding after September 30, 2007, but
were reserved for issuance as set forth in subsection (a)
above, and (ii) there are no outstanding subscriptions,
options, warrants, calls, convertible securities, phantom stock
or other similar rights, agreements, arrangements or commitments
relating to the issuance of capital stock or voting securities
to which the Company or any of its Subsidiaries is a party
obligating the Company or any of its Subsidiaries to
(A) issue, transfer or sell any shares of capital stock or
other equity interests of the Company or any Subsidiary of the
Company or securities convertible into or exchangeable for such
shares or equity interests, (B) grant, extend or enter into
any such subscription, option, warrant, call, convertible
securities or other similar right, agreement or arrangement or
commitment, (C) redeem, repurchase or otherwise acquire, or
vote or dispose of, any such shares of capital stock or other
equity interests, or (D) provide a material amount of funds
to, or make any material investment (in the form of a loan,
capital contribution or otherwise) in, any Subsidiary.
(c) The Company Disclosure Schedule lists or, in the case
of clause (iii), describes, as of September 30, 2007 (the
Measurement Date
), (i) each outstanding
Company Stock Option, and (ii) each right of any kind,
contingent or accrued, to receive shares of Company Common Stock
or benefits measured in whole or in part by the value of a
number of shares of Company Common Stock granted under the
Company Stock Plans, Company Benefit Plans or otherwise
(including Restricted Shares, restricted stock units, phantom
units, deferred stock units and dividend equivalents)
(
Other Incentive Awards
), the number of
Shares issuable thereunder or with respect thereto, the vesting
schedule, the expiration date and the exercise price (if any)
thereof. From the close of business on the Measurement Date,
until the date of this Agreement, no options to purchase shares
of Company Common Stock or Company Preferred Stock have been
granted, no Company Stock Options have been granted, no Other
Incentive Awards have been granted and no shares of Company
Common Stock or Company Preferred Stock have been issued, except
for Shares issued pursuant to the exercise of Company Stock
Options, in accordance with their terms, outstanding on the
Measurement Date. Except for awards to acquire or receive shares
of Company Common Stock under any equity incentive plan of the
Company and its Subsidiaries, neither the Company nor any of its
Subsidiaries has outstanding bonds, debentures, notes or other
obligations, the holders of which have the right to vote (or
which are convertible into or exercisable for securities having
the right to vote) with the shareholders of the Company on any
matter.
(d) There are no voting trusts or other agreements or
understandings to which the Company or any of its Subsidiaries
is a party with respect to the voting or disposition of the
capital stock or other equity interest of the Company or any of
its Subsidiaries.
(e) All the outstanding shares of capital stock of, or
other equity interests in, each Subsidiary of the Company are
duly authorized, validly issued, fully paid and nonassessable,
and were not issued in violation of any preemptive or similar
rights, purchase option, call or right of first refusal or
similar rights. All the outstanding shares of capital stock of,
or other equity interests in, each Subsidiary of the Company are
owned by the Company or a wholly owned Subsidiary of the Company
free and clear of all Liens (other than Permitted Liens and
those that are immaterial). There are no subscriptions, options,
warrants, rights, calls, contracts or other commitments,
understandings, restrictions or arrangements relating to the
issuance, acquisition, redemption, repurchase or sale with
respect to any shares of capital stock or other ownership
interests of any Subsidiary of the Company, including any right
of conversion or exchange under any outstanding security,
instrument or agreement.
(f)
Section 3.2(f)
of the Company Disclosure
Schedule sets forth as of the date hereof the name, jurisdiction
of organization and the Companys percentage ownership of
any and all persons (other than Subsidiaries of the Company) of
which the Company directly or indirectly owns a 20% or greater
interest and the value of which is in excess of $1,000,000, as
of the date hereof (collectively, the
Investments
). All of the Investments are
owned by the Company or by a Subsidiary of the Company free and
clear of all Liens. Except
A-8
for the capital stock and other ownership interests of
Subsidiaries of the Company and the Investments, the Company
does not own, directly or indirectly, any capital stock or other
voting or equity securities or interests in any person that is
material to the business and activities of the Company and its
Affiliates (collectively, the
Business
).
Section
3.3
Corporate
Authority Relative to This Agreement; No Violation.
(a) The Company has all requisite corporate power and
authority to enter into this Agreement and, subject to receipt
of the Company Shareholder Approval, to consummate the
transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and
validly authorized by the Board of Directors and, to the extent
required, by the Special Committee (acting unanimously) and,
except for (i) the Company Meeting, (ii) the Company
Shareholder Approval, and (iii) the delivery to the
Department of State of the State of Florida for filing of the
Articles of Merger, no other corporate proceedings on the part
of the Company are necessary to authorize this Agreement or the
consummation of the transactions contemplated by this Agreement.
The Special Committee has unanimously determined and resolved,
and the Board of Directors has determined and resolved
(i) that the Merger is fair to, and in the best interests
of, the Company and its shareholders, (ii) to submit this
Agreement for approval by the Companys shareholders and to
declare the advisability of this Agreement and (iii) to
recommend that the Companys shareholders approve this
Agreement and the transactions contemplated by this Agreement
(collectively, the
Recommendation
), all of
which determinations and resolutions have not been rescinded,
modified or withdrawn in any way as of the date of this
Agreement. This Agreement has been duly and validly executed and
delivered by the Company and, assuming this Agreement
constitutes the valid and binding agreement of Parent and Merger
Sub, constitutes the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms,
except (i) as such enforceability may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar
laws affecting the enforcement of creditors rights
generally, and (ii) as the remedy of specific performance
and other forms of injunctive relief may be subject to equitable
defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(b) Other than in connection with or in compliance with the
applicable requirements of (i) the FBCA, including, but not
limited to, the delivery to the Department of State of the State
of Florida for filing of the Articles of Merger (ii) the
Securities Exchange Act of 1934 (the
Exchange
Act
), (iii) the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the
HSR
Act
), (iv) the Securities Act of 1933 (the
Securities Act
), (v) applicable foreign
or state securities or Blue Sky Laws, (vi) the rules and
regulations of NASDAQ Global Select Market, and (vii) the
approvals set forth on
Section 3.3(b)
of the Company
Disclosure Schedule (collectively, the
Company
Approvals
), and subject to the accuracy of the
representations and warranties of Parent and Merger Sub in
Section 4.9
, no authorization, consent, permit,
action or approval of, or filing with, or notification to, any
United States federal, state or local or foreign governmental or
regulatory agency, commission, court, body, entity or authority
(each, a
Governmental Entity
) is necessary,
under applicable Law, for the consummation by the Company of the
transactions contemplated by this Agreement or the control and
operation of the Company, its Subsidiaries and their respective
businesses by Parent, except for any such authorization,
consent, permit, action, approval, filing or notification the
failure of which to make or obtain would not (A) reasonably
be expected, individually or in the aggregate, to have an
adverse affect equal to or greater than 2.5% of the revenues,
EBITDA or assets of the Company and its Subsidiaries, taken as a
whole or (B) reasonably be expected to prevent or
materially delay the consummation of the Merger or the other
transactions contemplated hereby.
(c) The execution and delivery by the Company of this
Agreement does not, and, except as described in
Section 3.3(b)
, the consummation of the transactions
contemplated by this Agreement and compliance with the
provisions of this Agreement will not (i) result in any
violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination,
amendment, cancellation or acceleration of any material
obligation or to the loss of a material benefit under any loan,
guarantee of Indebtedness or credit agreement, note, bond,
mortgage, indenture, lease, agreement, contract, instrument,
permit or license agreement (collectively,
Contracts
) binding upon the Company or any of
its Subsidiaries, or to which any of them is a party or any of
their respective properties are bound, or result in the creation
of any liens, claims,
A-9
mortgages, encumbrances, pledges, security interests, equities
or charges of any kind (each, a
Lien
), other
than any such Lien (A) for Taxes or governmental
assessments, charges or claims of payment not yet due or
payable, (B) which is a carriers,
warehousemens, mechanics, materialmens,
repairmens construction or other similar lien arising in
the ordinary course of business not yet due or payable,
(C) which is disclosed on the most recent consolidated
balance sheet of the Company (or notes thereto or securing
liabilities reflected on such balance sheet) or (D) which
was incurred in the ordinary course of business since the date
of the most recent consolidated balance sheet of the Company
(each of the foregoing, a
Permitted Lien
),
upon any of the properties or assets of the Company or any of
its Subsidiaries, (ii) conflict with or result in any
violation of any provision of the articles of incorporation or
bylaws or other equivalent organizational document, in each case
as amended, of the Company or any of its Subsidiaries, or to the
Companys knowledge, the Managed Practices or
(iii) assuming receipt of the Company Shareholder Approval,
conflict with or violate any applicable Laws, other than, in the
case of clauses (i), (ii) and (iii), any such violation,
conflict, default, termination, cancellation, acceleration,
right, loss or Lien that (A) has not had and would not
reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect or (B) would
not reasonably be expected to prevent or materially delay the
consummation of the Merger or the other transactions
contemplated hereby.
(d)
Section 3.3(d)
of the Company Disclosure
Schedule sets forth a list of any consent, approval,
authorization or permit of, action by, registration, declaration
or filing with or notification to any person under any
(i) Company Material Contract or (ii) material lease,
material sublease, material assignment of lease or material
occupancy agreement (each a
Material Lease
)
to which the Company or any of its Subsidiaries is a party which
is required in connection with the consummation of the Merger
and the other transactions contemplated by this Agreement (the
Third Party Consents
), other than those the
failure of which to obtain, individually or in the aggregate,
would not reasonably be expected to have a Company Material
Adverse Effect.
Section
3.4
Reports
and Financial Statements.
(a) To the Companys knowledge, the Company has filed
or furnished all forms, documents and reports (including
exhibits) required to be filed or furnished prior to the date of
this Agreement by it with the Securities and Exchange Commission
(the
SEC
) since December 31, 2004 (the
Company SEC Documents
). To the Companys
knowledge, as of their respective dates, or, if amended prior to
the date hereof, as of the date of the last such amendment, the
Company SEC Documents complied in all material respects with the
requirements of the Securities Act and the Exchange Act, as the
case may be, and the applicable rules and regulations
promulgated thereunder, and none of the Company SEC Documents
contained any untrue statement of a material fact or omitted to
state or incorporate by reference any material fact required to
be stated or incorporated by reference therein or necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading. To the Companys
knowledge, no Subsidiary of the Company is required to file any
form or report with the SEC. The Company has made available to
Parent correct and complete copies of all material
correspondence between the SEC, on the one hand, and the Company
and any of the Companys Subsidiaries, on the other hand,
occurring since December 31, 2004 and prior to the date
hereof. To the Companys knowledge (except for any
comments, as part of the SECs on-going compensation
disclosure review project, that the Company has not yet received
and has not yet been notified of), as of the date hereof, there
are no outstanding or unresolved comments in comment letters
from the SEC staff with respect to any of the Company SEC
Documents. To the Companys knowledge (except for any
comments, as part of the SECs on-going compensation
disclosure review project, that the Company has not yet received
and has not yet been notified of), as of the date hereof, none
of the Company SEC Documents is the subject of ongoing SEC
review, outstanding SEC comment or outstanding SEC investigation.
(b) Each of the consolidated financial statements
(including all related notes and schedules) of the Company
included in the Company SEC Documents has been prepared in
accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated therein or in the
notes thereto) and fairly presents in all material respects the
consolidated financial position of the Company and its
consolidated Subsidiaries, as at the respective dates thereof,
and the consolidated results of their operations and their
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consolidated cash flows for the respective periods then ended
(subject, in the case of the unaudited statements, to normal
year-end audit adjustments and to any other adjustments
described therein, including the notes thereto) in conformity
with United States GAAP (except, in the case of the unaudited
statements, as permitted by the SEC).
Section
3.5
Internal
Controls and Procedures.
The Company has established and maintains disclosure controls
and procedures and internal control over financial reporting (as
such terms are defined in paragraphs (e) and (f),
respectively, of
Rule 13a-15
under the Exchange Act) as required by
Rule 13a-15
under the Exchange Act. The Companys disclosure controls
and procedures are reasonably designed to ensure that all
material information required to be disclosed by the Company in
the reports that it files or furnishes under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC, and that
all such material information is accumulated and communicated to
the Companys management as appropriate to allow timely
decisions regarding required disclosure and to make the
certifications required pursuant to Sections 302 and 906 of
the Sarbanes-Oxley Act of 2002 (the
Sarbanes-Oxley
Act
). The Companys management has completed
assessment of the effectiveness of the Companys internal
control over financial reporting in compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act for
the year ended December 31, 2006, and such assessment
concluded that such controls were effective. Except as has not
had, and would not reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect, the
Company has disclosed, based on its most recent evaluation prior
to the date of this Agreement, to the Companys auditors
and the audit committee of the Board of Directors and Parent
(A) any significant deficiencies and material weaknesses in
the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect in any
material respect the Companys ability to record, process,
summarize and report financial information and (B) any
fraud, whether or not material, that involves executive officers
or employees who have a significant role in the Companys
internal controls over financial reporting. As of the date of
this Agreement, the Company has not identified any material
weaknesses in the design or operation of internal controls over
financial reporting. There are no outstanding loans made by the
Company or any of its Subsidiaries to any executive officer (as
defined in
Rule 3b-7
under the Exchange Act) or director of the Company.
Section
3.6
No
Undisclosed Liabilities.
Except (a) as reflected or reserved against in the
Companys consolidated balance sheets (or the notes
thereto) included in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2006 (other than risk
factors and similarly cautionary and forward looking disclosure
under the headings Risk Factors, Forward
Looking Statements or Future Operating
Results) (b) for liabilities permitted or
contemplated by this Agreement, (c) for liabilities and
obligations incurred in the ordinary course of business since
December 31, 2006 and (d) for liabilities or
obligations which have been discharged or paid in full in the
ordinary course of business, as of the date of this Agreement,
neither the Company nor any Subsidiary of the Company has any
liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, other than those which have
not had and would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse
Effect.
Section
3.7
Compliance
with Law; Permits.
(a) The Company and each of its Affiliates and, to the
knowledge of the Company, each of the Managed Practices are, and
since January 1, 2005, have been, in compliance in all
material respects with and are not in default under or in
violation of any material federal, state, local or foreign law,
statute, ordinance, rule, regulation, judgment, order,
injunction, decree, agency requirement, license or permit of any
Governmental Entity in effect as of the date of this Agreement
(collectively,
Laws
and each, a
Law
) applicable to the Company, its
Affiliates, the Managed Practices and their respective
businesses and activities, or binding upon their assets or
properties except where such non-compliance, default or
violation would not reasonably be expected, individually or in
the aggregate, to have an adverse affect equal to or greater
than 1.0% of the revenues, EBITDA or assets of the Company and
its Subsidiaries, taken as a whole. Notwithstanding anything
contained in this
Section 3.7(a)
, no representation
or warranty shall be deemed to be made in this
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Section 3.7(a)
in respect of health care regulatory
compliance, which matters are governed by Section 3.8, in
respect of environmental matters, which matters are governed by
Section 3.9
, Tax matters, which are governed by
Section 3.14
, employee benefits matters, which are
governed by
Section 3.10
, or labor Law matters,
which are governed by
Section 3.15.
As
used in this Agreement, Managed Practice means any
medical professional association, professional corporation,
partnership or similar entity that provides medical services at
a center, clinic or other facility operated or managed by the
Company or any of its Subsidiaries pursuant to a Services
Agreement, or at a hospital or hospital department with which
the Company or any of its Subsidiaries has a Services Agreement
and excludes those set forth on Section 3.7(a) of the
Company Disclosure Schedule. As used in this Agreement,
Services Agreement
means any agreement or
arrangement between the Company or any of its Subsidiaries and
one or more Managed Practices, hospital or hospital departments
pursuant to which the Company or such Subsidiary agrees to
provide or arrange for management, administration and other non
medical support services to such Managed Practice or Practices
in exchange for payment to the Company or such Subsidiary of a
service, management or similar fee.
(b) The Company and its Affiliates and, to the knowledge of
the Company, each of the Managed Practices are in possession of
all grants, authorizations, registrations, qualifications,
licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Entity
necessary for the Company and each of its Affiliates and the
Managed Practices to own, lease and operate their respective
properties and assets or to carry on their respective businesses
as they are now being conducted (the
Company
Permits
), except where the failure to have any of the
Company Permits would not reasonably be expected, individually
or in the aggregate, to have an adverse affect equal to or
greater than 2.5% of the revenues, EBITDA or assets of the
Company and its Subsidiaries, taken as a whole. All Company
Permits are in full force and effect, except where the failure
to be in full force and effect, individually or in the
aggregate, has not affected and would not reasonably be expected
to affect aspects of the businesses
and/or
operations of the Company and its Subsidiaries that are
responsible for 2.5% or more of the revenues, EBITDA or assets
of the Company and its Subsidiaries, taken as a whole.
Section
3.8
Health
Care Regulatory Compliance.
(a) The Company and each of its Affiliates and, to the
knowledge of the Company, each of the Managed Practices, are in
compliance with Sections 1128A, 1128B, or 1877 of the
Social Security Act (42 U.S.C.
§§ 1320a-7a,
1320a-7b,
and 1395nn), 31 U.S.C. § 3729 et seq. (the Civil
False Claims Act), 18 U.S.C. § 1347 (Health Care
Fraud), Public Law
104-191
(the
Health Insurance Portability and Accountability Act of 1996),
all fraud and abuse, false claims and anti-self referral Laws
and all Laws related to the confidentiality, privacy and
security of medical information, or to licensing, the corporate
practice of medicine, fee-splitting, certificate of need and
reimbursement or billing for healthcare services (collectively,
Health Care Laws
), except where the failure
to comply would not reasonably be expected, individually or in
the aggregate, to have an adverse affect equal to or greater
than 2.5% of the revenues, EBITDA or assets of the Company and
its Subsidiaries, taken as a whole. The Company and each of its
Affiliates have timely and accurately filed all material
reports, data and other information required to be filed with
any Governmental Entity, including with respect to obtaining or
maintaining any Company Permit.
(b) The Company has disclosed to Parent any and all
corporate integrity or other agreements with any Governmental
Entity which apply to the Business. The Company and each of its
Affiliates are in material compliance with all such agreements.
No employee or independent contractor of the Business (whether
an individual or entity), or any physician performing services
related to the Business is excluded from participating in the
Medicare, Medicaid, TRICARE or any other federal or state
governmental health care program, including those as defined in
42 U.S.C.
§ 1320a-7b(f).
(
Programs
) nor to the Companys
knowledge is any such exclusion threatened or pending. None of
the officers, directors, agents or managing employees (as such
term is defined in 42 U.S.C.
§ 1320a-5(b))
of the Company or its Affiliates has been excluded from the
Programs, been subject to sanction pursuant to 42 U.S.C.
§ 1320a-7a
or
1320a-8,
or been convicted of a crime described at 42 U.S.C.
§ 1320a-7b,
nor is any such exclusion, sanction or conviction threatened or
pending, except where such exclusion, sanction or conviction
would not reasonably be expected, individually or in the
aggregate, to have an adverse affect equal to or greater than
2.5% of the revenues,
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EBITDA or assets of the Company and its Subsidiaries, taken as a
whole. Neither the Company nor its Affiliates has been excluded
from the Programs.
(c) No event has occurred or circumstance exists that (with
or without notice or lapse of time) (i) constitutes or may
result in a material violation by the Company or its Affiliates
or, to the knowledge of the Company, each of the Managed
Practices of, or a failure on their respective parts to comply
in all material respects with, any Health Care Law, or
(ii) may give rise to any liability or obligation on their
respective parts to undertake, or to bear all or any portion of
the costs of, any remedial action of any nature, including the
repayment or refund of previously paid fees or reimbursed
expenses, or for other excessive reimbursement or non-covered
services, or the payment of any penalties or sanctions arising
under the Programs or any third-party payor program, except
where such violation, failure to comply, obligation or liability
would not reasonably be expected, individually or in the
aggregate, to have an adverse affect equal to or greater than
2.5% of the revenues, EBITDA or assets of the Company and its
Subsidiaries, taken as a whole.
(d) Neither the Company nor, to the Companys
knowledge, its Affiliates or Managed Practices, have received
any notice or other communication (whether oral or written) from
any Governmental Entity or any other person having standing to
assert such a claim regarding (i) any actual, alleged or
potential violation of, or failure to comply with, any Health
Care Law, or (ii) any actual, alleged or potential
obligation on their respective parts to undertake, or to bear
all or any portion of the costs of, any remedial action of any
nature, except where such violation, failure to comply, or
obligation would not reasonably be expected, individually or in
the aggregate, to have an adverse affect equal to or greater
than 2.5% of the revenues, EBITDA or assets of the Company and
its Subsidiaries, taken as a whole.
(e) Except as permitted by applicable Law or except where
it would not reasonably be expected, individually or in the
aggregate, to have an adverse affect equal to or greater than
2.5% of the revenues, EBITDA or assets of the Company and its
Subsidiaries, taken as a whole, to the Companys knowledge,
neither the Company nor Affiliates nor Managed Practices or any
director, officer or employee of any of the foregoing or any
agent acting on behalf of or for the benefit of any of the
foregoing, is directly or indirectly a party to any contract,
lease agreement or other financial arrangement (including but
not limited to any joint venture or consulting agreement) with
any physician, close family member of any physician, entity
owned in whole or in part by a physician or close family member
of a physician, health care facility, hospital, or other person
who is in a position to make or influence referrals to or
otherwise generate business with respect to the Company or its
Affiliates, to provide services, lease space, lease equipment or
engage in any other venture or activity.
Section
3.9
Environmental
Laws and Regulations.
(a) Except as would not, individually or in the aggregate,
have a Company Material Adverse Effect, (i) the Company and
its Affiliates and, to the knowledge of the Company, each
Managed Practice have conducted their respective businesses in
compliance with all applicable Environmental Laws, (ii) to
the knowledge of the Company, none of the properties owned,
leased or operated by the Company or any of its Affiliates or
any Managed Practice contains any Hazardous Substance as a
result of any activity of the Company or any of its Affiliates,
and the Company or any of its Affiliates have not exposed any
Person to any Hazardous Substance, in each case in amounts
exceeding the levels permitted by applicable Environmental Laws
or otherwise giving rise to liabilities under Environmental
Laws, (iii) since January 1, 2002, as of the date of
this Agreement, neither the Company nor any of its Affiliates,
nor, to the knowledge of the Company, any Managed Practice has
received any notices, demand letters or requests for information
from any federal, state, local or foreign Governmental Entity
indicating that the Company or any of its Affiliates or any
Managed Practice may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation
of their respective businesses or any of their respective
properties or assets, (iv) to the knowledge of the Company,
no Hazardous Substance has been disposed of, released or
transported in violation of any applicable Environmental Law, or
in a manner giving rise to any liability under Environmental
Law, at or from any properties presently or formerly owned,
leased or operated by the Company or any of its Affiliates or
any Managed Practice and (v) neither the Company, its
Affiliates nor any Managed Practice nor any of their respective
properties are subject to any liabilities relating to any suit,
settlement, court order,
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administrative order, regulatory requirement, judgment or
written claim asserted or arising under any Environmental Law.
It is agreed and understood that no representation or warranty
is made in respect of environmental matters in any Section of
this Agreement other than this Section 3.9. The Company has
made available to Parent true and complete copies of all
material environmental records, reports, notifications,
certificates of need, permits, engineering studies, and
environmental studies or assessments, in each case in the
Companys possession or under its reasonable control.
(b) As used herein,
Environmental Law
means any Law, and all common law, relating to (x) the
protection, preservation or restoration of the environment
(including air, water vapor, surface water, groundwater,
drinking water supply, surface land, subsurface land, plant and
animal life or any other natural resource), or (y) the
exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Substances, in each
case as in effect at the date of this Agreement.
(c) As used herein,
Hazardous Substance
means any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive, or dangerous, or
otherwise regulated, under any Environmental Law. Hazardous
Substance includes any substance to which exposure is regulated
by any Governmental Entity or any Environmental Law including
any toxic waste, pollutant, contaminant, hazardous substance
(including toxic mold), toxic substance, hazardous waste,
special waste, industrial substance or petroleum or any
derivative or byproduct thereof, radon, radioactive material,
asbestos, or asbestos-containing material, urea formaldehyde,
foam insulation or polychlorinated biphenyls.
Section
3.10
Employee
Benefit Plans.
(a)
Section 3.10(a)
of the Company Disclosure
Schedule sets forth a true and complete list of each employee or
director benefit plan, arrangement or agreement, whether or not
written, including, without limitation, any employee welfare
benefit plan within the meaning of Section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended
(
ERISA
), any employee pension benefit plan
within the meaning of Section 3(2) of ERISA (whether or not
such plan is subject to ERISA) and any bonus, incentive,
deferred compensation, vacation, stock purchase, stock option or
other equity-based plan or arrangement, severance, employment,
change of control or material fringe benefit plan, program or
agreement that is or has been sponsored, maintained or
contributed to by the Company or any of its Subsidiaries or with
respect to which the Company or any of its Subsidiaries has any
material liability (the
Company Benefit
Plans
).
(b) The Company has made available to Parent true and
complete copies of each of the Company Benefit Plans and
material related documents, including, but not limited to;
(i) each writing constituting a part of such Company
Benefit Plan, including all amendments thereto; (ii) the
three most recent Annual Reports (Form 5500 Series) and
accompanying schedules, if any; and (iii) for any Company
Benefit Plan intended to be a tax-qualified retirement plan, the
most recent determination letter from the Internal Revenue
Service (the IRS) (if applicable) for such Company
Benefit Plan, or if the Company Benefit Plan is maintained under
a pre-approved prototype plan, the IRS opinion letter ruling on
the prototype plan.
(c)(i) Each of the Company Benefit Plans has been operated,
funded and administered in all material respects in compliance
with its terms and with applicable Laws, including, but not
limited to, ERISA, the Code and in each case the regulations
thereunder; (ii) each of the Company Benefit Plans intended
to be
qualified
within the meaning of
Section 401(a) of the Code is so qualified, and to the
knowledge of the Company there are no existing circumstances or
any events that have occurred that could reasonably be expected
to adversely affect the qualified status of any such plan;
(iii) no Company Benefit Plan is subject to Title IV
or Section 302 of ERISA or Section 412 or 4971 of the
Code; (iv) no Company Benefit Plan provides benefits,
including, without limitation, death or medical benefits
(whether or not insured), with respect to current or former
employees, officers, contractors or directors of the Company or
its Subsidiaries beyond their retirement or other termination of
service, other than (A) coverage mandated by applicable Law
or (B) death benefits or retirement benefits under any
employee pension benefit plan
(as such term
is defined in Section 3(2) of ERISA); (v) no liability
under Title IV of ERISA or Section 412 of the Code has
been incurred by the Company, its Subsidiaries or any ERISA
Affiliate that has not been satisfied in full, and, to the
knowledge of the Company, no condition exists that presents a
material risk to the Company, its Subsidiaries
A-14
or any ERISA Affiliate of incurring a liability thereunder;
(vi) no Company Benefit Plan is, and neither the Company
nor any of its Subsidiaries has any liability under or with
respect to, (A) a
multiemployer pension
plan
(as such term is defined in Section 3(37) of
ERISA) or a plan that has two or more contributing sponsors, at
least two of whom are not under common control, within the
meaning of Section 4063 of ERISA, (B) a
multiple employer welfare arrangement
(as
defined in Section 3(40) of ERISA), or (C) a
multiple employer plan
within the meaning of
Section 210 of ERISA or Section 413(c) of the Code;
(vii) all material contributions or other amounts payable
by the Company or its Subsidiaries with respect to each Company
Benefit Plan in respect of current or prior plan years have been
paid or accrued in accordance with GAAP; (viii) neither the
Company nor its Subsidiaries or, to the knowledge of the
Company, any other person or entity has engaged in a transaction
in connection with which the Company or its Subsidiaries
reasonably could be subject to either a material civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a
material tax imposed pursuant to Section 4975 or 4976 of
the Code; and (ix) there are no pending, or to the
knowledge of the Company, threatened or anticipated claims
(other than routine claims for benefits), audits,
investigations, proceedings, or litigation by, on behalf of or
against or relating to any of the Company Benefit Plans or any
trusts related thereto.
ERISA Affiliate
means
any person or entity that is or, at the time it terminated a
pension plan subject to Title IV of ERISA or withdrew from
any multiemployer plan (as defined in Section 3(37) of
ERISA) or missed any contribution required by Section 412
of the Code was a member of a group described in
Section 414(b), (c), (m) or (o) of the Code or
Section 4001(b)(1) of ERISA that includes or included the
Company or any of its Subsidiaries, or that is or was a member
of the same
controlled group
as the Company
or any of its Subsidiaries pursuant to Section 4001(a)(14)
of ERISA. The Company and each of its Subsidiaries have for
purposes of each Company Benefit Plan correctly classified those
individuals performing services for the Company or any of its
Subsidiaries as common law employees, leased employees,
independent contra ctors or agents.
(d) Except as set forth in Section 3.10(d) of the
Company Disclosure Schedule, neither the execution, delivery,
performance of this Agreement nor the consummation of the
transactions contemplated by this Agreement (either alone or in
conjunction with any other event) will (i) result in any
payment (including, without limitation, severance, unemployment
compensation and forgiveness of Indebtedness or otherwise)
becoming due to any current or former officer, contractor,
director or employee of the Company or any of its Subsidiaries
from the Company or any of its Subsidiaries under any Company
Benefit Plan or otherwise, (ii) result in any
excess parachute payment
(within the meaning
of Section 280G of the Code), (iii) increase any
benefits otherwise payable under any Company Benefit Plan,
(iv) result in any acceleration of any benefits or the time
of payment or vesting of any such benefits, (v) require the
funding of any such benefits or (vi) limit the ability to
amend or terminate any Company Benefit Plan or related trust.
(e) Each
nonqualified deferred compensation
plan
with respect to which any member of the Company
Group or any of their respective Affiliates is a
service recipient
(each as defined in
Section 409A of the Code or proposed regulations
promulgated thereunder) is in operational compliance with
Section 409A of the Code, and will be in formal compliance
(to the extent required by Section 409A of the Code or
regulations promulgated thereunder) on or before the applicable
deadline, and no current or former employee of any member of the
Company Group or any of their respective Affiliates (in his or
her capacity as such) has incurred or will incur (based on the
operation of such plan as of the date hereof) the Tax imposed by
Section 409A(a)(1)(B) or (b)(4)(A) of the Code.
Section
3.11
Absence
of Certain Changes or Events.
Since December 31, 2006 through the date of this Agreement,
(i) the businesses of the Company and its Subsidiaries, and
to the knowledge of the Company, the Managed Practices have been
conducted, in all material respects, in the ordinary course of
business consistent with past practice and (ii) there has
not been any event, development or state of circumstances that
has had or is reasonably expected to have, individually or in
the aggregate, a Company Material Adverse Effect. For purposes
of this
Section 3.11
, facts, circumstances, events
or changes that are known by the Company and have a materially
disproportionate effect on the industries in which the Company
and its Subsidiaries operate in the United States shall
constitute a Company Material Adverse Effect.
A-15
Section
3.12
Investigations;
Litigation.
As of the date of this Agreement,
(a) there is, to the knowledge of the Company, no
investigation or review pending (or, to the knowledge of the
Company, threatened) by any Governmental Entity with respect to
the Company or any of its Affiliates or, to the knowledge of the
Company, any Managed Practice which would have, individually or
in the aggregate, a Company Material Adverse Effect, and
(b) there are no actions, suits, inquiries, investigations,
arbitration, mediation or proceedings pending (or, to the
knowledge of the Company, threatened) against or affecting the
Company or any of its Affiliates, or any of their respective
properties at law or in equity before, and there are no orders,
judgments or decrees of, or before, any Governmental Entity, in
each case of clause (a) or (b), which have had or would
reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
Section
3.13
Schedule 13E-3/Proxy
Statement; Other Information.
None of the information provided by the Company to be included
in (a) the
Rule 13e-3
transaction statement on
Schedule 13E-3
related to the Merger (the
Schedule 13E-3
)
or (b) the Proxy Statement will, in the case of the
Schedule 13E-3,
as of the date of its filing and of each amendment or supplement
thereto and, in the case of the Proxy Statement, (i) at the
time of the mailing of the Proxy Statement or any amendments or
supplements thereto and (ii) at the time of the Company
Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Each of the Proxy Statement and the
Schedule 13E-3,
as to information supplied by the Company, will comply as to
form in all material respects with the provisions of the
Exchange Act. The letter to shareholders, notice of meeting,
proxy statement and forms of proxy to be distributed to
shareholders in connection with the Merger and to be filed with
the SEC are collectively referred to herein as the
Proxy Statement.
Notwithstanding the
foregoing, the Company makes no representation or warranty with
respect to the information supplied by Parent or Merger Sub or
any of their respective Representatives that is contained or
incorporated by reference in the Proxy Statement or the
Schedule 13E-3.
Section
3.14
Tax
Matters.
(a)(i) Except as would not have, individually or in the
aggregate, an adverse affect equal to or greater than 2.5% of
the revenues, EBITDA or assets of the Company and its
Subsidiaries, taken as a whole, the Company and each of its
Subsidiaries and, to the knowledge of the Company, each of the
Managed Practices have prepared and timely filed (taking into
account any extension of time within which to file) all Tax
Returns required to be filed by any of them and all such filed
Tax Returns are complete and accurate; (ii) the Company and
each of its Subsidiaries, and to the knowledge of the Company,
each of the Managed Practices, have paid all Taxes that are
required to be paid by any of them (whether or not shown on any
Tax Return); (iii) there are not pending or, to the
knowledge of the Company, threatened in writing, any audits,
examinations, investigations, actions, suits, claims or other
proceedings in respect of Taxes of the Company or any of its
Subsidiaries nor has any deficiency for any Tax of the Company
or any of its Subsidiaries been assessed by any Governmental
Entity in writing against the Company or any of its
Subsidiaries, or to the knowledge of the Company, against the
Managed Practices (except, in the case of clause (i),
(ii) or (iii) above or clause (iv) or
(v) below, with respect to matters contested in good faith
or for which adequate reserves have been established in
accordance with GAAP); (iv) neither the Company nor any of
its Subsidiaries nor, to the knowledge of the Company, any of
the Managed Practices has made any payments or has been or is a
party to any agreement, contract, arrangement or plan that
provides for payments that were not deductible or could
reasonably be expected to become nondeductible under
Section 162(m) or Section 280G of the Code;
(v) all Taxes required to be withheld by the Company and
its Subsidiaries and, to the knowledge of the Company, the
Managed Practices have been withheld and paid over to the
appropriate Tax authority; (vi) the Company has not been a
controlled corporation
or a
distributing corporation
in any distribution
occurring during the two-year period ending on the date of this
Agreement that was intended to be governed by Section 355
of the Code; (vii) neither the Company nor any of its
Subsidiaries nor any Managed Practice has waived any statute of
limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency;
(viii) no jurisdiction where the Company and its
Subsidiaries do not file a Tax Return has made a claim that any
of the Company and its Subsidiaries is required to file a Tax
Return in such jurisdiction;
A-16
(ix) neither the Company nor any of its Subsidiaries has
any liability for the Taxes of any person (other than the
Company or any of its Subsidiaries) under Treasury
Regulation Section 1.1502-6
(or similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise and
(x) neither the Company nor any of its Subsidiaries has
entered into any transaction defined under
Sections 1.6011-4(b)(2),
-4(b)(3) or -4(b)(4) of the Treasury Regulations promulgated
under the Code.
(b) As used in this Agreement,
(i)
Taxes
means all (i) United
States federal, state or local or
non-United
States taxes, assessments, charges, duties, levies or other
similar governmental charges of any nature, including all
income, franchise, profits, capital gains, capital stock,
transfer, sales, use, occupation, property, excise, severance,
windfall profits, stamp, stamp duty reserve, license, payroll,
withholding, ad valorem, value added, alternative minimum,
environmental, customs, social security (or similar),
unemployment, sick pay, disability, registration and other
taxes, assessments, charges, duties, fees, levies or other
similar governmental charges of any kind whatsoever, whether
disputed or not, together with all estimated taxes, deficiency
assessments, additions to tax, penalties and interest;
(ii) any liability for the payment of any amount of a type
described in clause (i) arising as a result of being or
having been a member of any consolidated, combined, unitary or
other group or being or having been included or required to be
included in any Tax Return related thereto; and (iii) any
liability for the payment of any amount of a type described in
clause (i) or clause (ii) as a result of any
obligation to indemnify or otherwise assume or succeed to the
liability of any other person, and (ii)
Tax
Return
means any return, report or similar filing
(including the attached schedules) required to be filed with
respect to Taxes, including any information return or
declaration of estimated Taxes.
Section
3.15
Labor
Matters.
(a) Neither the Company nor any of its Affiliates nor, to
the Companys knowledge, any of the Managed Practices is a
party to, or bound by, any collective bargaining agreement,
contract or other agreement or understanding with a labor union
or labor organization. To the Companys knowledge, there
are no pending material representation petitions involving
either the Company or any of its Affiliates or, to the
Companys knowledge, any of the Managed Practices before
the National Labor Relations Board or any state labor board.
Neither the Company nor any of its Affiliates nor, to the
Companys knowledge, any of the Managed Practices is
subject to any material unfair labor practice charge or
complaint, dispute, strike or work stoppage. Except as set forth
on
Section 3.15
of the Company Disclosure Schedule,
to the knowledge of the Company, there are no organizational
efforts with respect to the formation of a collective bargaining
unit presently being made or threatened involving employees of
the Company or any of its Affiliates or any of the Managed
Practices.
(b) The Company and each of its Affiliates and, to the
knowledge of the Company, each of the Managed Practices to the
knowledge of the Company, the Managed Practices are in
compliance, in all material respects, with all employment
agreements, consulting and other service contracts, written
employee or human resources personnel policies (to the extent
they contain enforceable obligations), handbooks or manuals, and
severance or separation agreements, except in each case that
would not, individually or in the aggregate, be material to the
Company and its Affiliates, taken as a whole. The Company and
each of its Affiliates and, to the knowledge of the Company,
each of the Managed Practices are in compliance in all material
respects with applicable Laws related to employment, employment
practices, wages, hours and other terms and conditions of
employment, except in each case that would not, individually or
in the aggregate, be material to the Company and its Affiliates,
taken as a whole. As of the date of this Agreement, neither the
Company nor any of its Affiliates has a material labor or
employment dispute currently subject to any grievance procedure,
arbitration or litigation, or to the knowledge of the Company,
threatened against it.
Section
3.16
Intellectual
Property.
The Company or its Affiliates own, or are
licensed or otherwise possess legally enforceable rights to use,
free and clear of all Liens (other than Permitted Liens), all
intellectual property of any type, registered or unregistered
and however denominated, including all trademarks, service
marks, trade names, Internet domain names and other brand or
source identifiers, together with all registrations and
applications thereof and the goodwill associated therewith,
registered and unregistered copyrights, patents and patent
applications, computer software, data and databases, inventions,
know-how, trade secrets and all other confidential and
proprietary technology and information and rights to
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sue and other choices of action arising from any of the
foregoing (collectively, the
Intellectual
Property
) necessary for the conduct of their
respective businesses in all material respects as currently
conducted (the
Company Intellectual
Property
).
Section 3.16
of the Company
Disclosure Schedule sets forth all (i) Company Intellectual
Property that has been registered or applied for with any
Governmental Entity and any Internet domain name registrars,
(ii) all software owned or used by the Company or any of
its Affiliates (other than off-the-shelf software with a
replacement cost
and/or
annual license fee of less than $50,000 and (iii) all
material unregistered trademarks and copyrights. The Company
Intellectual Property is valid, subsisting and to the knowledge
of the Company, enforceable. Except as set forth on
Section 3.16
of the Company Disclosure Schedule,
(a) as of the date of this Agreement, there are no pending
or, to the knowledge of the Company, threatened claims, nor have
there been any such claims within the past six (6) years,
by any person alleging infringement, dilution, misappropriation
or other violation by the Company or any of its Affiliates of
any Intellectual Property of any person or challenging the
validity, enforceability, ownership or use of any Company
Intellectual Property, (b) to the knowledge of the Company,
the conduct of the business of the Company and its Affiliates
does not infringe, dilute, misappropriate or otherwise violate
any Intellectual Property rights of any person, and neither the
Company nor any of its Affiliates has received notice of any of
the foregoing, including an invitation to license or
other communication from any third party asserting that the
Company or any of its Affiliates is or may be obligated to take
a license under any Intellectual Property owned by any third
party in order to continue to conduct their respective
businesses as they are currently conducted, (c) in the past
two (2) years, neither the Company nor any of its
Affiliates has made any claim in writing of any violation,
infringement, dilution or misappropriation by others of its
rights to or in connection with the Company Intellectual
Property, (d) to the knowledge of the Company, no person is
infringing, diluting, misappropriating or otherwise violating
any Company Intellectual Property in a manner that would have a
material impact on the Business, (e) the execution and
delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement shall not result in
the loss or reduction in scope of any material Company
Intellectual Property, whether by termination or expiration of
any license, the performance of any license pursuant to its
terms, or other means. The Company and its Affiliates have taken
commercially reasonable actions to protect, preserve, and
maintain the validity and effectiveness of all material Company
Intellectual Property, including, but not limited to paying all
applicable fees related to the registration, maintenance, and
renewal of any such owned Company Intellectual Property. The
Company and its Affiliates own all right, title and interest in
and to all material Intellectual Property created by any present
or former employee in the course of his or her employment with
the Company or its Affiliates, as the case may be. The computer
systems, including the software, firmware, hardware, networks,
interfaces, and related systems owned or used by the Company and
its Affiliates in the conduct of its business are sufficient in
all material respects for the needs of the Company and its
Affiliates.
Section
3.17
Real
Property.
(a)
Section 3.17(a)
of the Company Disclosure
Schedule contains a list of the addresses of all land, together
with all buildings located thereon, and all easements and other
rights and interests appurtenant thereto, owned by the Company
or any Affiliate of the Company (the
Owned Real
Properties
). Except as disclosed in
Section 3.17(a)
of the Company Disclosure Schedule,
except as would not have, individually or in the aggregate, a
Company Material Adverse Effect, the Company or an Affiliate of
the Company has good and marketable indefeasible fee simple
title to each of the Owned Real Properties free and clear of all
leases, rights to use or occupy, tenancies, options to purchase
or lease, rights of first refusal, rights of first offer,
claims, liens, charges, security interests or encumbrances of
any nature whatsoever, except (A) leases to an Affiliate of
the Company that the Company or an Affiliate of the Company may
freely amend or terminate without the consent of any other
person, (B) statutory liens securing payments not yet due
or payable, (C) mortgages, or deeds of trust, security
interest or other encumbrances on title related to Indebtedness
reflected on the consolidated financial statements of the
Company, and (D) Permitted Liens. (b)
Section 3.17(b)
of the Company Disclosure Schedule
contains a list of all leases, subleases, licenses, concessions
and other agreements (written or oral) pursuant to which the
Company or any Affiliate of the Company holds any interests in
real property (other than Owned Real Property) with reference to
the addresses for all such real property (the
Leased
Real Properties
, and together with the Owned Real
Properties, the
Real Properties
). Except as
would not have, individually or in the aggregate, a Company
Material Adverse Effect, (i) the
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Company or an Affiliate of the Company has good leasehold title
with respect to each of the Leased Real Properties, subject only
to (A) subleases to an Affiliate of the Company,
(B) statutory liens securing payments not yet due or
payable, (C) Easements, covenants, conditions, restrictions
and other similar matters of record that do not materially
affect the continued use of the property for the purposes for
which the property is currently being used, and
(D) Permitted Liens; (ii) to the knowledge of the
Company, each lease of the Leased Real Properties is the legal,
valid, binding obligation of the Company or an Affiliate of the
Company, in full force and effect and enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar Laws, now or
hereafter in effect, and principles of equity affecting
creditors rights and remedies generally;
(iii) neither the Company nor, to the knowledge of the
Company, any Affiliate of the Company nor any other party of any
of such leases, is in breach or default under any such lease,
and no event has occurred or circumstance exists which, with the
delivery of notice, the passage of time or both, would
constitute such a breach or default, or permit the termination,
modification or acceleration of rent under such lease; and
(iv) the Company or any of its Affiliates has not
subleased, licensed or otherwise granted any person the right to
use or occupy any Leased Real Property or any portion thereof.
(c) The Real Properties comprise all of the real property
used or being developed for use, or otherwise related to, the
business conducted by the Company and its Affiliates. The
buildings, structures, improvements, fixtures, building systems
and equipment included in the Real Property (the
Improvements
) are, in all material respects,
generally in good condition and repair (taken as a whole),
ordinary wear and tear excepted, and sufficient for the
operation of the business of the Company or its Affiliates, as
applicable, in all material respects consistent with past
practice.
Section
3.18
Opinion
of Financial Advisor.
The Special Committee has received the opinion of Morgan
Joseph & Co. Inc. (the
Advisor
)
dated on or about the date of this Agreement, to the effect
that, as of such date, the Merger Consideration to be received
by the holders of the Company Common Stock (other than
Participating Holders) is fair to such holders from a financial
point of view. The Company has been authorized by the Advisor to
permit the inclusion in full of such opinion in the Proxy
Statement. As of the date of this Agreement, no such opinion has
been withdrawn, revoked or modified.
Section
3.19
Required
Vote of the Company Shareholders.
The affirmative vote of the holders of a majority of the voting
power of Company Common Stock outstanding on the record date of
the Company Meeting, voting together as a single class, is the
only vote of holders of securities of the Company which is
required to approve this Agreement and the Merger (the
Company Shareholder Approval
).
Section
3.20
Material
Contracts.
(a) Except as disclosed in this Agreement and the Company
Disclosure Schedules, the Company Benefit Plans or such
Contracts as are filed with the SEC, as of the date of this
Agreement, neither the Company nor any of its Affiliates nor
Managed Practices is a party to or bound by any Contract that:
(i) constitutes a material contract (as such
term is defined in Item 601(b)(10) of
Regulation S-K
of the SEC);
(ii) contains covenants binding upon the Company or any of
its Affiliates or Managed Practices that materially restricts
the ability of the Company or any of its Affiliates or Managed
Practices (or which, following the consummation of the Merger,
could materially restrict or impair the ability of the Surviving
Corporation or its Affiliates or Managed Practices) to compete
in any business, or that restricts the ability of the Company or
any of its Affiliates or Managed Practices (or which, following
the consummation of the Merger, would restrict or impair the
ability of the Surviving Corporation or its Affiliates or
Managed Practices) to compete with any person or in any
geographic area in any material respect;
(iii) relates to the lease or license of any material
asset, including material Intellectual Property (excluding
licenses for off-the-shelf software with a replacement cost
and/or
annual license fee of less than $75,000 per annum);
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(iv) relates to a joint venture, partnership, limited
liability or other similar agreement or arrangement relating to
the formation, creation, operation, management or control of any
partnership or joint venture that is material to the Business;
(v) relates to any indenture, credit agreement, loan
agreement, security agreement, guarantee, note, mortgage or
other evidence of Indebtedness providing for borrowings in
excess of $2,500,000;
(vi) prohibits the payment of dividends or distributions in
respect of the capital stock of the Company or any of its
Affiliates, prohibits the pledging of the capital stock of the
Company or any Affiliate of the Company, or prohibits the
issuance of guarantees by any Affiliate of the Company;
(vii) relates to any acquisition, divestiture, merger or
similar transaction involving the Company or any its Affiliates
pursuant to which the Company or any of its Affiliates has
continuing indemnification, earn-out or other
contingent payment obligations, in each case, that could result
in payments in excess of $750,000;
(viii) other than any acquisition permitted under
clause (vii) above, obligates the Company to make any
capital commitment or expenditure in excess of $750,000
(excluding existing plans for capital commitments and
expenditures of the Company for 2007 and the first quarter of
2008 that have previously been made available to Parent);
(ix) involves any directors, executive officers or 5% or
greater of stockholders of the Company or with respect to the
voting or registration of the capital stock of the Company or
any of its Affiliates;
(x) by its terms calls for aggregate payment or receipt by
the Company and its Affiliates under such Contract of more than
$2,000,000 over the remaining terms of such Contract (excluding
any third party payor agreements, physician employment
agreements, real estate leases and capital leases); or
(xi) that would prevent, materially delay or materially
impede the Companys ability to consummate the Merger or
the other transactions contemplated by this Agreement (all
contracts of the type described in clauses (i) through
(xi) of this
Section 3.20(a)
, together with all
Material Leases, all administrative services agreements,
transition agreements and stock pledges, physician employment
agreements and all other employment agreements being referred to
herein as
Company Material Contracts
).
(b) Neither the Company nor any Affiliate of the Company is
in breach of or default under the terms of any Company Material
Contract where such breach or default has had or would
reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. To the knowledge
of the Company, no other party to any Company Material Contract
is in breach of default under the terms of any Company Material
Contract where such breach or default has had or would
reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. Each Company
Material Contract is a valid and binding obligation of the
Company or an Affiliate of the Company which is party thereto
and, to the knowledge of the Company, of each other party
thereto, and is in full force and effect, subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar Laws, now or hereafter in effect, and principles of
equity affecting creditors rights and remedies generally.
Section
3.21
Finders
or Brokers.
Except for the Advisor and Wachovia Capital Markets, LLC,
neither the Company nor any of its Affiliates has engaged any
investment banker, broker or finder in connection with the
transactions contemplated by this Agreement who is entitled to
any fee or any commission in connection with or upon
consummation of the Merger. The Company has made available to
Parent a complete and correct copy of any Contract with the
Advisor pursuant to which any fees may be payable by the Company
in connection with this Agreement and the transactions
contemplated by this Agreement.
Section
3.22
Insurance.
(a) The Company and its Affiliates and Managed Practices
own or hold policies of insurance, or are self-insured, in
amounts providing reasonably adequate coverage against all risks
customarily insured against by companies and their Affiliates in
similar lines of business as the Company and its Affiliates and
Managed
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Practices, and in amounts sufficient to comply with all Material
Contracts to which the Company or its Affiliates or Managed
Practices are parties or are otherwise bound.
Section 3.22
of the Company Disclosure Schedule sets
forth a list of all material insurance policies (including
directors and officers liability insurance and
fiduciary liability insurance) maintained by the Company or its
Affiliates or Managed Practices, including the premiums payable
in connection therewith, and a description of all self-insurance
programs of the Company
and/or
its
Affiliates. Except as would not, individually or in the
aggregate, reasonably be expected to have a Company Material
Adverse Effect, (a) all insurance policies maintained by
the Company and its Affiliates and Managed Practices are in full
force and effect (and were in full force and effect during the
periods of time such insurance policies were purported to be in
effect) and all premiums due and payable thereon have been paid;
and (b) neither the Company nor any of its Affiliates nor
Managed Practices is in breach or default of any of the
insurance policies, and to the Companys knowledge, neither
the Company nor any of its Affiliates nor Managed Practices has
taken any action or failed to take any action which, with notice
or the lapse of time, would constitute such a breach or default
or permit termination or modification of any of the insurance
policies. Except as would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse
Effect, neither the Company nor any of its Affiliates nor
Managed Practices has received any notice of termination or
cancellation or denial of coverage with respect to any insurance
policy.
(b) To the Companys knowledge, Batan Insurance
Company, a Cayman Island corporation (
Batan
Insurance
) has conducted and is conducting its
operations in all material respects in accordance with its plan
of operations, a true and complete copy of which has been made
available to Parent prior to the date hereof. To the
Companys knowledge, Batan Insurance has posted reserves in
relation to the anticipated payment of benefits, losses, claims
and expenses under any insurance Contract or policy that it is
party to or is bound by, and all such reserves (i) are
reflected adequately in all material respects in the financial
statements of Batan Insurance and the Company, and
(ii) were calculated in all material respects in accordance
with generally accepted actuarial assumptions given the
circumstances under which such Contract or policy was written.
To the Companys knowledge, the cash balances of Batan
Insurance are sufficient to satisfy the requirements, if any, of
applicable Law.
Section
3.23
Takeover
Statutes; Rights Plan.
No
fair price
,
affiliated
transactions
,
moratorium
,
control share acquisitions
,
business
combination
or other similar anti-takeover statute,
provision or regulation (including Sections 607.0901 and
607.0902 of the FBCA) enacted under state or federal Laws in the
United States applicable to the Company (collectively,
Anti-Takeover Statutes) is applicable to the Merger
or the other transactions contemplated by this Agreement or the
Support and Voting Agreements and the transactions contemplated
by the Support and Voting Agreements.
Section
3.24
Affiliate
Transactions.
There are no material transactions, agreements, arrangements or
understandings between (i) the Company or any of its
Subsidiaries, on the one hand, and (ii) any Affiliate of
the Company (other than any of its Subsidiaries or the Managed
Practices) on the other hand, of the type that would be required
to be disclosed under Item 404 of
Regulation S-K
under the Securities Act which have not been so disclosed prior
to the date hereof (such transactions referred to herein as
Affiliate Transactions
).
Section
3.25
Indebtedness.
Section 3.25
of the Company Disclosure Schedule sets
forth, as of the date of this Agreement or such other date as is
set forth in such schedule, all of the outstanding Indebtedness
for borrowed money of, and all the outstanding guarantees of
Indebtedness for borrowed money of any person by, the Company
and each of its Affiliates. As of the date of this Agreement
there is not, and as of the Effective Time there will not be,
any Indebtedness for borrowed money of, or guarantees of
Indebtedness for borrowed money of any person by, the Company
and each of its Affiliates except as set forth on
Section 3.25
of the Company Disclosure Schedule and
except as may be incurred in accordance with
Section 5.1.
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Section
3.26
Disclosure
of Material Information.
To the best of the Companys knowledge all information
(other than projections provided to Parent or any of its
Affiliates or any of its financing sources, and other than
information of a general economic or industry nature) concerning
the Company or its Affiliates that has been made available or
will be made available to Parent or its debt financing sources
by the Company or any of its representatives in connection with
the transactions contemplated by this Agreement is, or will be
when furnished (taken as a whole), complete and correct in all
material respects and does not, or will not when furnished
(taken as a whole), contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make
the statements contained therein not materially misleading in
light of the circumstances under which such statements are made.
Section
3.27
Disclaimer
of Other Representation and Warranties.
The Company does not make, and has not made, any representations
or warranties in connection with the Merger and the transactions
contemplated hereby other than those expressly set forth herein,
including those items set forth in the Company Disclosure
Schedule or incorporated herein by reference. For the avoidance
of doubt, notwithstanding the fact that Parent and Merger Sub
and their representatives have been afforded the opportunity,
prior to the date of this Agreement, to ask questions of, and
receive answers from the Company and its management, it is
understood that any responses from or other information provided
by the Company, or its management, including, but not limited to
any data, financial information or any memoranda or other
materials of any nature whatsoever or any presentations are not
and shall not be deemed to be or to include representations and
warranties of the Company except as otherwise set forth herein
or in the Company Disclosure Schedule.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
Except as disclosed in the disclosure schedule delivered by
Parent to the Company immediately prior to the execution of this
Agreement (the
Parent Disclosure Schedule
),
Parent and Merger Sub represent and warrant to the Company as
follows:
Section
4.1
Qualification;
Organization, Subsidiaries, etc.
Each of Parent and Merger Sub is a legal entity duly organized,
validly existing and in good standing or with active status
under the Laws of its respective jurisdiction of organization
and has all requisite corporate or similar power and authority
to own, lease and operate its properties and assets and to carry
on its business as presently conducted and is qualified to do
business and is in good standing or with active status as a
foreign corporation in each jurisdiction where the ownership,
leasing or operation of its assets or properties or conduct of
its business requires such qualification, except where the
failure to be so organized, validly existing, qualified or in
good standing or with active status, or to have such power or
authority, would not, individually or in the aggregate, prevent
or materially delay or materially impair the ability of Parent
or Merger Sub to consummate the Merger and the other
transactions contemplated by this Agreement (a
Parent
Material Adverse Effect
). Parent has made available to
the Company prior to the date of this Agreement a true and
complete copy of the articles of incorporation and bylaws or
other equivalent organizational documents of Parent and Merger
Sub, each as amended through the date of this Agreement. The
articles of incorporation and bylaws or similar organizational
documents of Parent and Merger Sub are in full force and effect,
except as would not have, individually or in the aggregate, a
Parent Material Adverse Effect. Neither Parent nor Merger Sub is
in violation of any provisions of its articles of incorporation
or bylaws or similar organizational documents, other than such
violations as would not have, individually or in the aggregate,
a Parent Material Adverse Effect.
Section
4.2
Corporate
Authority Relative to This Agreement; No Violation.
(a) Each of Parent and Merger Sub has all requisite
corporate power and authority to enter into this Agreement and
to consummate the transactions contemplated by this Agreement.
The execution and delivery
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of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly and validly
authorized by the Boards of Directors of Parent and Merger Sub
and by Parent, as the sole shareholder of Merger Sub, and,
except for the delivery to the Department of State of the State
of Florida for filing of the Articles of Merger, no other
corporate proceedings on the part of Parent or Merger Sub are
necessary to authorize this Agreement or the consummation of the
transactions contemplated by this Agreement. This Agreement has
been duly and validly executed and delivered by Parent and
Merger Sub and, assuming this Agreement constitutes the valid
and binding agreement of the Company, constitutes the valid and
binding agreement of Parent and Merger Sub, enforceable against
each of Parent and Merger Sub in accordance with its terms,
except as (i) such enforceability may be limited by
bankruptcy, insolvency, reorganization, or similar laws
affecting the enforcement of creditors rights generally,
and (ii) as the remedy of specific performance and other
forms of injunctive relief may be subject to equitable defenses
and to the discretion of the court before which any proceeding
therefore may be brought.
(b) Other than in connection with or in compliance with
(i) the FBCA, including, but not limited to, the delivery
to the Department of State of the State of Florida for filing of
the Articles of Merger, (ii) the Securities Act, the
Exchange Act, state securities, takeover and
blue
sky
laws and (iii) the HSR Act (collectively, the
Parent Approvals
), no authorization, consent,
permit, action or approval of, or filing with, or notification
to, any Governmental Entity is necessary for the consummation by
Parent or Merger Sub of the transactions contemplated by this
Agreement, except for any such authorization, consent, permit,
action, approval, filing or notification the failure of which to
make or obtain would not (A) individually or in the
aggregate, reasonably be expected to have a Parent Material
Adverse Effect or (B) reasonably be expected to prevent or
materially delay the consummation of the Merger or the other
transactions contemplated hereby.
(c) The execution and delivery by Parent and Merger Sub of
this Agreement does not, and, except as described in
Section 4.2(b)
, the consummation of the transactions
contemplated by this Agreement and compliance with the
provisions of this Agreement will not (i) result in any
violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination,
amendment, cancellation or acceleration of any material
obligation or to the loss of a material benefit under any loan,
guarantee of Indebtedness or credit agreement, note, bond,
mortgage, indenture, lease, agreement, contract, instrument,
permit or license agreement binding upon Parent or any of its
Subsidiaries, or to which any of them is a party or any of their
respective properties are bound, or result in the creation of
any Lien (other than Permitted Liens) upon any of the properties
or assets of Parent or any of its Subsidiaries,
(ii) conflict with or result in any violation of any
provision of the articles of incorporation or bylaws or other
equivalent organizational document, in each case as amended, of
Parent or any of its Subsidiaries or (iii) conflict with or
violate any applicable Laws, other than, in the case of clauses
(i), (ii) and (iii), any such violation, conflict, default,
termination, cancellation, acceleration, right, loss or Lien
that would not have, individually or in the aggregate, a Parent
Material Adverse Effect.
Section
4.3
Investigations;
Litigation.
As of the date hereof, there is no investigation or review
pending (or, to the knowledge of Parent, threatened) by any
Governmental Entity with respect to Parent or any of its
Subsidiaries which would have, individually or in the aggregate,
a Parent Material Adverse Effect, and there are no actions,
suits, inquiries, investigations or proceedings pending (or, to
Parents knowledge, threatened) against or affecting Parent
or its Subsidiaries, or any of their respective properties at
law or in equity before, and there are no orders, judgments or
decrees of, or before, any Governmental Entity, in each case,
which would have, individually or in the aggregate, a Parent
Material Adverse Effect.
Section
4.4
Schedule 13E-3/Proxy
Statement; Other Information.
None of the information provided by Parent or its Subsidiaries
to be included in the
Schedule 13E-3
or the Proxy Statement will, in the case of the
Schedule 13E-3,
as of the date of its filing (which shall be no later than 30
(thirty) days from the date hereof) and of each amendment or
supplement thereto and, in the case of the Proxy Statement,
(i) at the time of the mailing of the Proxy Statement or
any amendments or supplements thereto and (ii) at the time
of the Company Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements
therein, in
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light of the circumstances under which they were made, not
misleading;
provided
,
however
, that this
representation and warranty shall not apply to any information
so provided by Parent or Merger Sub that subsequently changes or
becomes incomplete or incorrect to the extent such changes or
failure to be complete or correct are promptly disclosed to the
Company and to the further extent that Parent and Merger Sub
reasonably cooperate with the Company in preparing, filing or
disseminating updated information to the extent required by Law.
Notwithstanding the foregoing, neither Parent nor Merger Sub
makes any representation or warranty with respect to any
information supplied by the Company or any of its
Representatives that is contained or incorporated by reference
in the Proxy Statement or the
Schedule 13E-3.
Section
4.5
Financing.
Parent has delivered to the Company true, accurate and complete
copies of (a) executed equity commitment letters to provide
equity financing to Parent
and/or
Merger Sub and (b) an executed debt commitment letter and
related term sheets (the
Debt Commitment
Letter
and together with the equity commitment letters
described in clause (a), the
Financing
Commitments
) pursuant to which, and subject to the
terms and conditions thereof, certain lenders and their
Affiliates have committed to provide and arrange the financings
described therein, the proceeds of which may be used to
consummate the Merger and the other transactions contemplated by
this Agreement (the
Debt Financing
and
together with the equity financing referred to in clause (a),
the
Financing
). As of the date of this
Agreement, (i) the Financing Commitments are in full force
and effect and have not been withdrawn or terminated or
otherwise amended or modified in any respect (except as
permitted by this Agreement) and (ii) neither Parent nor
Merger Sub is in breach of any of the terms or conditions set
forth therein that could reasonably be expected to constitute a
failure to satisfy a condition precedent set forth in the
Financing Commitments. As of the date of this Agreement, subject
to the accuracy of the representations and warranties of the
Company set forth in
Article III
, and the
satisfaction of the conditions set forth in
Sections 6.1
and
6.3
, neither Parent nor
Merger Sub has any reason to believe that it will be unable to
satisfy the conditions of closing to be satisfied by it set
forth in the Financing Commitments on the Closing Date. Assuming
the funding of the Financing in accordance with the Financing
Commitments and the true and correctness of the Companys
representations and warranties set forth in
Article III
, the proceeds from such Financing
constitute all of the financing required for the consummation of
the transactions contemplated by this Agreement, and, together
with cash on hand from operations of the Company, are sufficient
for the satisfaction of all of Parents and Merger
Subs obligations under this Agreement, including the
payment of the Merger Consideration and the Option and
Stock-Based Award Consideration (and any fees and expenses of or
payable by Parent, Merger Sub or the Surviving Corporation). All
of the conditions precedent to the obligations of the lenders
under the Debt Commitment Letter to make the Debt Financing
available to Parent
and/or
Merger Sub are set forth in the Debt Commitment Letter, and the
equity commitment letter contains all of the conditions
precedent to the obligations of the funding party to make the
equity financing thereunder available to Parent
and/or
Merger Sub on the terms therein. Notwithstanding anything in
this Agreement to the contrary, one or more Debt Commitment
Letters may be amended, modified, supplemented, restated or
superseded at the option of Parent and Merger Sub after the date
of this Agreement but prior to the Effective Time (the
New Financing Commitments
);
provided
that the terms of any New Financing Commitment shall not
(i) reduce the aggregate amount of the Financing,
(ii) expand upon the conditions precedent to the Financing
as set forth in the Debt Commitment Letter in any material
respect, or (iii) reasonably be expected to delay the
Closing beyond the End Date. In such event, the terms
Debt Commitment Letter
and
Financing
Commitments
as used herein shall be deemed to include
the Debt Commitment Letters that are not so amended, modified,
supplemented, restated or superseded at the time in question and
the New Financing Commitments to the extent then in effect.
Section
4.6
Capitalization
of Merger Sub.
As of the date of this Agreement, the authorized capital stock
of Merger Sub consists of 100 shares of common stock, par
value $0.01 per share, all of which are validly issued and
outstanding. All of the issued and outstanding capital stock of
Merger Sub is, and at the Effective Time will be, owned by
Parent or a direct or indirect wholly owned Subsidiary of
Parent. Merger Sub has outstanding no option, warrant, right, or
any other agreement pursuant to which any person other than
Parent may acquire any equity security of Merger Sub. Merger Sub
has not conducted any business prior to the date hereof and has,
and prior to the Effective
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Time will have, no assets, liabilities or obligations of any
nature other than those incident to its formation and pursuant
to this Agreement and the Merger and the other transactions
contemplated by this Agreement.
Section
4.7
Finders
or Brokers.
Neither Parent nor any of its Subsidiaries has employed any
investment banker, broker or finder in connection with the
transactions contemplated by this Agreement who is entitled to
any fee or any commission in connection with or upon
consummation of the Merger.
Section
4.8
Lack
of Ownership of Company Common Stock.
Neither Parent nor any of its Subsidiaries beneficially owns,
directly or indirectly, any shares of Company Common Stock or
other securities convertible into, exchangeable into or
exercisable for shares of Company Common Stock. Other than the
Support and Voting Agreements and the transactions contemplated
thereby, there are no voting trusts or other agreements,
arrangements or understandings to which Parent or any of its
Subsidiaries is a party with respect to the voting of the
capital stock or other equity interest of the Company or any of
its Subsidiaries nor are there any agreements, arrangements or
understandings to which Parent or any of its Subsidiaries is a
party with respect to the acquisition, divestiture, retention,
purchase, sale or tendering of the capital stock or other equity
interest of the Company or any of its Subsidiaries.
Section
4.9
Interest
in Competitors.
Neither Parent nor Merger Sub owns any interest(s), nor do any
of their respective Affiliates insofar as such Affiliate-owned
interests would be attributed to Parent or Merger Sub under the
HSR Act, in any entity or person that derives a substantial
portion of its revenues from a line of business within the
Companys principal lines of business.
Section
4.10
No
Additional Representations.
Parent acknowledges that it has conducted to its satisfaction an
independent investigation of the Company in making its
determination to proceed with the transactions contemplated by
this Agreement. Parent acknowledges that neither the Company nor
any person has made any representation or warranty, express or
implied, as to the accuracy or completeness of any information
regarding the Company furnished or made available to Parent and
its Representatives except as expressly set forth in
Article III (or the Company Disclosure Schedules
referred to therein)
, and neither the Company nor any other
person shall be subject to any liability to Parent or any of its
Affiliates resulting from the Companys making available to
Parent or Parents use of such information provided or made
available to Parent or its Representatives, or any information,
documents or material made available to Parent in the due
diligence materials provided to Parent, other management
presentations (formal or informal) or in any other form in
connection with the transactions contemplated by this Agreement.
Without limiting the foregoing, the Company makes no
representation or warranty to Parent with respect to any
financial projection, forecast, estimate or budget relating to
the Company or any of its Subsidiaries, whether or not included
in any management presentation, disclosure or otherwise
delivered to or made available to Parent or Merger Sub or any of
their respective Affiliates or any representatives of future
revenues, future results of operations (or any component
thereof), future cash flows or future financial condition (or
any component thereof) of the Company and its Subsidiaries or of
the future business and operations of the Company and its
Subsidiaries.
Section
4.11
Solvency.
As of the date hereof, to the knowledge of Parent and Merger Sub
assuming (i) satisfaction of the conditions to
Parents and Merger Subs obligation to consummate the
Merger, or waiver of such conditions, (ii) the accuracy of
the representations and warranties of the Company set forth in
Article III
(for such purposes, such representations
and warranties shall be true and correct in all material
respects without giving effect to any
knowledge
, materiality or
Company
Material Adverse Effect
qualification or exception),
and (iii) estimates, projections or forecasts provided by
the Company to Parent prior to the date hereof have been
prepared in good faith on assumptions that were and continue to
be reasonable (provided, however, nothing herein shall be deemed
to be a guarantee of the accuracy of the information set forth
therein), immediately following the Effective Time and after
giving effect to the Merger and the other transactions
contemplated
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hereby, the Surviving Corporation and each of its Subsidiaries
(on a consolidated basis) will not (i) be insolvent (either
because its financial condition is such that the sum of its
debts is greater than the fair market value (on a going concern
basis) of its assets or because the fair saleable value of its
assets is less than the amount required to pay its probable
liability on its existing debts as they mature), (ii) have
unreasonably small capital with which to engage in its business
or (iii) have incurred debts beyond its ability to pay as
they become due.
Section
4.12
Management
Agreements.
Other than (i) this Agreement and (ii) the Support and
Voting Agreements and the agreements, arrangements, transactions
contemplated thereby, there are no contracts, undertakings,
commitments, agreements or obligations or understandings between
Parent or Merger Sub or any of their Affiliates, on the one
hand, and any member of the Companys management or the
Board of Directors or any Participating Holders, on the other
hand relating to the transactions contemplated by this Agreement
or the operations of the Company after the Effective Time.
Section
4.13
Disclaimer
of Other Representation and Warranties.
Parent and Merger Sub do not make, and have not made, any
representations or warranties, express or implied, in connection
with the Merger and the transactions contemplated hereby other
than those expressly set forth herein.
ARTICLE V
CERTAIN
AGREEMENTS
Section
5.1
Conduct
of Business by the Company and Parent.
(a) From and after the date of this Agreement and prior to
the Effective Time or the date, if any, on which this Agreement
is earlier terminated pursuant to
Section 7.1
(the
Termination Date
), and except (i) as may
be required by applicable Law, (ii) as may be agreed in
writing by Parent (which consent shall not be unreasonably
withheld, delayed or conditioned), (iii) as may be
required, permitted or expressly contemplated by this Agreement
or (iv) as set forth in
Section 5.1
of the
Company Disclosure Schedule, the Company agrees with Parent that
(A) the business of the Company and its Affiliates shall be
conducted in, and such entities shall not take any action except
in, the ordinary course of business and the Company shall use
commercially reasonable efforts to (1) preserve intact its
and its Affiliates present business organization and
capital structure; (2) maintain in effect all material
Company Permits that are required for the Company or its
Affiliates to carry on their respective businesses;
(3) keep available the services of present officers and key
employees; (4) maintain the current relationships with its
lenders, suppliers and other persons with which the Company or
its Affiliates have significant business relationships; and
(5) maintain the Real Property, including all of the
Improvements, in substantially the same condition as of the date
of this Agreement, ordinary wear and tear excepted, and shall
not, except in the ordinary course of business, demolish or
remove any of the existing Improvements or erect new
Improvements on the Real Property or any portion thereof;
provided
,
however
, that no action by the Company
or its Affiliates with respect to matters specifically addressed
by any provision of
Section 5.1(b)
shall be deemed a
breach of this sentence unless such action would constitute a
breach of such other provision.
(b) The Company agrees with Parent, on behalf of itself and
its Affiliates, that between the date of this Agreement and the
Effective Time or the Termination Date, without the prior
written consent of Parent (which consent shall not be
unreasonably withheld, delayed or conditioned), the Company:
(i) shall not authorize, declare or pay any dividends on or
make any distribution with respect to its outstanding shares of
capital stock (whether in cash, assets, stock or other
securities of the Company) other than a dividend or distribution
by a wholly owned Subsidiary of the Company to the Company in
the ordinary course of business;
A-26
(ii) shall not, and shall not permit any of its Affiliates
to, split, combine or reclassify any of its capital stock or
other equity securities or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or other equity
securities, except for any such transaction by a wholly owned
Subsidiary of the Company which remains a wholly owned
Subsidiary after consummation of such transaction;
(iii) except as required by existing written agreements or
Company Benefit Plans, or as otherwise required by applicable
Law (including Section 409A of the Code), shall not, and
shall not permit any of its Affiliates to (A) except in the
ordinary course of business, increase or accelerate the payment
of the compensation or other benefits payable or provided to the
Companys present or former directors, officers or
employees, (B) approve or enter into, and will use its
reasonable best efforts to cause the Managed Practices not to
approve or enter into, any employment, change of control,
severance or retention agreement with any non-physician employee
of the Company or Managed Practice (except (1) for
employment agreements terminable on less than thirty
(30) days notice without penalty or severance
obligation or (2) for severance agreements entered into
with employees (other than officers) in the ordinary course of
business in connection with terminations of employment that do
not involve payments in excess of $200,000), (C) approve or
enter into, and will use its reasonable best efforts to cause
the Managed Practices not to approve or enter into, any
employment or retention agreement with any physician employee of
the Company or Managed Practice that provides for potential
aggregate annual compensation, severance or any change of
control payment(s), in any such case, in excess of $750,000, or
(D) establish, adopt, enter into, amend, terminate or waive
any rights with respect to any (x) collective bargaining
agreement, (y) any plan, trust, fund, policy or arrangement
for the benefit of any current or former directors, officers or
employees or any of their beneficiaries, except, in the case of
clause (y) only, as would not, individually or in the
aggregate, cause the accelerated payment of any compensation or
benefits or result in a material increase in cost to the Company
or (z) any Company Benefit Plan;
(iv) shall not, and shall not permit any of its Affiliates
to, change in any material respects any financial accounting
policies or procedures or any of its methods of reporting
income, deductions or other material items for financial
accounting purposes, except as required by GAAP, SEC rule or
policy or applicable Law;
(v) shall not, and shall not permit any of its Affiliates
to, adopt any amendments to its articles of incorporation or
bylaws or similar applicable charter documents;
(vi) except for transactions among the Company and its
wholly owned Subsidiaries or among the Companys wholly
owned Subsidiaries, shall not, and shall not permit any of its
Affiliates to, issue, sell, pledge, dispose of or encumber, or
authorize the issuance, sale, pledge, disposition or encumbrance
of, any shares of its capital stock or other ownership interest
in the Company or any of its Affiliates or any securities
convertible into or exchangeable for any such shares or
ownership interest, or any rights, warrants or options to
acquire or with respect to any such shares of capital stock,
ownership interest or convertible or exchangeable securities or
take any action to cause to be exercisable any otherwise
unexercisable option under any existing stock option plan
(except as otherwise provided by the terms of this Agreement or
the express terms of any unexercisable options outstanding on
the date of this Agreement), other than issuances of shares of
Company Common Stock in respect of any exercise of Company Stock
Options in each case outstanding on the date of this Agreement.
(vii) except for transactions among the Company and its
wholly owned Subsidiaries or among the Companys wholly
owned Subsidiaries, shall not, and shall not permit any of its
Affiliates to, directly or indirectly, purchase, redeem or
otherwise acquire any shares of its capital stock or any rights,
warrants or options to acquire any such shares;
(viii) shall not, and shall not permit any of its
Affiliates to, incur, assume, guarantee, prepay or otherwise
become liable for, modify in any material respect the terms of,
any Indebtedness for borrowed money or become responsible for
the obligations of any person (directly, contingently or
otherwise), except for (A) any intercompany Indebtedness
for borrowed money among the Company and its wholly owned
Subsidiaries or among the Companys wholly owned
Subsidiaries, (B) Indebtedness for borrowed
A-27
money incurred to replace, renew, extend, refinance or refund
any existing Indebtedness for borrowed money set forth on
Section 3.25
of the Company Disclosure Schedule
without increasing the amount of such permitted borrowings or
incurring breakage costs, and provided that, except as set forth
on
Schedule 5.1(b)(viii)
, any such Indebtedness is
prepayable with out premium or penalty, or with premium or
penalty that is no greater than the prepayment premium or
penalty applicable to the Indebtedness replaced by such
Indebtedness, (C) guarantees by the Company of Indebtedness
or borrowed money of the Company, which Indebtedness for
borrowed money is incurred in compliance with this
Section 5.1(b)(viii)
, (D) Indebtedness for
borrowed money incurred pursuant to the terms of agreements in
effect prior to the execution of this Agreement, including
amounts available but not borrowed as of the date of this
Agreement, to the extent such agreements are set forth on
Section 3.25
of the Company Disclosure Schedule and
(E) Indebtedness for borrowed money not to exceed
$5,000,000 (excluding existing plans for capital expenditures
and working capital requirements of the Company for 2007 and the
first quarter of 2008 that have previously been made available
to Parent) in aggregate principal amount outstanding at any time
incurred by the Company and its Subsidiaries other than in
accordance with clauses (A)-(E), inclusive;
(ix) except for transactions among the Company and its
wholly owned Subsidiaries or among the Companys wholly
owned Subsidiaries, shall not, and shall cause its Affiliates
not to, sell, lease, license, transfer, exchange or swap,
mortgage or otherwise encumber (including securitizations), or
subject to any Lien (other than Permitted Liens) or otherwise
dispose of (whether by merger, consolidation or acquisition of
stock or assets, license or otherwise), any material portion of
its or its Affiliates properties or assets, including the
capital stock of Affiliates, other than in the ordinary course
of business consistent with past practice with an aggregate
value not to exceed $1,000,000 and other than (A) pursuant
to existing agreements in effect prior to the execution of this
Agreement, (B) as may be required by applicable Law or any
Governmental Entity in order to permit or facilitate the
consummation of the transactions contemplated by this Agreement
or (C) dispositions of obsolete equipment in the ordinary
course of business consistent with past practice;
(x) shall not, and shall not permit any of its Affiliates
to, modify, amend, terminate or waive any rights under any
Company Material Contract, or any Contract that would be a
Company Material Contract if in effect on the date of this
Agreement, in any material respect in a manner which is adverse
to the Company;
(xi) shall not, and shall not permit any of its Affiliates
to, enter into any Company Material Contracts other than in the
ordinary course of business;
(xii) shall not, and shall not permit any of its Affiliates
to, enter into, amend, waive or terminate (other than
terminations in accordance with their terms) any Affiliate
Transaction, other than continuing any Affiliate Transactions
pursuant to the terms and conditions thereof in existence on the
date of this Agreement;
(xiii) shall not, and shall not permit any of its
Affiliates to, without the prior written consent of Parent,
except to the extent required by Law, adopt or change any
accounting method or accounting period for Tax purposes, make
any amendment in any Tax Return, make or change any Tax
election, settle or compromise any Tax liability of the Company
or any of its Affiliates, agree to an extension of the statute
of limitations with respect to the assessment or determination
of material Taxes of the Company or any of its Affiliates, enter
into any closing agreement with respect to any Tax or surrender
any right to claim a Tax refund;
(xiv) shall not, and shall not permit any of its Affiliates
to, adopt or enter into a plan of complete or partial
liquidation, dissolution, restructuring, recapitalization or
other reorganization of the Company, or any of its Affiliates
(other than the Merger);
(xv) shall not, and shall not permit any of its Affiliates
to, write up, write down or write off the book value of any
assets that are, individually or in the aggregate, material to
the Company and its Subsidiaries, taken as a whole, other than
as may be required by GAAP or applicable Law;
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(xvi) shall not, and shall not permit any of its Affiliates
to, pay, discharge, waive, settle or satisfy any claim,
liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than (A) in the
ordinary course of business consistent with past practice or
(B) any claim, liability or obligation not in excess of
$250,000 individually or $750,000 in the aggregate, excluding
any amounts which may be paid under the Companys or its
Affiliates insurance policies;
(xvii) shall not and shall not permit any of its Affiliates
to enter into any new line of business or discontinue any line
of business;
(xviii) shall not and shall not permit any of its
Affiliates to settle, pay or discharge, any litigation,
investigation, arbitration, proceeding or other claim liability
or obligation except in the ordinary course not in excess of
$250,000 individually or $750,000 in the aggregate, excluding
any amounts which may be paid under existing insurance policies;
(xix) except in the ordinary course of business and
consistent with the Companys historical practices and
except as set forth in the Company plans for 2007 and for the
first quarter of 2008, shall not and shall not permit any of its
Affiliates to amend, modify, extend, renew or terminate any
lease for any Leased Real Property, and shall not enter into any
new lease, sublease, license or other agreement for the use or
occupancy of any real property; provided, however, that the
above exceptions shall not apply to any transaction with any
Affiliates of the Company;
(xx)(A) take, or fail to take, any action that could reasonably
be expected to result in, any loss, lapse, abandonment,
invalidity or unenforceability of any material Company
Intellectual Property; or (B) enter into any agreement with
any other person that materially limits or restricts the ability
of the Company or any of its Affiliates to conduct certain
activities or use certain assets (including any Company
Intellectual Property);
(xxi) shall not and shall not permit any of its Affiliates
to, authorize, or make any commitment with respect thereto, any
capital expenditure in excess of $1,000,000 individually or
$3,000,000 in the aggregate (including, without limitation,
expenditures for acquisitions of assets or entities, joint
ventures and the establishment of de novo centers), except for
capital expenditures that are contemplated by the Companys
existing plan for capital expenditures for 2007 and the first
quarter of 2008 previously made available to Parent;
(xxii) shall not and shall cause its Affiliates not to,
fail to maintain in full force and effect material insurance
policies covering the Company and its Affiliates and their
respective properties, assets and businesses in a form and
amount consistent with past practice;
(xxiii) shall not and shall not permit any of its
Affiliates to take any action (including rescinding, amending or
modifying any bylaw amendment or previous authorization or
approval of the Board of Directors, Special Committee or
disinterested directors) that would or could reasonably be
expected to cause any Anti-Takeover Statute to be or become
applicable to the Merger and the other transactions contemplated
by this Agreement or to the Support and Voting Agreements and
the agreements contemplated by the Support and Voting
Agreements; or
(xxiv) other than transactions between the Company and its
Subsidiaries or transactions among the Companys
Subsidiaries, shall not and shall not permit any of its
Affiliates to make any loan or advances to any other person,
except for (x) any loan or advance to any employee of the
Company in the ordinary course of business not to exceed
$10,000, or (y) any loan or advance to any other person not
to exceed $50,000; or
(xxv) shall not, and shall not permit any of its Affiliates
to acquire (including by merger, consolidation, or acquisition
of stock or assets) or make any investment in any interest in
any corporation, partnership, limited liability company,
association, trust or any other entity, group (as such term is
used in Section 13 of the Exchange Act) or organization
(including, a Governmental Entity), or any division thereof or
any assets thereof, except any such acquisitions or investments
that are consistent with past practice and are for consideration
that is individually not in excess of $1,500,000, or in the
aggregate, not
A-29
in excess of $5,000,000 for all such acquisitions by the Company
and the its Subsidiaries and except for such acquisitions or
investments that are contemplated by the Companys existing
plan for acquisitions and investments for 2007 and the first
quarter of 2008 previously made available to Parent; or
(xxvi) shall not, and shall not permit any of its
Affiliates to, agree, in writing or otherwise, or announce an
intention, to take any of the foregoing actions.
(c) Parent agrees with the Company, on behalf of itself and
its Affiliates, that, between the date of this Agreement and the
Effective Time, Parent shall not, and shall not permit any of
its Affiliates to, take or agree to take any action (including
entering into agreements with respect to any acquisitions,
mergers, consolidations or business combinations) which would
reasonably be expected to result in, individually or in the
aggregate, a Parent Material Adverse Effect, or to prevent,
materially delay or materially impede the ability of Parent and
Merger Sub to consummate the Merger or the other transactions
contemplated by this Agreement.
(d) Nothing contained in this Agreement is intended to give
Parent, directly or indirectly, the right to control or direct
the Companys or its Affiliates operations prior to
the Effective Time, and nothing contained in this Agreement is
intended to give the Company, directly or indirectly, the right
to control or direct Parents or its Affiliates
operations. Prior to the Effective Time, each of Parent and the
Company shall exercise, consistent with the terms and conditions
of this Agreement, complete control and supervision over its and
its Affiliates respective operations.
Section
5.2
Access.
(a) The Company shall afford, and shall cause its
Affiliates, agents, and representatives to afford, to Parent and
to its officers, employees, accountants, consultants, legal
counsel, financial advisors, prospective financing sources,
Affiliates and agents and other representatives (collectively,
Representatives
) reasonable access during
normal business hours (and at other times as may be mutually
agreed), throughout the period prior to the earlier of the
Effective Time and the Termination Date, to its and its
Affiliates officers, employees, accountants, properties,
contracts, commitments, books and records and any report,
schedule or other document filed or received by it pursuant to
the requirements of applicable Laws and shall furnish Parent
with financial, operating and other data and information as
Parent, through its officers, employees or other authorized
representatives, may from time to time reasonably request in
writing. Notwithstanding the foregoing, the Company shall not be
required to afford such access if it would unreasonably disrupt
the operations of the Company or any of its Affiliates, would
cause a violation of any agreement to which the Company or any
of its Affiliates is a party, or would constitute a violation of
any applicable Law, nor shall Parent or any of its
Representatives be permitted to perform any onsite procedure
(including any onsite environmental study) with respect to any
property of the Company or any of its Affiliates, except, with
respect to any on site procedure, with the Companys prior
written consent (which consent shall not be unreasonably
withheld, delayed or conditioned).
(b) Parent hereby agrees that all information provided to
it or its Representatives in connection with this Agreement and
the consummation of the transactions contemplated by this
Agreement shall be kept confidential in accordance with the
Confidentiality and Nondisclosure Agreement, dated as of
May 8, 2007 between the Company and Vestar Capital
Partners V, L.P. (the
Confidentiality
Agreement
) which Confidentiality Agreement shall
continue to apply.
Section
5.3
No
Shop; Alternative and Superior Proposals.
(a) Subject to
Section 5.3(b)
, from the date of
this Agreement and continuing until the earlier of the receipt
of the Company Shareholder Approval and the Termination Date,
none of the Company, the Companys Subsidiaries nor any of
their respective Representatives shall, directly or indirectly
(A) initiate, solicit or knowingly encourage (including by
way of providing information) the submission of any inquiries,
proposals or offers or any other efforts or attempts that
constitute or may reasonably be expected to lead to, any
Alternative Proposal or engage in any discussions or
negotiations with respect thereto or otherwise knowingly
cooperate with or knowingly assist or participate in, or
knowingly facilitate any such inquiries, proposals, discussions
or negotiations, (B) participate in any way in any
negotiations or discussions regarding, or furnish or disclose to
any third party any information with respect to, or which could
reasonably be
A-30
expected to lead to, any Alternative Proposal, or (C) make
a Change of Recommendation or approve or recommend, or publicly
propose to approve or recommend, an Alternative Proposal or
(D) enter into any merger agreement, letter of intent,
agreement in principle, share purchase agreement, asset purchase
agreement or share exchange agreement, option agreement or other
similar agreement or arrangement providing for or relating to or
which could reasonably be expected to lead to an Alternative
Proposal or enter into any agreement or agreement in principle
requiring the Company to abandon, terminate or fail to
consummate the transactions contemplated hereby or breach its
obligations hereunder or propose or agree to do any of the
foregoing.
(b) Notwithstanding the limitations set forth in
Section 5.3(a)
, at any time from the date of this
Agreement and continuing until the earlier of the receipt of the
Company Shareholder Approval and the Termination Date, if
(A) the Company receives an unsolicited bona fide written
Alternative Proposal which (i) constitutes a Superior
Proposal or (ii) which the Special Committee or the Board
of Directors determines in good faith could reasonably be
expected to result in a Superior Proposal and (B) the
Special Committee or the Board of Directors determines in good
faith, after consultation with the Special Committees or
the Companys outside legal counsel and the Advisor that
the failure of the Special Committee or the Board of Directors
to take the actions set forth in clauses (x) and
(y) below with respect to such Alternative Proposal would
be inconsistent with the directors exercise of their
fiduciary obligations to the Companys shareholders under
applicable Law, then the Company may take the following actions:
(x) furnish non-public information to the third party
making such Alternative Proposal (if, and only if,
(1) prior to so furnishing such information, the Company
receives from the third party an executed confidentiality
agreement with confidentiality and standstill provisions in form
no more favorable to such person than those contained in the
Confidentiality Agreement and (2) all such information has
previously been made available to Parent or is made available to
Parent prior to, or concurrently with, the time it is provided
to such third party) and (y) engage in discussions or
negotiations with such third party with respect to such
Alternative Proposal.
(c) The Company shall, and shall cause each of its
Subsidiaries and their respective Representatives to,
immediately cease and cause to be terminated any discussions or
negotiations with any parties (other than Parent, Merger Sub and
their Representatives) that may be ongoing as of the date hereof
with respect to or which could reasonably be expected to lead to
an Alternative Proposal. The Company shall promptly (within
24 hours) advise Parent of the Companys receipt of
any request for information or request to discuss any
Alternative Proposal or any Alternative Proposal and provide a
copy of such request or Alternative Proposal made in writing or
the material terms and conditions of such request or Alternative
Proposal to the extent not made in writing, and shall keep
Parent apprised as to the status and any material developments,
discussions and negotiations concerning the same on a current
basis. Without limiting the foregoing, the Company shall
promptly (within 24 hours) notify Parent orally and in
writing if it determines to begin providing information or to
engage in negotiations concerning an Alternative Proposal
pursuant to this
Section 5.3(b).
Promptly
upon determination by the Special Committee or the Board of
Directors that an Alternative Proposal constitutes a Superior
Proposal, the Company shall deliver to Parent a written notice
advising it that the Special Committee or the Board of Directors
has made such determination, specifying the material terms and
conditions of such Superior Proposal and the identity of the
person making such Superior Proposal.
(d) Other than in accordance with this
Section 5.3
, neither the Special Committee nor the
Board of Directors shall (i) withdraw or modify, or propose
publicly to withdraw or modify in a manner adverse to Parent,
the approval or recommendation by the Special Committee or the
Board of Directors of or regarding the Merger or this Agreement
or the other transactions contemplated by this Agreement;
(ii) approve, adopt or recommend, or propose publicly to
approve, adopt or recommend, any Alternative Proposal;
(iii) make any recommendation in connection with a tender
offer or exchange offer other than a recommendation against such
offer, or (iv) other than in connection with this Agreement
and the Support and Voting Agreements and the agreements and
transactions contemplated by this Agreement and the Support and
Voting Agreements, exempt any person, agreement or transaction
from the restrictions contained in any state takeover or similar
laws, including in Sections 607.0901 and 607.0902 of the
FBCA (each of the foregoing, a
Change of
Recommendation
). Notwithstanding the foregoing, in
response to the receipt of a Superior Proposal that was not
solicited in violation of this Agreement by the Company or a
Subsidiary or Representative of the Company
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and that has not been withdrawn or abandoned, the Board of
Directors may, prior to the receipt of the Company Shareholder
Approval, (x) make a Change of Recommendation and
(y) enter into an agreement regarding a Superior Proposal
if, (A) the Special Committee or the Board of Directors has
concluded in good faith, after consultation with the
Companys or the Special Committees outside legal
counsel and the Advisor, that the failure of the Special
Committee or the Board of Directors to take such action would be
inconsistent with the directors exercise of their
fiduciary obligations to the Companys shareholders under
applicable Law, (B) the Company has given Parent five
(5) business days (the
Notice
Period
) prior written notice of its intention to take
such action (it being understood and agreed that the Company
shall provide notice to Parent of any material amendment to the
financial terms or other material terms of any such Superior
Proposal and if at the time of such further notice, less than
two business days remain in such Notice Period, such Notice
Period shall be extended such that five business days remain in
such extended period following the delivery to Parent of such
further notice), which notice shall specify the material terms
and conditions of any such Superior Proposal (including the
identity of the person making such Superior Proposal), and be
accompanied by a copy of the proposed transaction agreements for
such Superior Proposal and any other material documents relating
thereto, and (C) during the Notice Period, the Board of
Directors or the Special Committee shall and shall cause their
respective Representatives to, negotiate with Parent and Merger
Sub and their respective Representatives in good faith (to the
extent Parent and Merger Sub desire to negotiate) to make such
adjustments to the terms and conditions of this Agreement so
that such Alternative Proposal ceases to constitute a Superior
Proposal, and (D) with respect to an action described in
clause (x) or (y) above, the Company has complied in
all material respects with its obligations under this
Section 5.3
and the Company shall have terminated
this Agreement in accordance with
Section 7.1(g)
hereof and paid the Company Termination Fee to Parent in
accordance with
Section 7.2(a)(ii).
No
Change of Recommendation shall change, modify or rescind any
authorization, action or approval of the Special Committee (or
disinterested directors) or the Board of Directors for purposes
of causing any Anti-Takeover Statutes or other state law to be
inapplicable to the transactions contemplated by this Agreement
or the Support and Voting Agreement
(e) Nothing contained in this Agreement shall prohibit the
Company or its Board of Directors from disclosing to its
shareholders a position contemplated by
Rules 14d-9
and
14e-2(a)
promulgated under the Exchange Act.
(f) As used in this Agreement,
Alternative
Proposal
shall mean any bona fide proposal or offer
made by any person or group of persons (other than a proposal or
offer by Parent or any of its Subsidiaries) for or with respect
to (i) a merger, reorganization, share exchange,
consolidation, business combination, recapitalization,
dissolution, liquidation or similar transaction involving the
Company or any Subsidiary or Subsidiaries of the Company whose
business constitutes ten percent (10%) or more of the net
revenues, net income or assets of the Company and its
Subsidiaries, taken as a whole (including capital stock of any
Subsidiary of the Company), (ii) the direct or indirect
acquisition in a single transaction or series of related
transactions by any person of the assets of the Company and its
Subsidiaries that constitute ten percent (10%) or more of the
net revenues, net income or assets of the Company and its
Subsidiaries, taken as a whole, (iii) the direct or
indirect acquisition in a single transaction or series of
related transactions by any person of ten percent (10%) or more
of the outstanding shares of Company Common Stock, or
(iv) any tender offer or exchange offer that if consummated
would result in any person beneficially owning ten percent (10%)
or more of the shares of Company Stock then outstanding.
(g) As used in this Agreement
Superior
Proposal
shall mean an Alternative Proposal (with all
percentages, in the definition of Alternative Proposal increased
to 50%) on terms that the Special Committee or the Board of
Directors determines in good faith, after consultation with a
financial advisor of nationally recognized reputation and its
respective outside legal counsel, (i) is at least as likely
to be consummated in accordance with its terms as the
transactions contemplated by this Agreement and (ii) if
consummated, would result in a transaction more favorable to the
holders of Company Common Stock (other than the Participating
Holders) than the transactions provided for in this Agreement,
in each case with respect to clauses (i) and (ii), after
taking into account such factors as it considers to be
appropriate (with the advice of outside legal counsel)
including, among other things, the person making such
Alternative Proposal and all legal, financial, regulatory,
fiduciary, timing and other aspects of this Agreement and such
Alternative Proposal, including any
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conditions relating to financing, regulatory approvals or other
events or circumstances beyond the control of the party invoking
the condition and taking into account any revisions made or
proposed in writing by Parent or Merger Sub prior to the time of
determination.
Section
5.4
Filings;
Other Actions.
(a) The Company, Parent and Merger Sub shall take or cause
to be taken such actions as may be required to be taken under
the Exchange Act any other federal securities Laws, and under
any applicable state securities or
blue sky
Laws in connection with the Merger and the other transactions
contemplated by this Agreement, including the Proxy Statement
and the
Schedule 13E-3.
In connection with the Merger and the Company Meeting, the
Company shall as promptly as practicable after the date hereof
prepare and file (in not event later than November 30,
2007) with the SEC the Proxy Statement relating to the
Merger and the other transactions contemplated by this
Agreement, and the Company and Parent shall use all reasonable
efforts to respond to the comments of the SEC and to cause the
Proxy Statement to be mailed to the Companys shareholders,
all as promptly as reasonably practicable;
provided
,
however
, that prior to the filing of the Proxy Statement,
the Company shall consult with Parent with respect to such
filings and shall afford Parent or its Representatives
reasonable opportunity to comment thereon. Parent and Merger Sub
shall provide the Company with any information for inclusion in
the Proxy Statement which may be required under applicable Law
and/or
which
is reasonably requested by the Company. The Company shall notify
Parent promptly of the receipt of comments of the SEC and of any
request from the SEC for amendments or supplements to the Proxy
Statement or for additional information, and will promptly
supply Parent with copies of all correspondence between the
Company or its Representatives, on the one hand, and the SEC or
members of its staff, on the other hand, with respect to the
Proxy Statement or the Merger. Concurrently with the preparation
and filing of the Proxy Statement, the Company, Parent and
Merger Sub shall jointly prepare and file with the SEC the
Schedule 13E-3.
The parties shall cooperate and consult with each other in
preparation of the
Schedule 13E-3,
including, without limitation, furnishing to the others the
information relating to it required by the Exchange Act and the
rules and regulations promulgated thereunder to be set forth in
the
Schedule 13E-3.
Each of the Company, Parent and Merger Sub shall use its
respective commercially reasonable efforts to resolve all SEC
comments with respect to the Proxy Statement and the
Schedule 13E-3
and any other required filings as promptly as practicable after
receipt thereof. Each of the Company, Parent and Merger Sub
agree to correct any information provided by it for use in the
Proxy Statement or
Schedule 13E-3
which shall have become false or misleading. If at any time
prior to the Company Meeting any event should occur which is
required by applicable Law to be set forth in an amendment of,
or a supplement to, the Proxy Statement or the
Schedule 13E-3,
the Company will promptly inform Parent. In such case, the
Company, with the cooperation of Parent, will, upon learning of
such event, promptly prepare and file such amendment or
supplement with the SEC to the extent required by applicable Law
and shall mail such amendment or supplement to the
Companys shareholders to the extent required by applicable
Law;
provided
,
however
, that prior to such filing,
the Company shall consult with Parent with respect to such
amendment or supplement and shall afford Parent or its
Representatives reasonable opportunity to comment thereon.
(b) Prior to the earlier of the Effective Time or the
Termination Date, the Company and Parent shall cooperate with
each other in order to lift any injunctions or remove any other
legal impediment to the consummation of the transactions
contemplated by this Agreement or the Support and Voting
Agreements.
(c) Subject to the other provisions of this Agreement, the
Company shall (i) take all action necessary in accordance
with the FBCA and its amended and restated articles of
incorporation and amended and restated bylaws to duly call, give
notice of, convene and hold a meeting of its shareholders as
promptly as reasonably practicable following the mailing of the
Proxy Statement for the purpose of obtaining the Company
Shareholder Approval (the
Company Meeting
)
(including mailing the Proxy Statement as soon as reasonably
practicable after the SEC has cleared the Proxy Statement and
holding the Company Meeting as soon as practicable after mailing
the Proxy Statement), (ii) include in the Proxy Statement
the Recommendation of the Board of Directors, based on the
unanimous recommendation of the Special Committee, that the
shareholders of the Company vote in favor of the approval of
this Agreement and, as applicable, the written opinion of the
Advisor, dated on or about the date of this Agreement, to the
effect that, as of such date, the Merger Consideration is fair,
from a financial point of view, to the holders of the Company
Common Stock (other
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than the Participating Holders) and (iii) use all
reasonable efforts to solicit from its shareholders proxies in
favor of the approval of this Agreement and the transactions
contemplated by this Agreement.
Section
5.5
Stock
Options and Restricted Shares; Employee Matters.
(a)
Stock Options and Restricted
Shares.
Except as otherwise agreed to in writing
between the Company, Parent and Merger Sub:
(i) Each unexercised option to purchase or acquire shares
of Company Common Stock (each, a
Company Stock
Option
) granted under the Company Stock Plans or
otherwise, whether vested or unvested, that is outstanding
immediately prior to the Effective Time shall, as of the
Effective Time, by virtue of the Merger and without any action
on the part of Parent, Merger Sub, the Company, or the holder
thereof, become fully vested and be converted into the right to
receive from the Surviving Corporation at the Effective Time an
amount in cash in U.S. dollars equal to the product of
(x) the total number of shares of Company Common Stock
subject to such Company Stock Option immediately prior to the
Effective Time and (y) the excess, if any, of the amount of
the Merger Consideration over the exercise price per share of
Company Common Stock subject to such Company Stock Option, with
the aggregate amount of such payment rounded up to the nearest
cent, less such amounts as Parent, the Company or the Paying
Agent determine in good faith are required to be withheld or
deducted under the Code or any provision of state, local or
foreign Tax Law with respect to the making of such payment. The
vesting of a Company Stock Option as provided in the immediately
preceding sentence shall be deemed a release of any and all
rights the holder thereof had or may have had in respect of such
Company Stock Option.
(ii) Immediately prior to the Effective Time, except as set
forth below, each award of restricted Company Common Stock (the
Restricted Shares
) shall be converted into
the right to receive the Merger Consideration, less such amounts
as Parent, the Company or the Paying Agent determine in good
faith are required to be withheld or deducted under the Code or
any provision of state, local or foreign Tax Law with respect to
the making of such payment.
(iii) Prior to the Effective Time, the Board of Directors
or the Compensation Committee of the Board of Directors, as
applicable, shall adopt amendments to the Company Stock Plans
and the applicable Company Benefit Plans with respect to Company
Stock Options and Restricted Shares to implement the foregoing
provisions of
Sections 5.5(a)(i)
, and
5.5(a)(ii)
and the Company shall take all such actions as
may be necessary to accelerate the vesting of all Company Stock
Options that are not vested Company Stock Options as of the
Effective Time.
(b)
Employee Matters.
(i) For a period of one year following the Effective Time,
Parent shall provide or cause to be provided, to each individual
who is a current employee of the Company and its Subsidiaries as
of the Effective Time (
Company Employees
)
total compensation and benefits that are substantially
comparable in the aggregate to the total compensation and
benefits provided to Company Employees immediately before the
Effective Time (excluding any equity based compensation, equity
based benefits and nonqualified deferred compensation programs);
provided
,
however
, that nothing herein shall be
construed to establish or amend any benefit plan, program,
agreement or arrangement or to prevent the amendment or
termination of any Company Benefit Plan or interfere with
Parents or any of its Subsidiaries right or
obligation to make such changes as are necessary to conform with
applicable Law or shall cause or require the extension, renewal
or amendment of, or prevent the expiration of, any employment
agreement which shall expire, terminate or fail to renew
pursuant to its terms during such period. Nothing in this
Section 5.5(b)(i)
or this Agreement shall limit the
right of the Surviving Corporation or any of its Subsidiaries to
terminate the employment of any employee at any time and for any
or no reason.
(ii) For all purposes (including purposes of vesting,
eligibility to participate and level of benefits) under the
employee benefit plans providing benefits to any Company
Employees after the Effective Time (the
New
Plans
), each Company Employee shall be credited with
his or her years of service with the
A-34
Company and its Subsidiaries and their respective predecessors
before the Effective Time, to the same extent as such Company
Employee was entitled, before the Effective Time, to credit for
such service under any similar Company Benefit Plan in which
such Company Employee participated or was eligible to
participate immediately prior to the Effective Time,
provided
that the foregoing shall not apply with respect
to benefit accrual under any defined benefit pension plan or to
the extent that its application would result in a duplication of
benefits with respect to the same period of service and shall
not apply with respect to any equity-based arrangement. In
addition, and without limiting the generality of the foregoing,
(A) each Company Employee shall be immediately eligible to
participate, without any waiting time, in any and all New Plans
to the extent coverage under such New Plan is comparable to a
Company Benefit Plan in which such Company Employee participated
immediately before the consummation of the Merger (such plans,
collectively, the
Old Plans
), and
(B) for purposes of each New Plan providing medical,
dental, pharmaceutical
and/or
vision benefits to any Company Employee, Parent shall cause all
pre-existing condition exclusions and actively-at-work
requirements of such New Plan to be waived for such employee and
his or her covered dependents in the plan year in which the
Effective Time occurs, unless such conditions would not have
been waived under the comparable Old Plans of the Company or its
Subsidiaries in which such employee participated immediately
prior to the Effective Time and Parent shall cause any eligible
expenses incurred by such employee and his or her covered
dependents during the portion of the plan year of the Old Plan
ending on the date such employees participation in the
corresponding New Plan begins to be taken into account under
such New Plan for purposes of satisfying all deductible,
coinsurance and maximum out-of-pocket requirements applicable to
such employee and his or her covered dependents for the plan
year in which the Effective Time occurs as if such amounts had
been paid in accordance with such New Plan.
(iii) The provisions of this
Section 5.5(b)
are
for the sole benefit of the parties to this Agreement and
nothing herein, expressed or implied, is intended or shall be
construed to confer upon or give to any person (including for
the avoidance of doubt any Company Employees), other than the
parties hereto and their respective permitted successors and
assigns, any legal or equitable or other rights or remedies
(with respect to the matters provided for in this
Section 5.5(b)
under or by reason of any provision
of this Agreement).
Section
5.6
Commercially
Reasonable Efforts.
(a) Subject to the terms and conditions set forth in this
Agreement, or as otherwise required by
Section 6.3(c)
each of the parties hereto shall use
(and cause its Affiliates to use) its commercially reasonable
efforts (subject to, and in accordance with, applicable Law) to
take promptly, or cause to be taken promptly, all actions, and
to do promptly, or cause to be done promptly, and to assist and
cooperate with the other parties in doing, all things necessary,
proper or advisable under applicable Laws to consummate and make
effective the Merger and the other transactions contemplated by
this Agreement, including (i) obtaining all necessary
actions or nonactions, waivers, consents and approvals,
including the Company Approvals and the Parent Approvals, from
Governmental Entities and making all necessary registrations and
filings and taking all steps as may be necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by,
any Governmental Entity, (ii) obtaining all necessary
consents, approvals or waivers from third parties, including
Third Party Consents, and all consents, approvals and waivers
from third parties reasonably requested by Parent to be obtained
in respect of the Company Material Contracts in connection with
the Merger, this Agreement or the transactions contemplated by
this Agreement, (iii) defending any lawsuits or other legal
proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the Merger and the other
transactions contemplated by this Agreement, and
(iv) executing and delivering any additional instruments
necessary to consummate the Merger and the other transactions
contemplated by this Agreement;
provided
,
however
,
that prior to the Effective Time in no event shall the Company
or any of its Affiliates, absent the prior written consent of
Parent (such consent not to be unreasonably withheld,
conditioned or delayed), pay or commit to pay any material fee,
material penalties or other material consideration to any
landlord or other third party to obtain any consent, approval or
waiver required for the consummation of the Merger under any
real estate leases or Company Material Contracts.
A-35
(b) Subject to the terms and conditions herein provided and
without limiting the foregoing, the Company and Parent shall
(i) promptly, but in no event later than fifteen
(15) business days after the date of this Agreement, make
their respective filings and thereafter make any other required
submissions under the HSR Act; (ii) use commercially
reasonable efforts to cooperate with each other in
(x) determining whether any filings are required to be made
with, or consents, permits, authorizations, waivers or approvals
are required to be obtained from, any third parties or other
Governmental Entities in connection with the execution and
delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement and (y) timely
making all such filings and timely seeking all such consents,
permits, authorizations or approvals; (iii) promptly inform
the other party upon receipt of any material communication from
the United States Federal Trade Commission, the Antitrust
Division of the United States Department of Justice or any other
Governmental Entity regarding any of the transactions
contemplated by this Agreement; and (iv) subject to
applicable legal limitations and the instructions of any
Governmental Entity, keep each other apprised of the status of
matters relating to the completion of the transactions
contemplated thereby, including promptly furnishing the other
with copies of notices or other communications received by the
Company or Parent, as the case may be, or any of their
respective Affiliates, from any third party
and/or
any
Governmental Entity with respect to such transactions. The
Company and Parent shall permit legal counsel for the other
party reasonable opportunity to review in advance, and consider
in good faith the views of the other party in connection with,
any proposed written communication to any Governmental Entity.
Each of the Company and Parent agrees not to
(A) participate in any substantive meeting or discussion,
either in person or by telephone, with any Governmental Entity
in connection with the proposed transactions unless it consults
with the other party in advance and, to the extent not
prohibited by such Governmental Entity, gives the other party
the opportunity to attend and participate, (B) extend any
waiting period under the HSR Act without the prior written
consent of the other party (such consent not to be unreasonably
withheld, conditioned or delayed) and (C) enter into any
agreement with any Governmental Entity not to consummate the
transactions contemplated by this Agreement without the prior
written consent of the other party.
(c) In furtherance and not in limitation of the agreements
of the parties contained in this
Section 5.6
, if any
administrative or judicial action or proceeding, including any
proceeding by a private party, is instituted (or threatened to
be instituted) challenging any transaction contemplated by this
Agreement as violative of any Regulatory Law, each of the
Company and Parent shall cooperate in all respects with each
other and shall use their respective commercially reasonable
efforts to contest and resist any such action or proceeding and
to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order, whether temporary,
preliminary or permanent, that is in effect and that prohibits,
prevents or restricts consummation of the transactions
contemplated by this Agreement. Notwithstanding the foregoing or
any other provision of this Agreement, nothing in this
Section 5.6
shall limit a partys right to
terminate this Agreement pursuant to
Section 7.1(b)
or
7.1(c)
so long as such party has, prior to such
termination, complied with its obligations under this
Section 5.6.
(d) For purposes of this Agreement,
Regulatory
Law
means the Sherman Act of 1890, the Clayton
Antitrust Act of 1914, the HSR Act, the Federal Trade Commission
Act of 1914 and all other federal, state or foreign statutes,
rules, regulations, orders, decrees, administrative and judicial
doctrines and other Laws, including any antitrust, competition
or trade regulation Laws, that are designed or intended to
(i) prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade or
lessening competition through merger or acquisition, or
(ii) protect the national security or the national economy
of any nation.
Section
5.7
Anti-Takeover
Statutes.
If any Anti-Takeover Statute shall become applicable to the
agreements or transactions contemplated by this Agreement or the
Support and Voting Agreements, each of the Company and Parent
and the members of their respective Boards of Directors (and, in
the case of the Company, the Special Committee) shall grant all
approvals and take all actions as are necessary to ensure that
the transactions and agreements contemplated by this Agreement
and the Support and Voting Agreements may be effectuated and
consummated as promptly as practicable on the terms contemplated
by this Agreement and the Support and Voting Agreements and
shall
A-36
otherwise act to eliminate or minimize the effects of such
Anti-Takeover Statute on or with respect to the transactions and
agreements contemplated by this Agreement and the Support and
Voting Agreements.
Section
5.8
Public
Announcements.
So long as this Agreement is in effect, the Company and Parent
will consult with and provide each other the reasonable
opportunity to review and comment upon any press release or
other public statement or comment prior to the issuance of such
press release or other public statement or comment relating to
this Agreement or the transactions contemplated by this
Agreement and shall not issue any such press release or other
public statement or comment prior to such consultation except as
may be required by applicable Law or by obligations pursuant to
any listing agreement with any national securities exchange.
Parent and the Company agree to issue a joint press release
announcing this Agreement.
Section
5.9
Director
and Officer Liability.
(a) Parent shall not, and shall cause the Surviving
Corporation not to, take any action to alter or impair, any
exculpatory or indemnification provisions existing in the
articles of incorporation or bylaws of the Surviving Corporation
or in the written indemnification agreements set forth on
Section 5.9(a)
of the Company Disclosure Schedule
for the benefit of any individual who served as a director or
officer of the Company at any time prior to the Effective Time,
provided that the Surviving Corporation shall, to the extent
permitted by applicable Law, comply with all of the
Companys and its respective Subsidiaries obligations
to indemnify and hold harmless (including any obligations to
advance funds for expenses) (i) the present and former
officers and directors thereof against any and all costs or
expenses (including reasonable attorneys fees and
expenses), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with
any actual or threatened claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or
investigative (
Damages
), arising out of,
relating to or in connection with any acts or omissions
occurring or alleged to occur prior to or at the Effective Time
to the extent provided under the Companys or such
Subsidiaries respective organizational and governing
documents or agreements in effect on the date hereof, including,
without limitation, the adoption and approval of this Agreement,
the Merger or the other transactions contemplated by this
Agreement or arising out of or pertaining to the transactions
contemplated by this Agreement; and (ii) such persons
against any and all Damages arising out of acts or omissions in
connection with any such person serving as an officer, director
or other fiduciary in any entity if such service was at the
request or for the benefit of the Company or any of its
Subsidiaries. Such obligations shall survive the Merger and
shall continue in full force and effect in accordance with the
terms of the Surviving Corporations articles of
incorporation and bylaws from the Effective Time until the
expiration of the applicable statue of limitations with respect
to any claims against such directors, officers or employees
arising out of such acts or omissions. Any determination
required to be made with respect to whether the conduct of an
individual seeking indemnification has complied with the
standards set forth under applicable Law shall be made by
independent counsel mutually acceptable to the Surviving
Corporation and such individual. For a period of six
(6) years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect, the current
policies of officers and directors liability
insurance, employment practice insurance and fiduciary
liabilities insurance maintained on the date hereof by the
Company and its Subsidiaries (the
Current
Policies
);
provided
,
however
, that the
Surviving Corporation may, and in the event of the cancellation
or termination of such policies shall substitute therefor
policies with reputable and financially sound carriers providing
such coverage and amount and containing such terms and
conditions that are no less favorable to the covered persons in
respect of claims arising from facts or events that existed or
occurred prior to or at the Effective Time under the Current
Policies;
provided
,
further
,
however
, that
in no event will the Surviving Corporation be required to expend
annually in excess of 300% of the annual premium currently paid
by the Company under the Current Policies and if the annual
premium exceeds such amount, the Surviving Corporation shall
provide the maximum amount of coverage that can be obtained for
such amount;
provided
,
further
,
however
,
that in lieu of the foregoing insurance coverage, Parent may
direct the Company to purchase tail insurance
coverage that provides coverage no less favorable than the
coverage described above,
provided
that the Company shall
not be required to pay any amounts in respect of such coverage
prior to the Closing.
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(b) This
Section 5.9
shall survive the
consummation of the Merger and is intended to be for the benefit
of, and shall be enforceable by, present or former directors,
officers or employees of the Company or its Subsidiaries, their
respective heirs and personal representatives and shall be
binding on the Surviving Corporation and its successors and
assigns, and the agreements and covenants contained herein shall
not be deemed to be exclusive of any other rights to which any
such present or former director or officer is entitled, whether
pursuant to Law, contract or otherwise. Nothing in this
Agreement is intended to, shall be construed to or shall
release, waive or impair any rights to directors and
officers insurance claims under any policy that is or has
been in existence with respect to the Company or any of its
Subsidiaries or their respective officers, directors and
employees, it being understood and agreed that the
indemnification provided for in this
Section 5.9
is
not prior to or in substitution for any such claims under any
such policies.
(c) If the Surviving Corporation or any of its successors
or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation
or entity or (ii) transfers or conveys substantially all of
its properties and assets to any person, then and in each case
to the extent reasonably necessary, proper provision shall be
made so that the successors and assigns of the Surviving
Corporation shall assume the obligations set forth in this
Section 5.9
Section
5.10
Notice
of Certain Events.
Each of the parties hereto shall use commercially reasonable
efforts to promptly notify the other party of:
(a) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would reasonably be
expected to cause any representation or warranty of such party
contained in this Agreement to be untrue or inaccurate in any
material respect;
(b) any failure of the Company, Parent or Merger Sub, as
the case may be, to comply with or satisfy, or the occurrence or
nonoccurrence of any event, the occurrence or nonoccurrence of
which would reasonably be expected to cause the failure by such
party to comply with or satisfy, any covenant, condition or
agreement to be complied with or satisfied by it hereunder;
(c) the receipt by such party of any notice or other
communication from any person alleging that the consent of such
person, which consent is or could reasonably be expected to be
material to the Company and its Subsidiaries or the operation of
their businesses, is or may be required in connection with the
transactions contemplated by this Agreement;
(d) the receipt by such party of any notice or other
communication from any Governmental Entity (including those
relating to the compliance with any Health Care Law) in
connection with the transactions contemplated by this
Agreement; or
(e) its learning of any actions, suits, claims,
investigations or proceedings commenced against, or affecting
such party that, if they were pending on the date of this
Agreement, would have been required to be disclosed pursuant to
this Agreement or which relate to the consummation of the
transactions contemplated by this Agreement.
Section
5.11
Financing.
Parent and Merger Sub shall use its commercially reasonable
efforts to obtain the Financing on the terms and conditions
described in the Financing Commitments, including using its
commercially reasonable efforts (i) to negotiate definitive
agreements with respect thereto on the terms and conditions
contained in the Financing Commitments, (ii) to satisfy all
conditions on a timely basis to obtaining the Financing
applicable to Parent and Merger Sub set forth in such definitive
agreements that are within its control, (iii) to comply
with its obligations under the Debt Commitment Letter and
(iv) to enforce its rights under the Debt Commitment
Letter. Parent shall give the Company prompt notice upon
becoming aware of any material breach by any party of the
Financing Commitments or any termination of the Financing
Commitments. Parent shall keep the Company informed on a
reasonable basis and in reasonable detail of the status of its
efforts to arrange the Debt Financing and shall not permit any
amendment or modification to be made to, or any waiver of any
material provision or remedy under, the Debt Commitment Letter
except as expressly permitted by
Section 4.5.
In the
event that Parent becomes aware of any event or circumstance
that makes procurement of
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any portion of the Financing unlikely to occur in the manner or
from the sources contemplated in the Financing Commitments,
Parent shall immediately notify the Company, and Parent and
Merger Sub shall use their respective commercially reasonable
efforts to arrange any such portion from alternative sources on
terms and conditions, taken as a whole, no less favorable to
Parent or Merger Sub (as determined in the reasonable judgment
of Parent and Merger Sub).
Section
5.12
Financing
Cooperation.
From the date of this Agreement until Closing, the Company shall
use commercially reasonable efforts to, and shall cause each of
its Affiliates to, provide all cooperation reasonably requested
by Parent (provided that such requested cooperation does not
unreasonably interfere with the ongoing operations of the
Company and its Affiliates beyond the level of involvement
ordinarily required in similar financing transactions) in
connection with obtaining the financing contemplated by the Debt
Commitment Letter, including (i) participating in a
reasonable number of meetings, presentations, road shows, due
diligence sessions, drafting sessions and sessions with rating
agencies, (ii) assisting with the preparation of materials
for rating agency presentations, offering documents, private
placement memoranda, bank information memoranda, prospectuses,
business projections and similar documents required in
connection with the financing contemplated by the Financing
Commitments; provided that any private placement memoranda or
prospectuses shall contain disclosure and financial statements
reflecting the Surviving Corporation
and/or
its
Affiliates as the obligor, (iii) using commercially
reasonable efforts to cause its independent accountants to
provide assistance and cooperation to Parent, including
participating in a reasonable number of drafting sessions and
accounting due diligence sessions, (iv) executing and
delivering any pledge and security documents, currency or
interest hedging arrangements or other definitive financing
documents or other certificates, legal opinions and documents as
may be reasonably requested by Parent (including certificates of
the chief financial officer or any of the Companys
Affiliates with respect to financing matters) or otherwise
facilitating the pledging of collateral as may be reasonably
requested by Parent; provided that any obligations contained in
such documents shall be effective no earlier than as of the
Effective Time, (v) furnishing Parent and Merger Sub and
their financing sources as promptly as practicable with
financial and other pertinent information regarding the Company
and its Affiliates as may be reasonably requested by Parent,
including all financial statements and financial and other data
of the type required by
Regulation S-X
and
Regulation S-K,
including audits thereto to the extent so required (which audits
shall be unqualified), under the Securities Act and of the type
and form customarily included in offering documents used in
private placements under Rule 144A of the Securities Act,
to consummate the offerings of debt securities contemplated by
the Debt Commitment Letter (information required to be delivered
pursuant to this clause (v) being referred to as, the
Required Financial Information
),
(vi) obtaining accountants comfort letters,
accountants consents, legal opinions, surveys and title
insurance as reasonably requested by Parent, (vii) taking
all actions reasonably necessary to (A) permit the lenders
under the Debt Commitment Letter to evaluate the Companys
and its Affiliates current assets, cash management and
accounting systems, policies and procedures relating thereto for
the purpose of establishing collateral arrangements, and
(B) establish bank and other accounts and blocked account
agreements and lock box arrangements in connection with the
foregoing, provided that such accounts, agreements and
arrangements will not become active or take effect until the
Effective Time, (viii) entering into one or more credit or
other agreements on terms reasonably satisfactory to Parent in
connection with the financing contemplated by the Debt
Commitment Letter; provided that neither the Company nor any of
its Affiliates shall be required to enter into any agreement
that is not contingent upon the Closing (including the entry
into any purchase agreement), and (ix) take all corporate
actions, subject to the occurrence of the Effective Time,
reasonably r equested by Parent to permit the consummation of
the financing contemplated by the Debt Commitment Letter and the
direct borrowing or incurrence of all of the proceeds of the
financing contemplated by the Debt Commitment Letter. Neither
the Company nor any of its Affiliates shall be required to pay
any commitment or other similar fee or incur any other liability
in connection with the financing contemplated by the Commitments
prior to the Effective Time. Parent and Merger Sub shall, on a
joint and several basis, indemnify and hold harmless the Company
and its Affiliates for and against any and all liabilities,
losses, damages, claims, costs, expenses, interest, awards,
judgments and penalties suffered or incurred by them in
connection with the arrangement of the financing contemplated by
the Commitments and any information utilized in connection
therewith. Notwithstanding anything to the contrary, the
condition set
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forth in
Section 6.3(b)
of this Agreement, as it
applies to the Companys obligations under this
Section 5.12
, shall be deemed satisfied unless the
financing contemplated by the Debt Commitment Letter (or any
alternative financing) has not been obtained as a result of the
Companys willful and material breach of its obligations
under this
Section 5.12.
The Company
hereby consents to the use of its and its Affiliates logos
in connection with the financing contemplated by the
Commitments; provided that such logos are used solely in a
manner that is not intended to or reasonably likely to harm or
disparage the Company or any of its Affiliates or the reputation
or goodwill of the Company or any of its Affiliates. All
non-public or otherwise confidential information regarding the
Company and its Affiliates obtained by Parent or the Parent
Representatives pursuant to this
Section 5.12
shall
be kept confidential by Parent in accordance with the
Confidentiality Agreement. Notwithstanding the foregoing
sentence, any offering documents, private placement memoranda,
bank information memoranda, prospectuses or other documents
prepared pursuant to this
Section 5.12
shall contain
such information as is customarily contained in documents for
similar financing transaction.
Section
5.13
Transfer
Tax.
All sales and transfer taxes, deed taxes, conveyance fees,
recording charges and similar taxes, fees and charges imposed as
a result of the change of control and transfer of the Real
Property to Parent (collectively, the
Transfer
Taxes
), together with any interest, penalties or
additions to such Transfer Taxes shall be paid by the Surviving
Corporation. The Company and Parent shall cooperate in timely
making all filings, returns, reports and forms as necessary or
appropriate to comply with the provisions of all applicable laws
in connection with the payment of such Transfer Taxes, and shall
cooperate in good faith to minimize, to the fullest extent
possible under such laws, the amount of any such Transfer Taxes
payable in connection therewith.
ARTICLE VI
CONDITIONS
TO THE MERGER
Section
6.1
Conditions
to Each Partys Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger
shall be subject to the fulfillment (or waiver by all parties)
at or prior to the Effective Time of the following conditions:
(a) The Company Shareholder Approval shall have been
obtained.
(b) No Law, judgment, injunction, order or decree by any
court or other tribunal of competent jurisdiction which
prohibits the consummation of the Merger shall have been entered
and shall continue to be in effect.
(c)(i) Any applicable waiting period (and any extension thereof)
under the HSR Act shall have expired or been earlier terminated,
and (ii) all other Company Approvals required to be
obtained for the consummation, as of the Effective Time, of the
transactions contemplated by this Agreement, shall have been
obtained, other than any approval, consent or waiver the failure
to obtain which would not (x) reasonably be expected,
individually or in the aggregate, to have an adverse affect
equal to or greater than 2.5% of the revenues, EBITDA or assets
of the Company and its Subsidiaries, taken as a whole,
(y) give rise to a violation of criminal law. As of the
Effective Time, all such Company Approvals and Third Party
Consents obtained by the Company shall remain in full force and
effect and shall not have been revoked or materially modified.
Section
6.2
Conditions
to Obligation of the Company to Effect the Merger.
The obligation of the Company to effect the Merger is further
subject to the satisfaction or waiver by the Company of the
following conditions:
(a) The representations and warranties of Parent and Merger
Sub set forth in this Agreement shall be true and correct in all
respects at and as of the date of this Agreement and at and as
of the Closing Date as though made at and as of the Closing
Date, disregarding for these purposes any materiality or
Parent Material Adverse Effect
qualifications
therein, except for such failures to be true and correct as
would not have,
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individually or in the aggregate, a Parent Material Adverse
Effect;
provided
,
however
, that representations
and warranties that are made as of a particular date or period
shall be true and correct only as of such date or period.
(b) Parent shall have in all material respects performed
all obligations and complied with all the agreements required by
this Agreement to be performed or complied with by it prior to
the Effective Time.
(c) Parent shall have delivered to the Company a
certificate, dated the Effective Time and signed by an executive
officer or another senior officer, certifying to the effect that
the conditions set forth in
Sections 6.2(a)
and
6.2(b)
have been satisfied.
(d) Substantially contemporaneous with the Effective Time
and in accordance with
Section 2.2(a)
, Parent shall
cause to be deposited with the Paying Agent cash in an aggregate
amount sufficient to pay the Merger Consideration in respect of
all Company Common Stock including Restricted Shares, plus cash
to pay for the Company Stock Options pursuant to
Section 5.5.
Section
6.3
Conditions
to Obligation of Parent and Merger Sub to Effect and the
Merger.
The obligation of Parent to effect the Merger is further subject
to the satisfaction or waiver Parent of the following conditions:
(a) (i) Other than with respect to
Sections 3.2(a)
,
3.2(b)
,
3.2(c),
3.3(a)
, and
3.26
, the representations and warranties
of the Company set forth in this Agreement shall be true and
correct in all respects at and as of the date of this Agreement
and at and as of the Closing Date as though made at and as of
the Closing Date, disregarding for these purposes any
materiality or
Company Material Adverse
Effect
qualifications therein, except for such
failures to be true and correct as would not have, individually
or in the aggregate, a Company Material Adverse Effect,
(ii) the representations and warranties of the Company set
forth in
Sections 3.2(a)
,
3.2(b)
,
3.2(c)
and
3.3(a)
shall be true and correct in all
respects at and as of the date of this Agreement and at and as
of the Closing Date as though made at and as of the Closing
Date;
provided
,
however
, that, with respect to
clauses (i) and (ii) above, representations and
warranties that are made as of a particular date or period shall
be true and correct (in the manner set forth in clauses (i)
or (ii), as applicable) only as of such date or period.
(b) The Company shall have in all material respects
performed all obligations and complied with all the agreements
required by this Agreement to be performed or complied with by
it prior to the Effective Time.
(c) The Company shall have delivered to Parent a
certificate, dated the Effective Time and signed by its Chief
Executive Officer or another senior officer, certifying to the
effect that the conditions set forth in
Sections 6.3(a)
and
6.3(b)
have been
satisfied.
(d) The Company shall have delivered to Parent a
certificate in form and substance reasonably satisfactory to
Parent, duly executed and acknowledged, certifying any facts
that would exempt the transactions contemplated hereby from
withholding under Section 1445 of the Code.
(e) Since the date of this Agreement, no change,
circumstance or effect shall have occurred that has had or would
reasonably be expected to have a Company Material Adverse
Effect. For purposes of this
Section 6.3(e)
, prior
to obtaining the Company Shareholder Approval, facts,
circumstances, events or changes that have a materially
disproportionate adverse effect on the industries in which the
Company and its Subsidiaries and Managed Practices operate in
the United States shall constitute a Company Material Adverse
Effect.
(f) The aggregate amount of Dissenting Shares shall be less
than 5% of the total outstanding Shares immediately prior to the
Effective Time.
(g) All Third Party Consents required to be obtained for
the consummation, as of the Effective Time, of the transactions
contemplated by this Agreement, as listed on
Schedule 6.3(g)
shall have been obtained.
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(h) The representations and warranties of the Company set
forth in
Section 3.26
shall be true and correct in
all respects at and as of the date of this Agreement and at and
as of the Closing Date as though made at and as of the Closing
Date.
Section
6.4
Frustration
of Closing Conditions.
Neither the Company nor Parent may rely, either as a basis for
not consummating the Merger or for terminating this Agreement
and abandoning the Merger, on the failure of any condition set
forth in
Section 6.1
,
Section 6.2
or
Section 6.3
, as the case may be, to be satisfied if
such failure was caused by such partys breach of any
provision of this Agreement or failure to use its commercially
reasonable efforts to consummate the Merger and the other
transactions contemplated by this Agreement, as required by and
subject to
Section 5.6.
ARTICLE VII
TERMINATION
Section
7.1
Termination
or Abandonment.
Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time in accordance
with the following provisions (whether before or after any
approval of the matters presented in connection with the Merger
by the shareholders of the Company, unless specified otherwise
herein):
(a) by the mutual written consent of the Company and Parent;
(b) by either the Company or Parent if (i) the
Effective Time shall not have occurred on or before
April 21, 2008 (the
End Date
) and
(ii) the failure of the Effective Time to have occurred by
such date is not the result of, or caused by, the failure of the
party seeking to exercise such termination right to perform or
observe any of the covenants or agreements of such party set
forth in this Agreement;
provided
,
however
, that
if the Marketing Period has commenced on or before any such End
Date, but not ended on or before any such End Date, such End
Date shall automatically be extended through the earlier of
(A) final day of the Marketing Period; or (B) the
tenth business day after the original End Date; provided,
further, that in the event Parent shall not have obtained the
Financing by the End Date (as such date may be extended pursuant
to the clause above) and the conditions set forth in
Sections 6.1
and
6.3
are satisfied,
notwithstanding the satisfaction of the conditions in
Sections 6.1
and
6.3
, Parent shall have the
right to terminate this Agreement pursuant to this
Section 7.1(b)
, but only if Holdings pays the Parent
Termination Fee in accordance with
Section 7.2(b)
(and such termination shall not constitute a breach of the
Parents obligation to close pursuant to Section 1.2);
(c) by either the Company or Parent if an injunction,
order, decree or ruling (
Order
) shall have
been entered permanently restraining, enjoining or otherwise
prohibiting the consummation of the Merger and such Order shall
have become final and non-appealable; provided, that the party
seeking to terminate this Agreement pursuant to this
Section 7.1(c)
shall have used its commercially
reasonable efforts to remove such Order or other action;
provided
,
further
, that the right to terminate
this Agreement under this
Section 7.1(c)
shall not
be available to a party if the issuance of such final,
non-appealable Order or the failure of remove such Order was
primarily due to the failure of such party to perform any of its
obligations under this Agreement;
(d) by either the Company or Parent if the Company Meeting
(including any adjournments or postponement thereof) shall have
concluded and the Company Shareholder Approval contemplated by
this Agreement shall not have been obtained;
(e) by the Company, if Parent shall have breached or failed
to perform in any material respect any of its representations,
warranties or agreements contained in this Agreement, which
breach or failure to perform (i) would result in a failure
of a condition set forth in
Section 6.2(a)
or
6.2(b)
and (ii) cannot be cured by the End Date,
provided
,
however
, that the Company is not then in
material breach of this Agreement;
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(f) by Parent, if (A) the Company, or any of its
Subsidiaries or Representatives shall have failed to comply in
any material respect with the provisions in
Section 5.3
of this Agreement or the Board of
Directors or the Special Committee shall have resolved to do so,
or (B) the Company shall have breached or failed to perform
in any material respect any of its representations, warranties
or agreements contained in this Agreement, which breach or
failure to perform (i) would result in a failure of a
condition set forth in
Section 6.3(a)
or
6.3(b)
and (ii) cannot be cured by the End Date,
provided
,
however
, that Parent is not then in
material breach of this Agreement;
(g) by the Company, if prior to obtaining the Company
Shareholder Approval, (x) the Special Committee or the
Board of Directors has concluded in good faith, after
consultation with the Special Committees or the
Companys outside legal counsel and the Advisor, that, in
light of a Superior Proposal, failure to terminate this
Agreement would be inconsistent with the directors
exercise of their fiduciary obligations to the Companys
stockholders (other than the Participating Holders) under
applicable Law, (y) the Company has complied in all
material respects with
Section 5.3
, and
(z) concurrent with such termination, the Company enters
into a definitive agreement with respect to such Superior
Proposal;
(h) by the Company, if Parent does not give effect to the
Closing within five (5) business days after notice by the
Company to Parent that the conditions set forth in
Sections 6.1
and
6.3
are satisfied and
Parent fails to effect the Merger within three (3) business
days following the final day of the Marketing Period;
provided
, that at the time of such notice and at the time
of such termination, the conditions set forth in
Sections 6.1
and
6.3
shall in fact be and
shall remain satisfied;
provided
,
further
, that
the Company shall not have the right to terminate this Agreement
pursuant to this
Section 7.1(h)
if, at the time of
such termination, there exists a breach of any representation,
warranty or covenant by the Company that would result in the
failure to satisfy the closing conditions set forth in
Section 6.3(a)
or
6.3(b)
; and
(i) by Parent, if (x) the Board of Directors of the
Company shall have effected a Change of Recommendation, or
(y) the Company has failed to include the Recommendation in
the Proxy Statement.
In the event of termination of this Agreement pursuant to this
Section 7.1
, this Agreement shall terminate (except
for the Confidentiality Agreement referred to in
Section 5.2
and the provisions of
Sections 7.2
and
8.2
through
8.14
),
and there shall be no other liability on the part of the Company
or Parent to the other except: (A) as provided for in the
Confidentiality Agreement; (B) as set forth in
Section 7.2
, as applicable; and (C) for
liability arising out of fraud or an intentional breach of this
Agreement, in which case the aggrieved party shall be entitled
to all rights and remedies available at law or in equity and may
seek to prove additional damages as contemplated by
Sections 7.3
,
7.4
and
8.12
below, as
applicable.
Actions taken by the Company pursuant to this
Section 7.1
shall be taken by the Special Committee
if then in existence.
Neither the Company nor Parent may terminate this Agreement or
abandon the Merger except in accordance with the provisions of
this
Section 7.1.
Section
7.2
Termination
Fees.
(a) Notwithstanding any provision in this Agreement to the
contrary:
(i) in the event that (A) prior to the termination of
this Agreement, any Alternative Proposal (substituting 50% for
the 10% threshold set forth in the definition of Alternative
Proposal) which could or could reasonably be expected to result
in a transaction as favorable or more favorable to the holders
of Company Common Stock (other than the Participating Holders)
than the transactions provided for in this Agreement at such
time as the bona fide intention of any person to make such
Alternative Proposal is publicly proposed or publicly disclosed
or otherwise made known to the Company prior to the time of such
termination, (B) this Agreement is terminated by Parent or
the Company pursuant to
Section 7.1(b)
, by Parent or
the Company pursuant to
Section 7.1(d)
, or by Parent
pursuant to
Section 7.1(f)
, and
(C) concurrently with or within nine (9) months after
such termination, any definitive agreement providing for an
Alternative Proposal shall have been entered into, the Company
shall pay to Holdings a fee of $25,000,000 in cash (the
Company Termination Fee
); provided, no
Company Termination Fee
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shall be payable if Holdings has previously paid the Parent
Termination Fee pursuant to Section 7.1(b) or
Section 7.2(b);
(ii) in the event that this Agreement is terminated by the
Company pursuant to
Section 7.1(g)
, on the date of
execution of a definitive agreement with respect to such
Superior Proposal, the Company shall pay to Holdings the Company
Termination Fee;
(iii) in the event that this Agreement is terminated by
Parent pursuant to
Section 7.1(i)
, the Company shall
pay the Company Termination Fee to Holdings no later than the
second business day following the day of such termination;
(iv) in the event that this Agreement is terminated by
Parent pursuant to
Section 7.1(f)
(regardless of
whether Parent is entitled to payment pursuant to
Section 7.2(a)(i)
), by the Company pursuant to
Section 7.1(g)
, by either party pursuant to
Section 7.1(d)
, or by Parent pursuant to
Section 7.1(i)
, the Company shall pay to Holdings,
upon termination, an amount in cash equal to the sum of
Parents and Merger Subs documented out-of-pocket
fees and expenses reasonably incurred by it in connection with
this Agreement and the transactions contemplated by this
Agreement in an aggregate amount not to exceed $3,000,000 (the
Company Expense Reimbursement
);
provided
,
however
, that the existence of
circumstances which could require the Company Termination Fee to
become subsequently payable by the Company pursuant to
Section 7.2(a)(i)
shall not relieve the Company of
its obligation to pay the Company Expense Reimbursement pursuant
to this
Section 7.2(a)(iv)
; and, provided, further,
that the payment by the Company of the Company Expense
Reimbursement pursuant to this
Section 7.2(a)(iv)
shall not relieve the Company of any subsequent obligation to
pay the Company Termination Fee pursuant to
Section 7.2(a)(i).
The Company Termination Fee and the Company Expense
Reimbursement shall be paid by wire transfer of same day funds
as directed by Holdings reasonably in advance. Notwithstanding
any provision in this Agreement to the contrary, in no event
shall the Company be required to pay the Company Termination Fee
or the Company Expense Reimbursement referred to in this
Section 7.2(a)
on more than one occasion. Upon
payment of the Company Termination Fee and the Company Expense
Reimbursement, as applicable, the Company shall have no further
liability with respect to this Agreement or the transactions
contemplated by this Agreement to Parent, Merger Sub, their
Affiliates or otherwise except for liability arising out of
fraud or an intentional breach of this Agreement, in which case
Parent shall have such rights and remedies as are contemplated
by
Sections 7.4
and
8.12
below (in addition
to any amounts owed to such party under Section 7.2).
(b) In the event that this Agreement is terminated
(i) by the Company or by Parent pursuant to
Section 7.1(b)
and the conditions set forth in
Sections 6.1
and
6.3
would have been
satisfied had the Closing been scheduled on the End Date, or
(ii) by the Company pursuant to
Section 7.1(e)
or
Section 7.1(h)
, then Holdings or its Affiliates
shall pay, upon termination, $25,000,000 (the
Parent
Termination Fee
) to the Company or as directed by the
Company as promptly as reasonably practicable (and, in any
event, within two (2) business days following such
termination), payable by wire transfer of same day funds. Under
no circumstances shall the Parent Termination Fee be payable
more than once pursuant to this
Section 7.2(b).
Concurrently with the
payment of the Parent Termination Fee, Holdings shall also pay
to the Company an amount equal to the sum of the Companys
documented out of pocket fees and expenses reasonably incurred
by it on and after September 24, 2007 in connection with
this Agreement and the transactions contemplated by this
Agreement in an aggregate amount not to exceed $3,000,000 (the
Parent Expense Reimbursement
). Upon payment
of the Parent Termination Fee and Parent Expense Reimbursement,
neither Holdings, Parent nor Merger Sub shall have any further
liability with respect to this Agreement or the transactions
contemplated by this Agreement to the Company, its stockholders,
Affiliates or otherwise except for liability arising out of
fraud or an intentional breach of this Agreement, in which case
the Company shall have such rights as are contemplated by
Section 7.3
below.
(c) Any payment made pursuant to this
Section 7.2
shall be net of any amounts as may be
required to be deducted or withheld therefrom under the Code or
under any provision of state, local or foreign Tax Law.
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(d) Each of Holdings, the Company, Parent and Merger Sub
acknowledge and agree that the agreements contained in this
Section 7.2
are an integral part of the transactions
contemplated by this Agreement, and that, without these
agreements, neither the Company nor Parent would have entered
into this Agreement, and that any amounts payable pursuant to
this
Section 7.2
do not constitute a penalty but
rather are liquidated damages in a reasonable amount to
compensate the receiving party for efforts and resources
expended and opportunities foregone while negotiating this
Agreement and in reliance on this Agreement and on the
expectation of the consummation of the transactions contemplated
hereby. Accordingly, if a party fails to pay the Company
Termination Fee, the Company Expense Reimbursement or the Parent
Termination Fee, as applicable, pursuant to this
Section 7.2
, and the receiving party commences a
suit to obtain such payments, which results in a judgment
against the paying party for the applicable amount due under
this
Section 7.2
, such paying party shall pay the
receiving party its costs and expenses (including reasonable
attorneys fees) in connection with such suit, together
with interest on such amount at the prime rate of Citibank N.A.
in effect on the date such payment was required to be made
through the date of payment.
Section
7.3
Limitation
of Liability of Parent, Merger Sub and Their Affiliates.
Notwithstanding anything to the contrary in this Agreement and
subject to
Section 8.12(b)
and the following
sentence of this
Section 7.3
, if Parent and Merger
Sub fail to effect the Closing or otherwise are in breach of
this Agreement, then the monetary liability of Parent, Merger
Sub and any of their respective former, current and future
direct or indirect equity holders, controlling persons,
stockholders, directors, officers, employees, agents, Affiliates
members, managers, general or limited partners or assignees, in
the aggregate, shall be limited to an amount equal to the Parent
Termination Fee and the Parent Expense Reimbursement or, in the
circumstances described in the following sentence, the Parent
Liability Cap, and no person shall have any rights under the
Equity Commitment Letter, whether at law or in equity, in
contract, in tort or otherwise. None of Parent, Merger Sub or
any of their respective former, current and future direct and
indirect equity holders, controlling persons, stockholders,
directors, officers, employees, agents, Affiliates, members,
mangers, general or limited partners or assignees shall have any
further monetary liability or obligation relating to or arising
out of this Agreement or the transactions contemplated by this
Agreement except as expressly provided herein, except in the
event of fraud or an intentional breach of this Agreement, in
which case the Company shall be entitled to all rights and
remedies available at law or in equity solely with respect to
the recovery of monetary damages, provided that in no event
shall the Company seek to prove or recover damages that,
together with any Parent Termination Fee and Parent Expense
Reimbursement received by the Company, exceed $40,000,000 (the
Parent Liability Cap
). The parties hereby
agree that in the event Parent takes or fails to take any action
or to perform any of its obligations under this Agreement or any
related document based on Parents good faith
determination, with a reasonable basis, that such action,
inaction or non-performance is consistent with the terms of this
Agreement or other related document, and it is ultimately
determined that such action, inaction or non-performance was not
consistent with the terms hereof or of such other related
document, then the resulting breach by Parent shall not
constitute an intentional breach or fraud by Parent for purposes
of this Agreement.
Section
7.4
Limitation
of Liability of the Company.
Notwithstanding anything to the contrary in this Agreement and
subject to
Section 8.12(a)
and the following
sentence of this
Section 7.4
, if the Company fails
to effect the Closing or otherwise is in breach of this
Agreement, then the monetary liability of the Company and any of
its respective former, current and future direct or indirect
equity holders, controlling persons, stockholders, directors,
officers, employees, agents, Affiliates, members, managers,
general or limited partners or assignees, in the aggregate,
shall be limited to an amount equal to the Company Termination
Fee and the Company Expense Reimbursement, as applicable, and no
person shall have any rights, whether at law or in equity, in
contract, in tort or otherwise. None of the Company or its
former, current and future direct and indirect equity holders,
controlling persons, stockholders, directors, officers,
employees, agents, Affiliates, members, managers, general or
limited partners or assignees shall have any further monetary
liability or obligation relating to or arising our of this
Agreement or the transactions contemplated by this Agreement
except as expressly provided herein except in the event of fraud
or an intentional breach of this Agreement, in which case the
Parent shall be entitled to all rights and remedies available at
law or in equity and may seek to prove and recover additional
damages (in addition to any
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amounts otherwise owed to such party under this Agreement). The
parties hereby agree that in the event the Company takes or
fails to take any action or to perform any of its obligations
under this Agreement or any related document based on the
Companys good faith determination, with a reasonable
basis, that such action, inaction or non-performance is
consistent with the terms of this Agreement or other related
document, and it is ultimately determined that such action,
inaction or non-performance was not consistent with the terms
hereof or of such other related document, then the resulting
breach by the Company shall not constitute an intentional breach
or fraud by the Company for purposes of this Agreement.
ARTICLE VIII
MISCELLANEOUS
Section
8.1
No
Survival of Representations and Warranties.
None of the representations and warranties in this Agreement or
in any instrument delivered pursuant to this Agreement shall
survive the Merger or the termination of this Agreement.
Section
8.2
Expenses.
Except as set forth in
Section 7.2
, whether or not
the Merger is consummated, all costs and expenses incurred in
connection with the Merger, this Agreement and the transactions
contemplated by this Agreement shall be paid by the party
incurring or required to incur such expenses.
Section
8.3
Counterparts;
Effectiveness.
This Agreement may be executed in two or more consecutive
counterparts (including by facsimile or electronic
transmission), each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the
same instrument, and shall become effective when one or more
counterparts have been signed by each of the parties and
delivered (by telecopy,
e-mail
or
otherwise) to the other parties.
Section
8.4
Governing
Law.
This Agreement, and the rights of the parties and all actions
arising in whole or in part under or in connection herewith,
shall be governed by and construed and enforced in accordance
with the laws of the State of Florida, without giving effect to
any choice or conflict of law provision or rule (whether of the
State of Florida or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State
of Florida.
Section
8.5
Jurisdiction;
Enforcement.
Each of the parties hereto
irrevocably agrees that any legal action or proceeding with
respect to this Agreement and the rights and obligations arising
hereunder, or for recognition and enforcement of any judgment in
respect of this Agreement and the rights and obligations arising
hereunder brought by the other party hereto or its successors or
assigns, shall be brought and determined exclusively in the
appropriate courts of the State of Florida or the United States
District Court for the Middle District of Florida to the
exclusion of any other forum or court. Each of the parties
hereto hereby irrevocably submits with regard to any such action
or proceeding for itself and in respect of its property,
generally and unconditionally, to the personal jurisdiction of
the aforesaid courts and agrees that it will not bring any
action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than the
aforesaid courts. Each of the parties hereto hereby irrevocably
waives, and agrees not to assert, by way of motion, as a
defense, counterclaim or otherwise, in any action or proceeding
with respect to this Agreement, (a) any claim that it is
not personally subject to the jurisdiction of the above-named
courts for any reason other than the failure to serve in
accordance with this
Section 8.5
, (b) any claim
that it or its property is exempt or immune from jurisdiction of
any such court or from any legal process commenced in such
courts (whether through service of notice, attachment prior to
judgment, attachment in aid of execution of judgment, execution
of judgment or otherwise) and (c) to the fullest extent
permitted by the applicable Law, any claim that (i) the
suit, action or proceeding in such court is brought in an
inconvenient forum, (ii) the venue of such suit, action or
proceeding is improper or (iii) this Agreement, or the
subject matter of this Agreement, may not be enforced in or by
such courts. Each of the Company, Parent and Merger Sub hereby
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consents to service being made through the notice procedures set
forth in
Section 8.7
and agrees that service of any
process, summons, notice or document by registered mail (return
receipt requested and first-class postage prepaid) to the
respective addresses set forth in
Section 8.7
shall
be effective service of process for any suit or proceeding in
connection with this Agreement or the transactions contemplated
by this Agreement.
Section
8.6
WAIVER
OF JURY TRIAL.
EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
Section
8.7
Notices.
Any
notice required to be given hereunder shall be sufficient if in
writing, and sent by facsimile transmission, with confirmation
(
provided
that any notice received by facsimile
transmission or otherwise at the addressees location not
on a business day or on any business day after 5:00 p.m.
(addressees local time) shall be deemed to have been
received at 9:00 a.m. (addressees local time) on the
next business day), by reliable overnight delivery service (with
proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid),
addressed as follows:
To Parent or Merger Sub:
Radiation Therapy Services Holdings, Inc.
c/o Vestar
Capital Partners V, L.P.
245 Park Avenue, 41st Floor
New York, NY 10167
Attention: James L. Elrod, Jr.
Facsimile:
(212) 808-4922
with copies (which shall not constitute notice) to:
Vestar Capital Partners V, L.P.
245 Park Avenue, 41st Floor
New York, NY 10167
Attention: General Counsel
Facsimile:
(212) 808-4922
and
Kirkland & Ellis LLP
Citigroup Center
153 East 53rd Street
New York, NY 10022
Attn: Michael Movsovich
Facsimile:
(212) 446-4900
To the Company (prior to the Closing):
Radiation Therapy Services, Inc.
2234 Colonial Boulevard
Fort Myers, Florida 33907
Attn: Chairman of the Special Committee
Facsimile:
(239) 690-1328
with copies (which shall not constitute notice) to:
Shumaker, Loop & Kendrick, LLP
101 East Kennedy Boulevard
Suite 2800 Tampa,
Florida 33602
Attn: Darrell C. Smith
Facsimile:
(813) 229-1660
A-47
and
Holland & Knight LLP
100 North Tampa Street
Suite 4100 Tampa,
Florida
33602-3644
Attn: Robert J. Grammig and Richard B. Hadlow
Facsimile:
(813) 229-0134
or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so telecommunicated, personally
delivered or mailed. Any party to this Agreement may notify any
other party of any changes to the address or any of the other
details specified in this paragraph;
provided
,
however
, that such notification shall only be effective
on the date specified in such notice or five (5) business
days after the notice is given, whichever is later. Rejection or
other refusal to accept or the inability to deliver because of
changed address of which no notice was given shall be deemed to
be receipt of the notice as of the date of such rejection,
refusal or inability to deliver.
Section
8.8
Assignment;
Binding Effect.
Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of
law or otherwise) without the prior written consent of the other
parties;
provided
,
however
, that Merger Sub may
designate, by written notice to the Company, a Subsidiary that
is wholly owned by Merger Sub to be merged with and into the
Company in lieu of Merger Sub, in which event this Agreement
will be amended such that all references in this Agreement to
Merger Sub will be deemed references to such Subsidiary, and in
that case, and pursuant to such amendment, all representations
and warranties made in this Agreement with respect to Merger Sub
will be deemed representations and warranties made with respect
to such Subsidiary as of the date of such designation and Parent
and Merger Sub may, without the prior written consent of the
other parties, assign any or all of their respective rights and
interests hereunder to one or more of its Affiliates, designate
one or more of its Affiliates to perform its obligations
hereunder; in each case, so long as Parent is not relieved of
any of its obligations hereunder; and provided further that
Parent and Merger Sub may assign its rights and obligations
hereunder to any person providing financing to such party for
collateral assignment purposes. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective
successors and assigns.
Section
8.9
Severability.
The
parties intend for this Agreement to be enforced as written. Any
term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement in any other
jurisdiction;
provided
that, if any provision of this
Agreement is so broad as to be unenforceable, such provision
shall be interpreted to be only so broad as is enforceable and,
provided
,
further
that upon a determination that
any term or other provision is invalid, illegal or incapable of
being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled
to the fullest extent possible.
Section
8.10
Entire
Agreement; No Third-Party Beneficiaries.
This
Agreement (including the exhibits and schedules hereto), the
Support and Voting Agreements, and the Confidentiality Agreement
constitute the entire agreement of the parties hereto with
respect to its subject matter and supersedes all other prior
oral or written agreements and understandings between the
parties with respect to the subject matter of this Agreement.
Except for the provisions of
Section 5.9
(which in
each case shall inure to the benefit of the persons benefiting
therefrom who are intended to be third-party beneficiaries
thereof), this Agreement is not intended to and shall not confer
upon any person other than the parties hereto any rights or
remedies hereunder. No representation, warranty, inducement,
promise, understanding or condition not set forth in this
Agreement has been made or relied upon by any of the parties
hereto.
Section
8.11
Amendments;
Waivers.
At any time prior to the Effective
Time, any provision of this Agreement may be amended or waived
if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company (acting
through the Special Committee, if then in existence),
A-48
Parent and Merger Sub, or in the case of a waiver, by the party
against whom the waiver is to be effective;
provided
,
however
, that after receipt of Company Shareholder
Approval, if any such amendment or waiver shall by applicable
Law or in accordance with the rules and regulations of the
NASDAQ Global Select Market require further approval of the
shareholders of the Company, the effectiveness of such amendment
or waiver shall be subject to the approval of the shareholders
of the Company. Notwithstanding the foregoing, no failure or
delay by the Company or Parent in exercising any right hereunder
shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise
of any other right hereunder.
Section
8.12
Specific
Performance.
(a) The parties acknowledge and agree that immediate and
irreparable harm would occur for which the payment of money
would not compensate the affected party and that the parties
would not have any adequate remedy at law in the event that any
of the provisions of this Agreement were not performed by the
Company in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that Parent and
Merger Sub shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the
State of Florida or any Federal court sitting in the State of
Florida, without proof of actual damages or the posting of bond
or other security, this being in addition to any other remedy to
which they are entitled at law or in equity;
provided
,
however
, that if this Agreement is terminated by the
Company pursuant to and in accordance with
Section 7.1(g)
, Parent and Merger Subs sole
and exclusive remedy shall be the remedies set forth in
Section 7.2
;
provided
,
further
, that
in the event a court orders specific performance of this
Agreement by the Company, such specific performance shall be in
lieu of the Company Termination Fee and Company Expense
Reimbursement.
(b) The parties acknowledge that the Company shall not be
entitled to any injunction to prevent breaches of this Agreement
by Parent or Merger Sub or any remedy to enforce specifically
the terms and provisions of this Agreement and that the
Companys sole and exclusive remedies with respect to any
such breach shall be the remedies set forth in
Section 7.2(b)
and
Section 7.3.
Section
8.13
Headings.
Headings
of the Articles and Sections of this Agreement are for
convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever. The table of
contents to this Agreement is for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement.
Section
8.14
Interpretation.
When
a reference is made in this Agreement to an Article or Section,
such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. Whenever the words
include
,
includes
or
including
are used in this Agreement, they
shall be deemed to be followed by the words
without
limitation.
The words
hereof
,
herein
and
hereunder
and
words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision
of this Agreement. All terms defined in this Agreement shall
have the defined meanings when used in any certificate or other
document made or delivered pursuant thereto unless otherwise
defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter
genders of such term. Each of the parties has participated in
the drafting and negotiation of this Agreement. If an ambiguity
or question of intent or interpretation arises, this Agreement
must be construed as if it is drafted by all the parties, and no
presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of authorship of any of the
provisions of this Agreement.
Section
8.15
Definitions.
(a) References in this Agreement to
Subsidiaries
of any party shall mean any
corporation, partnership, association, trust or other form of
legal entity of which (i) more than 50% of the outstanding
voting securities are on the date of this Agreement directly or
indirectly owned by such party, or (ii) such party or any
Subsidiary of such party is a general partner (excluding
partnerships in which such party or any Subsidiary of such party
does not have a majority of the voting interests in such
partnership). References in this Agreement (except as
specifically otherwise defined) to
Affiliates
shall mean, as to any person, any other person which,
A-49
directly or indirectly, controls, or is controlled by, or is
under common control with, such person, including such
persons Subsidiaries. As used in this definition,
control
(including, with its correlative
meanings,
controlled by
and
under
common control with
) shall mean the possession,
directly or indirectly, of the power to direct or cause the
direction of management or policies of a person, whether through
the ownership of securities or partnership or other ownership
interests, by contract (excluding through the exercise of rights
under administrative services agreements, and transition
agreement and stock pledges) or otherwise. References in this
Agreement (except as specifically otherwise defined) to
person
shall mean an individual, a
corporation, a partnership, a limited liability company, an
association, a trust or any other entity, group (as such term is
used in Section 13 of the Exchange Act) or organization,
including, a Governmental Entity, and any permitted successors
and assigns of such person. As used in this Agreement,
knowledge
means (i) with respect to
Parent, the actual knowledge after reasonable investigation of
the executive officers of Parent and (ii) with respect to
the Company, the actual knowledge after reasonable investigation
of the following individuals: Joseph Biscardi, Madlyn Dornaus,
Daniel E. Dosoretz, Daniel Galmarini, Michael J. Katin, James H.
Rubenstein, David N.T. Watson, and Amy Bergin. As used in this
Agreement,
business day
shall mean any day
other than a Saturday, Sunday or a day on which the banks in
Florida or New York are authorized by law or executive order to
be closed. As used in this Agreement,
GAAP
means United States generally accepted accounting principles. As
used in this Agreement,
Indebtedness
shall
mean, with respect to any person, all obligations (including all
obligations in respect of principal, accrued interest,
penalties, fees and premiums) of such person (i) for
borrowed money (including overdraft facilities),
(ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of
property, goods or services (other than trade payables or
accruals incurred in the ordinary course of business),
(iv) under capital leases (in accordance with generally
accepted accounting principles), (v) in respect of letters
of credit and bankers acceptances, (vi) for Contracts
relating to interest rate protection, swap agreements and collar
agreements and (vii) in the nature of guarantees of the
obligations described in clauses (i) through
(vi) above of any other person. References in this
Agreement to specific laws or to specific provisions of laws
shall include all rules and regulations promulgated thereunder.
As used in this Agreement,
EBITDA
shall have
the meaning ascribed to such term in the Companys Fourth
Amended and Restated Credit Agreement, dated December 16,
2005. Any statute defined or referred to herein or in any
agreement or instrument referred to herein shall mean such
statute as from time to time amended, modified or supplemented,
including by succession of comparable successor statutes.
(b) Each of the following terms is defined in the section
set forth opposite such term:
|
|
|
Defined Term
|
|
Section
|
|
Advisor
|
|
3.18
|
Affiliate Transactions
|
|
3.24(ii)
|
Agreement
|
|
Introduction
|
Alternative Proposal
|
|
5.3(f)
|
Articles of Merger
|
|
1.3
|
Batan Insurance
|
|
3.22(b)
|
Board of Directors
|
|
Recitals
|
Book-Entry Shares
|
|
2.2(a)(i)
|
Business
|
|
3.2(f)
|
Cancelled Shares
|
|
2.1(c)
|
Certificates
|
|
2.2(a)(i)
|
Change of Recommendation
|
|
5.3(d)(iv)
|
Closing
|
|
1.2
|
Closing Date
|
|
1.2
|
Code
|
|
2.2(b)(iii)
|
Company
|
|
Introduction
|
Company Approvals
|
|
3.3(b)(vii)
|
Company Benefit Plans
|
|
3.10(e)
|
A-50
|
|
|
Defined Term
|
|
Section
|
|
Company Common Stock
|
|
2.1(a)
|
Company Disclosure Schedule
|
|
Article III
|
Company Employees
|
|
5.5(b)(i)
|
Company Expense Reimbursement
|
|
7.2(a)(iv)
|
Company Intellectual Property
|
|
3.16
|
Company Material Adverse Effect
|
|
3.1
|
Company Material Contracts
|
|
3.20(a)(xi)
|
Company Meeting
|
|
5.4(c)(i)
|
Company Permits
|
|
3.7(b)
|
Company Preferred Stock
|
|
3.2(a)
|
Company SEC Documents
|
|
3.4(a)
|
Company Shareholder Approval
|
|
3.19
|
Company Stock Option
|
|
5.5(a)(i)
|
Company Stock Plans
|
|
3.2(a)(iii)
|
Company Termination Fee
|
|
7.2(a)(i)(c)
|
Confidentiality Agreement
|
|
5.2(b)
|
Contracts
|
|
3.3(c)(i)
|
Current Policies
|
|
5.9(a)
|
Damages
|
|
5.9(a)(i)
|
Debt Commitment Letter
|
|
4.5(b)
|
Debt Financing
|
|
4.5(b)
|
Dissenting Shares
|
|
2.1(f)(i)(C)
|
Effective Time
|
|
1.3
|
End Date
|
|
7.1(b)(i)
|
Environmental Law
|
|
3.9(b)
|
ERISA
|
|
3.10(e)
|
ERISA Affiliate
|
|
3.10(b)
|
Exchange Act
|
|
3.3(b)(ii)
|
Exchange Fund
|
|
2.2(a)(ii)
|
FBCA
|
|
Recitals
|
Financing
|
|
4.5(b)
|
Financing Commitments
|
|
4.5(b)
|
GAAP
|
|
8.15(a)
|
Governmental Entity
|
|
3.3(b)(vii)
|
Hazardous Substance
|
|
3.9(c)
|
Health Care Laws
|
|
3.8(a)
|
HSR Act
|
|
3.3(b)(iii)
|
Improvements
|
|
3.17(c)
|
Indebtedness
|
|
8.15(a)
|
Intellectual Property
|
|
3.16
|
Investments
|
|
3.2(f)
|
Investor
|
|
Recitals
|
Law
|
|
3.7(a)
|
Laws
|
|
3.7(a)
|
Leased Real Properties
|
|
3.17(b)
|
Lien
|
|
3.3(c)(i)
|
Managed Practice
|
|
3.7(a)
|
Marketing Period
|
|
1.2
|
A-51
|
|
|
Defined Term
|
|
Section
|
|
Material Lease
|
|
3.3(d)(ii)
|
Measurement Date
|
|
3.2(c)
|
Merger
|
|
Recitals
|
Merger Consideration
|
|
2.1(a)
|
Merger Sub
|
|
Introduction
|
New Financing Commitments
|
|
4.5
|
New Plans
|
|
5.5(b)(ii)
|
Notice Period
|
|
5.3(d)
|
Old Plans
|
|
5.5(b)(ii)(A)
|
Option and Stock-Based Award Consideration
|
|
2.2(a)
|
Order
|
|
7.1(c)
|
Other Incentive Awards
|
|
3.2(c)
|
Owned Real Properties
|
|
3.17(a)
|
Parent
|
|
Introduction
|
Parent Approvals
|
|
4.2(b)(iii)
|
Parent Disclosure Schedule
|
|
Article IV
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Parent Expense Reimbursement
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7.2(b)
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Parent Material Adverse Effect
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4.1
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Parent Liability Cap
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7.3
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Parent Termination Fee
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7.2(b)
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Participating Holder
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Recitals
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Paying Agent
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2.2(a)
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Permitted Lien
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3.3(c)(i)(D)
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Programs
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3.8(b)
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Proxy Statement
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3.13
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Real Properties
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3.17(b)
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Recommendation
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3.3(a)(iii)
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Regulatory Law
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5.6(d)
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Representatives
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5.2(a)
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Required Financial Information
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5.12
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Restricted Shares
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5.5(a)(i)
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Rollover Shares
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Recitals
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Sarbanes-Oxley Act
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3.5
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Schedule 13E-3
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3.13(a)
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SEC
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3.4(a)
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Securities Act
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3.3(b)(iv)
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Share
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2.1(a)
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Special Committee
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Recitals
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Subsidiaries
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8.15(a)
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Superior Proposal
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5.3(g)
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Surviving Corporation
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1.1
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Tax Return
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3.14(b)
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Taxes
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3.14(b)(i)
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Termination Date
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5.1(a)
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Transfer Taxes
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5.13
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A-52
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the date first
above written.
RADIATION THERAPY SERVICES, INC.
Name: Leo Doerr
|
|
|
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Title:
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Chairman-Special Committee
|
RADIATION THERAPY SERVICES HOLDINGS, INC.
Name: Erin L. Russell
RTS MERGERCO, INC.
Name: Erin L. Russell
For purposes of Section 7.2 only:
|
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RADIATION THERAPY INVESTMENTS, LLC
|
Name: Erin L. Russell
A-53
October 18, 2007
The Special Committee of the Board of Directors
Radiation Therapy Services, Inc.
2234 Colonial Boulevard
Fort Myers, FL 33907
Gentlemen:
We understand that Ranger Holdings, Inc. (Holdings),
a wholly-owned indirect subsidiary of Vestar Capital
Partners V, L.P. (Vestar), Ranger Merger Co, a
wholly-owned direct subsidiary of Holdings
(Merger Sub), Radiation Therapy Services, Inc.
(the Company) and, solely for purposes of
Section 7.2 of the Merger Agreement (as defined below), RTS
Holdings, LLC propose to enter into a Merger Agreement pursuant
to which, among other things, Merger Sub will be merged with and
into the Company (the Proposed Transaction) and
that, in connection with the Proposed Transaction, each
outstanding share of common stock of the Company (the
Common Stock) will be converted into the right to
receive $32.50 in cash (the Consideration).
Common Stock for the purposes of this letter will
exclude: (a) shares as to which appraisal rights have been
perfected and (b) shares held by Participating
Holders (as such term is defined in the Merger Agreement).
You have requested that we render our opinion, as investment
bankers, to the special committee (the Special
Committee) of the board of directors of the Company (the
Board of Directors) as to the fairness, from a
financial point of view, as of the date hereof, to the holders
of the Common Stock, of the Consideration to be received by such
holders in the Proposed Transaction.
In conducting our analysis and arriving at our opinion, we have
reviewed and analyzed, among other things, the following:
i. The drafts of the merger agreement dated as of
October 18, 2007 (the Merger Agreement), of the
equity commitment letter sent to us on October 18, 2007
between Vestar and Holdings (the Commitment Letter),
and of the support and voting agreements dated as of
October 18, 2007 by and among Ranger Investments, LLC
(Parent), Holdings (a direct, wholly-owned
subsidiary of Parent), and each of the shareholders of the
Company listed as signatories thereto (collectively, the
Voting Agreements), which you have represented to us
are, with respect to all material terms and conditions thereof,
substantially in the form of the definitive agreements to be
executed and delivered by the parties thereto promptly after the
receipt of this opinion;
ii. The Companys annual report on
Form 10-K
filed with the Securities and Exchange Commission (the
SEC) with respect to its fiscal year ended
December 31, 2007, the Companys quarterly reports on
Form 10-Q
filed with the SEC with respect to its fiscal quarters ended
March 31, 2007 and June 30, 2007, respectively, which
the Companys management has identified as being the most
current financial statements available, and certain other
filings made by the Company with the SEC;
iii. Certain other publicly available business and
financial information concerning the Company, and the industry
in which it operates, which we believe to be relevant;
iv. Certain internal information and other data relating to
the Company, and its respective business and prospects,
including budgets, forecasts, projections and certain
presentations prepared by the Company, which were prepared by
the Companys senior management and provided to us by the
Companys financial advisor;
v. The reported sales prices and trading activity of the
Common Stock;
B-1
vi. Certain publicly available information concerning
certain other public companies which we believe to be relevant
and the trading markets for certain of such other
companies securities; and
vii. The financial terms of certain unrelated transactions
which we believe to be relevant.
We have also met with and participated in conference calls with
certain officers and employees of the Company as well as the
Companys financial advisor to discuss the Companys
business, operations, assets, present financial condition and
prospects, as well as the Proposed Transaction, and undertook
such other studies, analyses, investigations and other efforts
as we deemed appropriate.
We have, with your permission, assumed and relied upon the
accuracy and completeness of the financial and other information
used by us and have not attempted independently to verify such
information, nor do we assume any responsibility to do so. We
have assumed that the Companys forecasts and projections
provided to or reviewed by us have been reasonably prepared
based upon the best current estimates and judgment of the
Companys management as to the future financial condition
and results of operations of the Company. In that regard, we
have assumed, with your consent, that (i) the forecasts and
projections of the Company will be achieved at the times and in
the amounts contemplated thereby and (ii) all material
assets and liabilities (contingent or otherwise) of the Company
are as set forth in the Companys financial statements or
other information made available to us. We express no opinion
with respect to the forecasts and projections of the Company or
the estimates and judgments upon which they are based. We have
made no independent investigation of any legal, accounting or
tax matters affecting the Company, and have assumed the
correctness of all legal, accounting and tax advice given the
Company and the Board of Directors or any committee thereof. We
have further assumed, with your consent, that the Proposed
Transaction will be consummated on the terms described in the
Merger Agreement, the Commitment Letter and the Voting
Agreements without waiver, modification or amendment of any of
the material terms or conditions. We have not conducted a
physical inspection of the properties and facilities of the
Company, nor have we made or obtained any independent evaluation
or appraisal of such properties and facilities. Our opinion
necessarily is based upon economic, market, financial,
political, regulatory and other conditions as they exist and can
be evaluated on the date hereof and we assume no responsibility
to update or revise our opinion based upon events or
circumstances occurring after the date hereof.
This opinion is provided to the Special Committee and may be
provided to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion does not
address the Companys underlying business decision to
approve the Proposed Transaction, and it does not constitute a
recommendation to the Company, the Board of Directors, the
Special Committee or any other committee of the Board of
Directors, its shareholders, or any other person as to any
specific action or vote that should be taken in connection with
the Proposed Transaction. This opinion may not be reproduced,
summarized, excerpted from or otherwise publicly referred to or
disclosed in any manner without our prior written consent,
except the Company may include this opinion in its entirety in
any proxy statement or information statement relating to the
Proposed Transaction sent to the Companys shareholders;
provided that any description or reference to Morgan
Joseph & Co. Inc. or to this opinion included in such
proxy statement or information statement shall be in form and
substance reasonably acceptable to us.
We have acted as financial advisor to the Special Committee in
connection with the Proposed Transaction and will receive a fee
for our services. In addition, the Company has agreed to
indemnify us for certain liabilities arising out of our
engagement. In the ordinary course of our business, we may
acquire, hold or sell, long or short positions, or trade or
otherwise effect transactions in debt, equity and other
securities and financial instruments (including loans and other
obligations) of, or investments in, the Company, portfolio
companies of Vestar, and their respective affiliates. Other than
this engagement, we have not been, and are not, engaged by the
Company, Vestar or any of the portfolio companies of Vestar.
B-2
Based upon and subject to the foregoing and such other factors
as we deem relevant, it is our opinion as investment bankers
that, as of the date hereof, the Consideration to be received by
the holders of Common Stock in the Proposed Transaction is fair,
from a financial point of view, to such holders.
Very truly yours,
MORGAN JOSEPH & CO. INC.
B-3
FLORIDA
BUSINESS CORPORATION ACT
607.1301
Appraisal rights; definitions.
The following definitions apply to ss. 607.1302-607.1333:
(1)
Affiliate
means a person that
directly or indirectly through one or more intermediaries
controls, is controlled by, or is under common control with
another person or is a senior executive thereof. For purposes of
s. 607.1302(2)(d), a person is deemed to be an affiliate of its
senior executives.
(2)
Beneficial shareholder
means a
person who is the beneficial owner of shares held in a voting
trust or by a nominee on the beneficial owners behalf.
(3)
Corporation
means the issuer of the
shares held by a shareholder demanding appraisal and, for
matters covered in ss. 607.1322-607.1333, includes the surviving
entity in a merger.
(4)
Fair value
means the value of the
corporations shares determined:
(a) Immediately before the effectuation of the corporate
action to which the shareholder objects.
(b) Using customary and current valuation concepts and
techniques generally employed for similar businesses in the
context of the transaction requiring appraisal, excluding any
appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable to the corporation
and its remaining shareholders.
(c) For a corporation with 10 or fewer shareholders,
without discounting for lack of marketability or minority status.
(5)
Interest
means interest from the
effective date of the corporate action until the date of
payment, at the rate of interest on judgments in this state on
the effective date of the corporate action.
(6)
Preferred shares
means a class or
series of shares the holders of which have preference over any
other class or series with respect to distributions.
(7)
Record shareholder
means the person
in whose name shares are registered in the records of the
corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with the
corporation.
(8)
Senior executive
means the chief
executive officer, chief operating officer, chief financial
officer, or anyone in charge of a principal business unit or
function.
(9)
Shareholder
means both a record
shareholder and a beneficial shareholder.
607.1302
Right of shareholders to
appraisal.
(1) A shareholder of a domestic corporation is entitled to
appraisal rights, and to obtain payment of the fair value of
that shareholders shares, in the event of any of the
following corporate actions:
(a) Consummation of a conversion of such corporation
pursuant to s. 607.1112 if shareholder approval is required for
the conversion and the shareholder is entitled to vote on the
conversion under ss. 607.1103 and 607.1112(6), or the
consummation of a merger to which such corporation is a party if
shareholder approval is required for the merger under s.
607.1103 and the shareholder is entitled to vote on the merger
or if such corporation is a subsidiary and the merger is
governed by s. 607.1104;
(b) Consummation of a share exchange to which the
corporation is a party as the corporation whose shares will be
acquired if the shareholder is entitled to vote on the exchange,
except that appraisal rights shall not be available to any
shareholder of the corporation with respect to any class or
series of shares of the corporation that is not exchanged;
(c) Consummation of a disposition of assets pursuant to s.
607.1202 if the shareholder is entitled to vote on the
disposition, including a sale in dissolution but not including a
sale pursuant to court order or
C-1
a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the
shareholders within 1 year after the date of sale;
(d) An amendment of the articles of incorporation with
respect to the class or series of shares which reduces the
number of shares of a class or series owned by the shareholder
to a fraction of a share if the corporation has the obligation
or right to repurchase the fractional share so created;
(e) Any other amendment to the articles of incorporation,
merger, share exchange, or disposition of assets to the extent
provided by the articles of incorporation, bylaws, or a
resolution of the board of directors, except that no bylaw or
board resolution providing for appraisal rights may be amended
or otherwise altered except by shareholder approval; or
(f) With regard to a class of shares prescribed in the
articles of incorporation prior to October 1, 2003,
including any shares within that class subsequently authorized
by amendment, any amendment of the articles of incorporation if
the shareholder is entitled to vote on the amendment and if such
amendment would adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to
any of his or her shares;
2. Altering or abolishing the voting rights pertaining to
any of his or her shares, except as such rights may be affected
by the voting rights of new shares then being authorized of any
existing or new class or series of shares;
3. Effecting an exchange, cancellation, or reclassification
of any of his or her shares, when such exchange, cancellation,
or reclassification would alter or abolish the
shareholders voting rights or alter his or her percentage
of equity in the corporation, or effecting a reduction or
cancellation of accrued dividends or other arrearages in respect
to such shares;
4. Reducing the stated redemption price of any of the
shareholders redeemable shares, altering or abolishing any
provision relating to any sinking fund for the redemption or
purchase of any of his or her shares, or making any of his or
her shares subject to redemption when they are not otherwise
redeemable;
5. Making noncumulative, in whole or in part, dividends of
any of the shareholders preferred shares which had
theretofore been cumulative;
6. Reducing the stated dividend preference of any of the
shareholders preferred shares; or
7. Reducing any stated preferential amount payable on any
of the shareholders preferred shares upon voluntary or
involuntary liquidation.
(2) Notwithstanding subsection (1), the availability of
appraisal rights under paragraphs (1)(a), (b), (c), and
(d) shall be limited in accordance with the following
provisions:
(a) Appraisal rights shall not be available for the holders
of shares of any class or series of shares which is:
1. Listed on the New York Stock Exchange or the American
Stock Exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.; or
2. Not so listed or designated, but has at least
2,000 shareholders and the outstanding shares of such class
or series have a market value of at least $10 million,
exclusive of the value of such shares held by its subsidiaries,
senior executives, directors, and beneficial shareholders owning
more than 10 percent of such shares.
(b) The applicability of paragraph (a) shall be
determined as of:
1. The record date fixed to determine the shareholders
entitled to receive notice of, and to vote at, the meeting of
shareholders to act upon the corporate action requiring
appraisal rights; or
C-2
2. If there will be no meeting of shareholders, the close
of business on the day on which the board of directors adopts
the resolution recommending such corporate action.
(c) Paragraph (a) shall not be applicable and
appraisal rights shall be available pursuant to
subsection (1) for the holders of any class or series of
shares who are required by the terms of the corporate action
requiring appraisal rights to accept for such shares anything
other than cash or shares of any class or any series of shares
of any corporation, or any other proprietary interest of any
other entity, that satisfies the standards set forth in
paragraph (a) at the time the corporate action becomes
effective.
(d) Paragraph (a) shall not be applicable and
appraisal rights shall be available pursuant to
subsection (1) for the holders of any class or series of
shares if:
1. Any of the shares or assets of the corporation are being
acquired or converted, whether by merger, share exchange, or
otherwise, pursuant to the corporate action by a person, or by
an affiliate of a person, who:
a. Is, or at any time in the
1-year
period immediately preceding approval by the board of directors
of the corporate action requiring appraisal rights was, the
beneficial owner of 20 percent or more of the voting power
of the corporation, excluding any shares acquired pursuant to an
offer for all shares having voting power if such offer was made
within 1 year prior to the corporate action requiring
appraisal rights for consideration of the same kind and of a
value equal to or less than that paid in connection with the
corporate action; or
b. Directly or indirectly has, or at any time in the
1-year
period immediately preceding approval by the board of directors
of the corporation of the corporate action requiring appraisal
rights had, the power, contractually or otherwise, to cause the
appointment or election of 25 percent or more of the
directors to the board of directors of the corporation; or
2. Any of the shares or assets of the corporation are being
acquired or converted, whether by merger, share exchange, or
otherwise, pursuant to such corporate action by a person, or by
an affiliate of a person, who is, or at any time in the
1-year
period immediately preceding approval by the board of directors
of the corporate action requiring appraisal rights was, a senior
executive or director of the corporation or a senior executive
of any affiliate thereof, and that senior executive or director
will receive, as a result of the corporate action, a financial
benefit not generally available to other shareholders as such,
other than:
a. Employment, consulting, retirement, or similar benefits
established separately and not as part of or in contemplation of
the corporate action;
b. Employment, consulting, retirement, or similar benefits
established in contemplation of, or as part of, the corporate
action that are not more favorable than those existing before
the corporate action or, if more favorable, that have been
approved on behalf of the corporation in the same manner as is
provided in s. 607.0832; or
c. In the case of a director of the corporation who will,
in the corporate action, become a director of the acquiring
entity in the corporate action or one of its affiliates, rights
and benefits as a director that are provided on the same basis
as those afforded by the acquiring entity generally to other
directors of such entity or such affiliate.
(e) For the purposes of paragraph (d) only, the term
beneficial owner means any person who, directly or
indirectly, through any contract, arrangement, or understanding,
other than a revocable proxy, has or shares the power to vote,
or to direct the voting of, shares, provided that a member of a
national securities exchange shall not be deemed to be a
beneficial owner of securities held directly or indirectly by it
on behalf of another person solely because such member is the
recordholder of such securities if the member is precluded by
the rules of such exchange from voting without instruction on
contested matters or matters that may affect substantially the
rights or privileges of the holders of the securities to be
voted. When two or more persons agree to act together for the
purpose of voting their shares of the corporation, each member
of the group formed thereby shall be deemed to have acquired
beneficial ownership, as of
C-3
the date of such agreement, of all voting shares of the
corporation beneficially owned by any member of the group.
(3) Notwithstanding any other provision of this section,
the articles of incorporation as originally filed or any
amendment thereto may limit or eliminate appraisal rights for
any class or series of preferred shares, but any such limitation
or elimination contained in an amendment to the articles of
incorporation that limits or eliminates appraisal rights for any
of such shares that are outstanding immediately prior to the
effective date of such amendment or that the corporation is or
may be required to issue or sell thereafter pursuant to any
conversion, exchange, or other right existing immediately before
the effective date of such amendment shall not apply to any
corporate action that becomes effective within 1 year of
that date if such action would otherwise afford appraisal rights.
(4) A shareholder entitled to appraisal rights under this
chapter may not challenge a completed corporate action for which
appraisal rights are available unless such corporate action:
(a) Was not effectuated in accordance with the applicable
provisions of this section or the corporations articles of
incorporation, bylaws, or board of directors resolution
authorizing the corporate action; or
(b) Was procured as a result of fraud or material
misrepresentation.
607.1303
Assertion of rights by nominees and beneficial
owners.
(1) A record shareholder may assert appraisal rights as to
fewer than all the shares registered in the record
shareholders name but owned by a beneficial shareholder
only if the record shareholder objects with respect to all
shares of the class or series owned by the beneficial
shareholder and notifies the corporation in writing of the name
and address of each beneficial shareholder on whose behalf
appraisal rights are being asserted. The rights of a record
shareholder who asserts appraisal rights for only part of the
shares held of record in the record shareholders name
under this subsection shall be determined as if the shares as to
which the record shareholder objects and the record
shareholders other shares were registered in the names of
different record shareholders.
(2) A beneficial shareholder may assert appraisal rights as
to shares of any class or series held on behalf of the
shareholder only if such shareholder:
(a) Submits to the corporation the record
shareholders written consent to the assertion of such
rights no later than the date referred to in s. 607.1322(2)(b)2.
(b) Does so with respect to all shares of the class or
series that are beneficially owned by the beneficial shareholder.
607.1320
Notice of appraisal rights.
(1) If proposed corporate action described in s.
607.1302(1) is to be submitted to a vote at a shareholders
meeting, the meeting notice must state that the corporation has
concluded that shareholders are, are not, or may be entitled to
assert appraisal rights under this chapter. If the corporation
concludes that appraisal rights are or may be available, a copy
of ss. 607.1301-607.1333 must accompany the meeting notice sent
to those record shareholders entitled to exercise appraisal
rights.
(2) In a merger pursuant to s. 607.1104, the parent
corporation must notify in writing all record shareholders of
the subsidiary who are entitled to assert appraisal rights that
the corporate action became effective. Such notice must be sent
within 10 days after the corporate action became effective
and include the materials described in s. 607.1322.
(3) If the proposed corporate action described in s.
607.1302(1) is to be approved other than by a shareholders
meeting, the notice referred to in subsection (1) must be
sent to all shareholders at the time that consents are first
solicited pursuant to s. 607.0704, whether or not consents are
solicited from all shareholders, and include the materials
described in s. 607.1322.
C-4
607.1321
Notice of intent to demand payment.
(1) If proposed corporate action requiring appraisal rights
under s. 607.1302 is submitted to a vote at a shareholders
meeting, or is submitted to a shareholder pursuant to a consent
vote under s. 607.0704, a shareholder who wishes to assert
appraisal rights with respect to any class or series of shares:
(a) Must deliver to the corporation before the vote is
taken, or within 20 days after receiving the notice
pursuant to s. 607.1320(3) if action is to be taken without a
shareholder meeting, written notice of the shareholders
intent to demand payment if the proposed action is effectuated.
(b) Must not vote, or cause or permit to be voted, any
shares of such class or series in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of
subsection (1) is not entitled to payment under this
chapter.
607.1322
Appraisal notice and form.
(1) If proposed corporate action requiring appraisal rights
under s. 607.1302(1) becomes effective, the corporation must
deliver a written appraisal notice and form required by
paragraph (2)(a) to all shareholders who satisfied the
requirements of s. 607.1321. In the case of a merger under s.
607.1104, the parent must deliver a written appraisal notice and
form to all record shareholders who may be entitled to assert
appraisal rights.
(2) The appraisal notice must be sent no earlier than the
date the corporate action became effective and no later than
10 days after such date and must:
(a) Supply a form that specifies the date that the
corporate action became effective and that provides for the
shareholder to state:
1. The shareholders name and address.
2. The number, classes, and series of shares as to which
the shareholder asserts appraisal rights.
3. That the shareholder did not vote for the transaction.
4. Whether the shareholder accepts the corporations
offer as stated in subparagraph (b)4.
5. If the offer is not accepted, the shareholders
estimated fair value of the shares and a demand for payment of
the shareholders estimated value plus interest.
(b) State:
1. Where the form must be sent and where certificates for
certificated shares must be deposited and the date by which
those certificates must be deposited, which date may not be
earlier than the date for receiving the required form under
subparagraph 2.
2. A date by which the corporation must receive the form,
which date may not be fewer than 40 nor more than 60 days
after the date the subsection (1) appraisal notice and form
are sent, and state that the shareholder shall have waived the
right to demand appraisal with respect to the shares unless the
form is received by the corporation by such specified date.
3. The corporations estimate of the fair value of the
shares.
4. An offer to each shareholder who is entitled to
appraisal rights to pay the corporations estimate of fair
value set forth in subparagraph 3.
5. That, if requested in writing, the corporation will
provide to the shareholder so requesting, within 10 days
after the date specified in subparagraph 2., the number of
shareholders who return the forms by the specified date and the
total number of shares owned by them.
6. The date by which the notice to withdraw under s.
607.1323 must be received, which date must be within
20 days after the date specified in subparagraph 2.
C-5
(c) Be accompanied by:
1. Financial statements of the corporation that issued the
shares to be appraised, consisting of a balance sheet as of the
end of the fiscal year ending not more than 15 months prior
to the date of the corporations appraisal notice, an
income statement for that year, a cash flow statement for that
year, and the latest available interim financial statements, if
any.
2. A copy of ss. 607.1301-607.1333.
607.1323
Perfection of rights; right to
withdraw.
(1) A shareholder who wishes to exercise appraisal rights
must execute and return the form received pursuant to s.
607.1322(1) and, in the case of certificated shares, deposit the
shareholders certificates in accordance with the terms of
the notice by the date referred to in the notice pursuant to s.
607.1322(2)(b)2. Once a shareholder deposits that
shareholders certificates or, in the case of
uncertificated shares, returns the executed forms, that
shareholder loses all rights as a shareholder, unless the
shareholder withdraws pursuant to subsection (2).
(2) A shareholder who has complied with subsection (1)
may nevertheless decline to exercise appraisal rights and
withdraw from the appraisal process by so notifying the
corporation in writing by the date set forth in the appraisal
notice pursuant to s. 607.1322(2)(b)6. A shareholder who fails
to so withdraw from the appraisal process may not thereafter
withdraw without the corporations written consent.
(3) A shareholder who does not execute and return the form
and, in the case of certificated shares, deposit that
shareholders share certificates if required, each by the
date set forth in the notice described in subsection (2), shall
not be entitled to payment under this chapter.
607.1324
Shareholders acceptance of
corporations offer.
(1) If the shareholder states on the form provided in s.
607.1322(1) that the shareholder accepts the offer of the
corporation to pay the corporations estimated fair value
for the shares, the corporation shall make such payment to the
shareholder within 90 days after the corporations
receipt of the form from the shareholder.
(2) Upon payment of the agreed value, the shareholder shall
cease to have any interest in the shares.
607.1326
Procedure if shareholder is dissatisfied with
offer.
(1) A shareholder who is dissatisfied with the
corporations offer as set forth pursuant to
s. 607.1322(2)(b)4. must notify the corporation on the form
provided pursuant to s. 607.1322(1) of that shareholders
estimate of the fair value of the shares and demand payment of
that estimate plus interest.
(2) A shareholder who fails to notify the corporation in
writing of that shareholders demand to be paid the
shareholders stated estimate of the fair value plus
interest under subsection (1) within the timeframe set
forth in s. 607.1322(2)(b)2. waives the right to demand payment
under this section and shall be entitled only to the payment
offered by the corporation pursuant to s. 607.1322(2)(b)4.
607.1330
Court action.
(1) If a shareholder makes demand for payment under s.
607.1326 which remains unsettled, the corporation shall commence
a proceeding within 60 days after receiving the payment
demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not
commence the proceeding within the
60-day
period, any shareholder who has made a demand pursuant to s.
607.1326 may commence the proceeding in the name of the
corporation.
(2) The proceeding shall be commenced in the appropriate
court of the county in which the corporations principal
office, or, if none, its registered office, in this state is
located. If the corporation is a foreign corporation without a
registered office in this state, the proceeding shall be
commenced in the county in this state in which the principal
office or registered office of the domestic corporation merged
with the foreign corporation was located at the time of the
transaction.
C-6
(3) All shareholders, whether or not residents of this
state, whose demands remain unsettled shall be made parties to
the proceeding as in an action against their shares. The
corporation shall serve a copy of the initial pleading in such
proceeding upon each shareholder party who is a resident of this
state in the manner provided by law for the service of a summons
and complaint and upon each nonresident shareholder party by
registered or certified mail or by publication as provided by
law.
(4) The jurisdiction of the court in which the proceeding
is commenced under subsection (2) is plenary and exclusive.
If it so elects, the court may appoint one or more persons as
appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers shall have the powers
described in the order appointing them or in any amendment to
the order. The shareholders demanding appraisal rights are
entitled to the same discovery rights as parties in other civil
proceedings. There shall be no right to a jury trial.
(5) Each shareholder made a party to the proceeding is
entitled to judgment for the amount of the fair value of such
shareholders shares, plus interest, as found by the court.
(6) The corporation shall pay each such shareholder the
amount found to be due within 10 days after final
determination of the proceedings. Upon payment of the judgment,
the shareholder shall cease to have any interest in the shares.
607.1331.
Court costs and counsel fees.
(1) The court in an appraisal proceeding shall determine
all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court.
The court shall assess the costs against the corporation, except
that the court may assess costs against all or some of the
shareholders demanding appraisal, in amounts the court finds
equitable, to the extent the court finds such shareholders acted
arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this chapter.
(2) The court in an appraisal proceeding may also assess
the fees and expenses of counsel and experts for the respective
parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all
shareholders demanding appraisal if the court finds the
corporation did not substantially comply with ss. 607.1320 and
607.1322; or
(b) Against either the corporation or a shareholder
demanding appraisal, in favor of any other party, if the court
finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this chapter.
(3) If the court in an appraisal proceeding finds that the
services of counsel for any shareholder were of substantial
benefit to other shareholders similarly situated, and that the
fees for those services should not be assessed against the
corporation, the court may award to such counsel reasonable fees
to be paid out of the amounts awarded the shareholders who were
benefited.
(4) To the extent the corporation fails to make a required
payment pursuant to s. 607.1324, the shareholder may sue
directly for the amount owed and, to the extent successful,
shall be entitled to recover from the corporation all costs and
expenses of the suit, including counsel fees.
607.1332.
Disposition of acquired shares.
Shares acquired by a corporation pursuant to payment of the
agreed value thereof or pursuant to payment of the judgment
entered therefor, as provided in this chapter, may be held and
disposed of by such corporation as authorized but unissued
shares of the corporation, except that, in the case of a merger
or share exchange, they may be held and disposed of as the plan
of merger or share exchange otherwise provides. The shares of
the surviving corporation into which the shares of such
shareholders demanding appraisal rights would have been
converted had they assented to the merger shall have the status
of authorized but unissued shares of the surviving corporation.
C-7
607.1333.
Limitation on corporate payment.
(1) No payment shall be made to a shareholder seeking
appraisal rights if, at the time of payment, the corporation is
unable to meet the distribution standards of s. 607.06401. In
such event, the shareholder shall, at the shareholders
option:
(a) Withdraw his or her notice of intent to assert
appraisal rights, which shall in such event be deemed withdrawn
with the consent of the corporation; or
(b) Retain his or her status as a claimant against the
corporation and, if it is liquidated, be subordinated to the
rights of creditors of the corporation, but have rights superior
to the shareholders not asserting appraisal rights, and if it is
not liquidated, retain his or her right to be paid for the
shares, which right the corporation shall be obliged to satisfy
when the restrictions of this section do not apply.
(2) The shareholder shall exercise the option under
paragraph (1)(a) or paragraph (b) by written notice filed
with the corporation within 30 days after the corporation
has given written notice that the payment for shares cannot be
made because of the restrictions of this section. If the
shareholder fails to exercise the option, the shareholder shall
be deemed to have withdrawn his or her notice of intent to
assert appraisal rights.
C-8
Information
Relating to Holdings, Parent, Merger Sub and Vestar Capital
Fund
Radiation
Therapy Investments, LLC: Board of Managers and Executive
Officers
The names and material occupations, positions, offices or
employment during the past five years of the current managers,
executive officers and members of Holdings are set forth below:
James L. Elrod, Jr.
, Manager and President.
Refer to
Vestar Capital Partners V, L.P.
below.
Jack M. Feder
, Manager and Secretary.
Refer to
Vestar Capital Partners V, L.P.
below.
Erin L. Russell
, Manager and Vice President.
Refer to
Vestar Capital Partners V, L.P.
below.
Vestar Capital Partners V, L.P.
, Member.
Refer to
Vestar Capital Partners V, L.P.
below.
During the last five years, no person or entity described above
has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) a party
to any judicial or administrative proceeding (except for matters
that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of
any violation of federal or state securities laws.
Radiation
Therapy Services Holdings, Inc.: Directors and Executive
Officers
The names and material occupations, positions, offices or
employment during the past five years of the current executive
officers and directors of Radiation Therapy Services Holdings,
Inc. are set forth below:
James L. Elrod, Jr.
, Director and President.
Refer
to Vestar Capital Partners V, L.P.
below.
Jack M. Feder
, Secretary.
Refer to
Vestar Capital Partners V, L.P.
below.
Erin L. Russell
, Director and Vice President.
Refer to
Vestar Capital Partners V, L.P.
below.
During the last five years, no person or entity described above
has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) a party
to any judicial or administrative proceeding (except for matters
that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of
any violation of federal or state securities laws.
RTS
MergerCo, Inc.: Directors and Executive Officers
The names and material occupations, positions, offices or
employment during the past five years of the current executive
officers and directors of RTS MergerCo, Inc. are set forth below:
James L. Elrod, Jr.
, Director and President.
Refer
to Vestar Capital Partners V, L.P.
below.
Jack M. Feder
, Secretary.
Refer to
Vestar Capital Partners V, L.P.
below.
Erin L. Russell
, Director and Vice President.
Refer to
Vestar Capital Partners V, L.P.
below.
During the last five years, no person or entity described above
has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) a party
to any judicial or administrative proceeding (except for matters
that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of
any violation of federal or state securities laws.
Vestar
Capital Partners V, L.P.
Vestar Capital Partners V, L.P (Vestar
Fund V) is a Cayman Islands exempted limited
partnership engaged in the business of making private equity and
other types of investments.
D-1
Vestar Associates V, L.P. (Vestar Associates V)
is the general partner of Vestar Fund V. Vestar
Associates V is a Scottish limited partnership, the
principal business of which is acting as a general partner of
Vestar Fund V and related funds.
Vestar Managers V Ltd. (Vestar Managers) is the
general partner of Vestar Associates V. Vestar Managers is a
Cayman Island exempted company engaged in the business of acting
as the general partner of persons primarily engaged in the
business of making private equity and other types of investments.
The business address of each of Vestar Fund V, Vestar
Associates V and Vestar Managers and the managing directors
listed below (collectively, the Vestar Parties) is
c/o Vestar
Capital Partners, 245 Park Avenue, 41st Floor, New York,
New York
10167-4098
The names and material occupations, positions, offices or
employment during the past five years of each managing director
of Vestar Managers are set forth below. Each is a
U.S. citizen.
Daniel S. OConnell
is the sole director and
managing director of Vestar Managers. Mr. OConnell
has been with Vestar for each of the last five years.
Norman W. Alpert
is a managing director of Vestar
Managers. Mr. Alpert has been with Vestar for each of the
last five years.
Bryan J. Carey
is a managing director of Vestar Managers.
Mr. Carey has been with Vestar for each of the last five
years.
James L. Elrod, Jr.
is a managing director of Vestar
Managers. Mr. Elrod has been with Vestar for each of the
last five years.
James P. Kelley
is a managing director of Vestar
Managers. Mr. Kelley has been with Vestar for each of the
last five years.
Sander M. Levy
is a managing director of Vestar Managers.
Mr. Levy has been with Vestar for each of the last five
years.
Kevin Mundt
is a managing director of Vestar Managers.
Mr. Mundt has been with Vestar for each of the last five
years.
Brian K. Ratzan
is a managing director of Vestar
Managers. Mr. Ratzan has been with Vestar for each of the
last five years.
Robert L. Rosner
is a managing director of Vestar
Managers. Mr. Rosner has been with Vestar for each of the
last five years.
Brian P. Schwartz
is a managing director of Vestar
Managers. Mr. Schwartz has been with Vestar for each of the
last five years.
John R. Woodard
is a managing director of Vestar
Managers. Mr. Woodward has been with Vestar for each of the
last five years.
During the last five years, no person or entity described above
has been (i) convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) a party
to any judicial or administrative proceeding (except for matters
that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of
any violation of federal or state securities laws.
D-2
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-50802
RADIATION THERAPY SERVICES,
INC.
(Exact Name of Registrant as
Specified in its Charter)
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Florida
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65-0768951
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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2234 Colonial Boulevard
Fort Myers, Florida
(Address Of Principal
Executive Offices)
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33907
(Zip Code)
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(239) 931-7275
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $.0001 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The aggregate market value of the shares of common stock of
Radiation Therapy Services, Inc. held by non-affiliates based
upon the closing price on June 30, 2006, was approximately
$332.2 million.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer as defined in
Rule 12b-2
of the Exchange Act. Large accelerated
filer
o
Accelerated
filer
þ
Non-accelerated
filer
o
As of February 1, 2007, the number of outstanding shares of
common stock of Radiation Therapy Services, Inc. was 23,427,078.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for our annual
meeting of shareholders, which we expect to file with the
Securities and Exchange Commission within 120 days after
December 31, 2006, are incorporated by reference into
Part III of this report.
E-1
Overview
We are a provider of radiation therapy services to cancer
patients. We own, operate and manage treatment centers focused
principally on providing comprehensive radiation treatment
alternatives ranging from conventional external beam radiation
to newer, technologically-advanced options. We believe we are
the largest company in the United States focused principally on
providing radiation therapy. We opened our first radiation
treatment center in 1983 and as of December 31, 2006, we
provided radiation therapy in 66 freestanding and 10
hospital-based treatment centers. In 2006 we acquired 11
treatment centers including 7 in Southeastern Michigan. Our
treatment centers are clustered into 24 local markets in
15 states, including Alabama, Arizona, California,
Delaware, Florida, Kentucky, Maryland, Massachusetts, Michigan,
Nevada, New Jersey, New York, North Carolina, Rhode Island
and West Virginia. In our 24 years of operation, we have
developed a standardized operating model that enables our
treatment centers to deliver high-quality, cost-effective
patient care. We have a highly experienced management team and a
number of our senior radiation oncologists are nationally
recognized by the American College of Radiation Oncology for
excellence and leadership in the field of radiation oncology. We
also have affiliations with physicians specializing in other
areas including gynecological and surgical oncology and urology
in a limited number of our markets to strengthen our clinical
working relationships.
We completed our initial public offering in June 2004. Our
principal executive office is located at 2234 Colonial
Boulevard, Fort Myers, Florida and our telephone number is
(239) 931-7275.
We conduct much of our business under the name of our
wholly-owned subsidiary, 21st Century Oncology, Inc. Our
corporate website is
www.rtsx.com
and we make available
copies of our filings with the Securities and Exchange
Commission on our website under the heading Investor
Relations as soon as reasonably practicable after their
filing. Our filings are also available on the Securities and
Exchange Commissions EDGAR database at
www.sec.gov
.
Industry
Overview
Cancer is the second leading cause of death in the United
States, exceeded only by heart disease. In 2007, the American
Cancer Society estimates there will be 1.5 million new
cancer cases diagnosed in the United States and that cancer will
account for one in every four deaths.
Treatment Options.
There are many types of
cancer, each of which is unique in how it grows and how it
responds to treatment. A physician may choose which treatment or
combination of treatments is most appropriate. Individuals
diagnosed with cancer have four general treatment options:
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radiation therapy (treatment with radiation to eliminate cancer
cells);
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surgery (to remove a tumor);
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chemotherapy (treatment with anticancer drugs); and
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biological therapy (treatment to stimulate or restore the
ability of the immune system to fight infection and disease).
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We focus principally on radiation therapy, which may be used
alone or in combination with surgery, chemotherapy or biological
therapy.
Radiation Therapy.
According to the American
Society for Therapeutic Radiology and Oncology, approximately
50% to 60% of patients diagnosed with cancer receive radiation
therapy. Radiation therapy is used to treat the most common
types of cancer, including prostate, breast, lung and colorectal
cancer, and involves exposing the patient to an external or
internal source of radiation. Radiation therapy can be used to
cure cancer by destroying cancer cells and, when curing cancer
is not possible, to shrink tumors and reduce pressure, pain and
relieve other symptoms of the cancer to enhance a patients
quality of life.
E-3
Radiation Therapy Technology.
The radiation
utilized by a radiation oncologist for external beam treatments
is produced by a machine known as a linear accelerator. A normal
course of external beam radiation therapy ranges from 20 to 40
total treatments, given daily over a four to eight week period.
Recent research has produced new, advanced methods for
performing radiation treatments. These advanced methods result
in more effective treatments that minimize the harm to healthy
tissues that surround the tumor and therefore result in fewer
side effects.
Radiation Therapy Market.
According to the
American Society for Therapeutic Radiology and Oncology, it is
estimated that there are approximately 4,200 radiation
oncologists in the United States and over 2,200 hospital and
freestanding radiation therapy centers. We believe that growth
in the radiation therapy market will be driven by the following
trends:
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aging of the population in the United States, as 77% of all
cancers are diagnosed in people over age 55;
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earlier detection and diagnosis of cancer;
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increased knowledge of and demand for advanced treatments by
patients;
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growing utilization of advanced treatment technologies; and
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discovery of new and innovative means of delivering radiation
therapy for the treatment of cancer.
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We believe most of our competitors are not in a position to take
full advantage of the opportunities within the market due to
barriers to entry, such as significant capital requirements,
limited size of operations, lack of depth in important areas
such as technology, limited number and experience of physicians,
availability of resources and lack of management experience.
Our
Operating Strategy
Our goal is to provide cancer patients with radiation therapy
treatments to maximize clinical outcomes. We focus principally
on providing a broad spectrum of radiation therapy in both a
patient-friendly environment and cost-effective manner. Our
model is designed to maximize our relationships with patients
and referring physicians, as well as attract and retain
radiation oncologists. We believe that our operating strategy
enables us to maximize patient service, quality of care and
financial performance. The key elements of our operating
strategy are to:
Emphasize Patient Service.
We focus on
providing our patients with an environment that minimizes the
stress and uncertainty of being diagnosed with and treated for
cancer. Our goal is to see patients within 24 hours of a
referral and begin treatment as soon as possible thereafter. Our
radiation oncologist discusses the proposed treatment, the
possible side effects and the expected results of treatment with
the patient and is available to respond to questions or concerns
at any time. Other services we provide include nutritional
counseling and assistance with reimbursement from third-party
payers. We believe that our focus on patient service enhances
the quality of care provided and differentiates us from other
radiation therapy providers.
Provide Advanced Radiation Treatment
Alternatives.
Within our local markets, we are a
leader in providing the most advanced radiation therapy
alternatives. The advanced radiation treatment alternatives we
provide are designed to deliver more effective radiation
directly to the tumor while minimizing harm to surrounding
tissues and therefore reducing side effects. We have directly
benefited from the increasing awareness of cancer patients to
these advanced radiation treatment alternatives.
Establish and Maintain Strong Clinical Relationships with
Referring Physicians.
Our team of radiation
oncologists seeks to develop and maintain strong working
clinical relationships with referring physicians by:
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establishing a presence in the medical community and receiving
referrals for radiation therapy based on our reputation for
providing a high standard of quality patient care;
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providing excellent patient service and involving the referring
physician in the care of the patient;
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educating our existing and potential referring physicians on new
methods of radiation therapy; and
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E-4
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strengthening clinical relationships by fully integrating with
key physicians through group practices in selected markets.
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Recruit and Retain Leading Radiation
Oncologists.
We recruit radiation oncologists
with excellent academic and clinical backgrounds who we believe
have potential for professional growth. Our more senior
oncologists are members of numerous professional organizations
and have developed national reputations for excellence. We
attract and retain radiation oncologists by:
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offering them the opportunity to join an established team of
leaders in the field of radiation oncology;
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providing them greater access to advanced technologies;
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offering them the opportunity to develop expertise in advanced
treatment procedures;
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enabling them to conduct research and encouraging them to
publish their results; and
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providing them with the opportunity to earn above the national
average compensation for radiation oncologists.
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Cluster Our Treatment Centers In Local
Markets.
We cluster treatment centers in our
local markets, which enables us to offer our patients a wide
array of radiation therapy services in a cost-effective manner.
By concentrating our treatment centers within a given geography,
we are able to leverage our investment in advanced treatment
technologies and our clinical and operational expertise across a
larger patient population. Treatment centers in each of our
clusters also share support services, such as physics, which
leads to lower operating costs per treatment center. We are also
able to better leverage our relationships with managed care
payers due to the number of patients treated within our local
markets.
Continually Enhance Operational
Efficiencies.
During our 24 years of
operations, we have developed a standardized operating model
that enables our treatment centers to cost-effectively deliver
high-quality patient care. We continue to enhance our operating
performance through the use of established protocols and
procedures in our clinical operations. Furthermore, we have a
centralized approach to business functions such as accounting,
administration, billing, collection, marketing and purchasing,
which we believe results in significant economies of scale and
operating efficiencies.
Our
Growth Strategy
Our growth strategy is to further increase our market share
within our established local markets and selectively expand into
new local markets. The key elements of our growth strategy are
to:
Increase
Revenue and Profitability of Our Existing Treatment
Centers
We plan to increase revenue and profitability at our treatment
centers within established local markets by:
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increasing clinical referrals from physicians;
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expanding our offering of advanced treatment services;
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affiliating with physicians specializing in other areas
including gynecological and surgical oncology and urology;
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adding additional radiation oncologists; and
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entering into additional payer relationships.
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Develop
New Treatment Centers Within Our Existing Local
markets
We plan to develop treatment centers to expand our existing
local markets. We have experience in the design and construction
of radiation treatment centers, having developed 22 treatment
centers located in California, Florida, Maryland, Nevada and
Rhode Island. Our newly-developed treatment centers typically
achieve positive cash flow within six to twelve months after
opening.
E-5
Selectively
Enter New Local Markets
We plan to selectively expand into new local markets through
acquisition, new treatment center development and strategic
alliances and joint ventures. We evaluate potential expansion
into new local markets based on:
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demographic characteristics, including the number and
concentration of Medicare recipients, population trends and
historical and projected patient population growth and radiation
treatment volumes;
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the extent to which we may have any pre-existing relationships
with physicians or hospitals;
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the current competitive landscape of existing freestanding or
hospital-based radiation treatment centers;
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the payer environment; and
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the regulatory environment.
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Expand Through Acquisitions.
We plan to enter
new local markets through the acquisition of established
treatment centers that provide us the opportunity to leverage
our current infrastructure. We seek to acquire treatment centers
with leading radiation oncologists, strong clinical referral
sources and substantial prospects for growth. We believe that
significant opportunity exists to add value to acquired
treatment centers by providing advanced radiation therapy
technology and services and by implementing our proven operating
model, which includes our standardized operating systems. In
2006 we entered 2 new local markets and we acquired 11 treatment
centers. We have entered 12 local markets through acquisitions
and have acquired 44 treatment centers to date.
Expand Through New Treatment Center
Development.
Where desirable, we plan to enter
new local markets by internally developing new radiation
treatment centers. To date, we have established 22 treatment
centers in 9 local markets located in California, Florida,
Maryland, Nevada and Rhode Island by internally developing new
radiation treatment centers. Although we did not internally
develop any new treatment centers in 2006, we currently plan to
develop new treatment centers in our new local markets in Palm
Springs, California and Scottsdale, Arizona, as well as add
centers to our existing markets in southwest Florida.
Expand Through Strategic Alliances and Joint
Ventures.
We also plan to enter new local markets
through strategic alliances and joint ventures. To date, we have
entered 3 local markets through strategic alliances. These
strategic alliances and joint ventures vary by market and can
include the provision of administrative services, technology
services and professional services or any combination thereof.
To date, we have established these arrangements primarily with
hospitals seeking our expertise in providing high-quality,
cost-effective radiation therapy. Our desire and ability to
enter into strategic alliances and joint venture arrangements
depends on the regulatory and competitive environment and other
economic factors. We have experience in effectively structuring
these arrangements in a manner designed to meet the needs of
multiple constituencies, including the physicians, the hospitals
and regulatory authorities. Strategic alliances and joint
ventures provide us with alternative methods to enter attractive
new markets.
Expand Through Affiliations with Other Oncologists and
Specialists.
Healthcare is delivered locally, and
in certain local markets, it may be advantageous to fully
integrate with key physicians with medical specialties other
than radiation oncology. As the practice of oncology and
radiation oncology has become increasingly sophisticated, there
has been a need to integrate other medical specialties in our
operations. High precision radiation therapy requires close
cooperation with other physicians, often from the surgical
fields, to be able to target and treat tumors. In these
instances, we believe we can further strengthen both our
clinical working relationships and our standing in the local
oncology field. We currently operate as a group practice in a
limited number of our markets, principally with other
oncologists, including gynecological and surgical oncologists,
and, beginning in December 2005, in one local market with
urologists. We plan to continue to seek affiliations with
physicians having specialties other than radiation oncology
where desirable.
E-6
Operations
We have 24 years of experience operating radiation
treatment centers. We have developed an integrated operating
model, which is comprised of the following key elements:
Treatment Center Operations.
Our treatment
centers are designed specifically to deliver high-quality
radiation therapy in a patient-friendly environment. A treatment
center typically has one or two linear accelerators, with
additional rooms for simulators, computed tomography (CT) scans,
physician offices, film processing and physics functions. In
addition, treatment centers include a patient waiting room,
dressing rooms, exam rooms and hospitality rooms, all of which
are designed to minimize patient stress.
Cancer patients referred to one of our radiation oncologists are
provided with an initial consultation, which includes an
evaluation of the patients condition to determine if
radiation therapy is appropriate, followed by a discussion of
the effects of the therapy. If radiation therapy is selected as
a method of treatment, the medical staff engages in clinical
treatment planning. Clinical treatment planning utilizes x-rays,
CT imaging, ultrasound, positron emission tomography (PET)
imaging and, in many cases, advanced computerized
3-D
conformal imaging programs, in order to locate the tumor,
determine the best treatment modality and the treatments
optimal radiation dosage, and select the appropriate treatment
regimen.
Our radiation treatment centers typically range from 5,000 to
12,000 square feet, have a radiation oncologist and a staff
ranging between 10 and 25 people, depending on treatment
center capacity and patient volume. The typical treatment center
staff includes: radiation therapists, who deliver the radiation
therapy, medical assistants or medical technicians, an office
financial manager, receptionist, transcriptionist, block cutter,
file clerk and van driver. In markets where we have more than
one treatment center, we can more efficiently provide certain
specialists to each treatment center, such as physicists,
dosimetrists and engineers who service the treatment centers
within that local market.
Standardized Operating Procedures.
We have
developed standardized operating procedures for our treatment
centers in order to ensure that our professionals are able to
operate uniformly and efficiently. Our manuals, policies and
procedures are refined and modified as needed to increase
productivity and efficiency and to provide for the safety of our
employees and patients. We believe that our standard operating
procedures facilitate the interaction of physicians, physicists,
dosimetrists and radiation therapists and permit the interchange
of employees among our treatment centers. In addition,
standardized procedures facilitate the training of new employees.
Coding and Billing.
Coding involves the
translation of data from a patients medical chart to our
billing system for submission to third-party payers. Our
treatment centers provide radiation therapy services under
approximately 60 different professional and technical codes,
which determine reimbursement. Our Medical Director along with
our certified professional coders work together to establish
coding and billing rules and procedures to be utilized at our
radiation treatment centers providing consistency across
centers. In each radiation treatment center, our office
financial manager is in charge of executing these rules and
procedures with the trained personnel located at each treatment
center. To provide an external check on the integrity of the
coding process, we have retained the services of a third-party
consultant to review and assess our coding procedures and
processes on a periodic basis. Billing and collection functions
are centrally performed by a staff at our executive offices.
Management Information Systems.
We utilize
centralized management information systems to closely monitor
data related to each treatment centers operations and
financial performance. Our management information systems are
used to track patient data, physician productivity and coding,
as well as billing functions. Our management information systems
also provide monthly budget analyses, financial comparisons to
prior periods and comparisons among treatment centers, thus
enabling management to evaluate the individual and collective
performance of our treatment centers. We developed a proprietary
image and text retrieval system referred to as the Oncology
Wide-Area Network, which facilitates the storage and review of
patient medical charts and films. We periodically review our
management information systems for possible refinements and
upgrading. Our management information systems personnel install
and maintain our system
E-7
hardware, develop and maintain specialized software and are able
to integrate the systems of the practices we acquire.
Engineering and Physics Departments.
We have
established engineering and physics departments which implement
standardized procedures for the acquisition, installation,
calibration, use, maintenance and replacement of our linear
accelerators, simulators and related equipment, as well as to
the overall operation of our treatment centers. Our engineers
perform preventive maintenance, repairs and installations of our
linear accelerators. This enables our treatment centers to
maximize equipment productivity and to minimize downtime. In
addition, the engineering department maintains a warehouse of
linear accelerator parts in order to provide equipment backup.
Our physicists monitor and test the accuracy and integrity of
each of our linear accelerators on a regular basis to ensure the
safety and effectiveness of patient treatment. This testing also
helps ensure that the linear accelerators are uniformly and
properly calibrated.
Total Quality Management Program.
We strive to
achieve total quality management throughout our organization.
Our treatment centers, either directly or in cooperation with
the appropriate professional corporation or hospital, have a
standardized total quality management program consisting of
programs to monitor the design of the individual treatment of
the patient via the evaluation of charts by radiation
oncologists, physicists, dosimetrists and radiation therapists
and for the ongoing validation of radiation therapy equipment.
Each of our new radiation oncologists is assigned to a senior
radiation oncologist who reviews each patients course of
treatment through the patients medical chart using our
Oncology Wide-Area Network. Furthermore, the data in our patient
database is used to evaluate patient outcomes and to modify
treatment patterns as necessary to improve patient care. We also
utilize patient questionnaires to monitor patient satisfaction
with the radiation therapy they receive.
Clinical Research.
We believe that a
well-managed clinical research program enhances the reputation
of our radiation oncologists and our ability to recruit new
radiation oncologists. Our treatment centers participate in
national cooperative group trials and we have a full-time,
in-house research staff to assure compliance with such trials
and to perform related outcome analyses. We maintain a
proprietary database of information on over
77,000 patients. The data collected includes tumor
characteristics such as stage, histology and grade, radiation
treatment parameters, other treatments delivered, complications
and information on disease recurrences. In addition,
follow-up
data on disease status and patient survival rates are collected.
This data can be used by the radiation oncologists to conduct
research and improve patient care. We also assist the radiation
oncologists with research in the form of outcome studies. These
studies often are presented at international conferences and
published in trade journals. To date, our radiation oncologists
have published more than 215 articles in peer reviewed journals
and related periodicals.
School of Radiation Therapy.
In 1989, we
founded The Radiation Therapy School for Radiation Therapy
Technology, which is accredited by the Joint Review Committee on
Education in Radiologic Technology. The school trains
individuals to become radiation therapists. Upon graduation,
students become eligible to take the national registry
examination administered by the American Registry of Radiologic
Technologists. Radiation therapists are responsible for
administering treatments prescribed by radiation oncologists and
monitoring patients while under treatment. Since opening in
1989, the school has produced 97 graduates, 49 of whom are
currently employed by us.
Recognizing a growing need for individuals trained in treatment
planning, we founded the School for Medical Dosimetry in 2005.
Currently, two senior and four junior students are enrolled in
this program. Among other duties, the medical dosimetrists,
under the supervision of the medical physicist, are responsible
for developing an appropriate treatment plan according to the
radiation oncologists prescribed dose for each patient.
Upon graduation, these students are eligible to sit for the
certifying examination administered by the Medical Dosimetry
Certification Board.
Privacy of Medical Information.
We focus on
being compliant with regulations under the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, regarding
privacy, security and transmission of health information. We
have implemented such regulations into our existing systems,
standards and policies to ensure compliance.
E-8
Compliance Program.
We have a compliance
program that is consistent with guidelines issued by the Office
of Inspector General of the Department of Health and Human
Services. As part of this compliance program, we adopted a code
of ethics and have a full-time compliance officer at the
corporate level. Our program includes an anonymous hotline
reporting system, compliance training programs, auditing and
monitoring programs and a disciplinary system to enforce our
code of ethics and other compliance policies. It also includes a
process for screening all employees through applicable federal
and state databases of sanctioned individuals. Auditing and
monitoring activities include claims preparation and submission
and also cover issues such as coding, billing, and financial
arrangements with physicians. These areas are also the focus of
our specialized training programs.
Service
and Treatment Offerings
We believe our radiation treatment centers are distinguishable
from those of many of our competitors because we are able to
offer patients a full spectrum of radiation therapy
alternatives, including conventional external beam radiation
therapy and advanced services such as image guided radiation
therapy, intensity modulated radiation therapy,
3-D
conformal treatment planning, brachytherapy (including prostate
seed implants and high dose rate remote after-loading of
radioactive sources) and stereotactic radiosurgery. Radiation
therapy is given in one of two ways: externally or internally,
with some cancers treated with both internal and external
radiation therapy. Most people undergoing radiation therapy for
cancer are treated with external beam radiation therapy.
Radiation therapy is used to treat the most common types of
cancers including: prostate, breast, lung and colorectal.
External Beam Therapy.
External beam radiation
therapy involves exposing the patient to an external source of
radiation through the use of a machine that directs radiation at
the cancer. Machines utilized for external beam radiation
therapy vary as some are better for treating cancers near the
surface of the skin and others are better for treating cancers
deeper in the body. A linear accelerator, the most common type
of machine used for external beam radiation therapy, can create
both high-energy and low-energy radiation. High-energy radiation
is used to treat many types of cancer while low-energy radiation
is used to treat some forms of skin cancer. A course of external
beam radiation therapy normally ranges from 20 to 40 treatments.
Treatments generally are given to a patient once each day with
each session lasting for 10 to 20 minutes.
Internal Radiation Therapy.
Internal radiation
therapy also called brachytherapy, involves the placement of the
radiation source inside the body. The source of the radiation
(such as radioactive iodine) is sealed in a small holder called
an implant and is introduced through the aid of thin wires or
plastic tubes. Internal radiation therapy places the radiation
source as close as possible to the cancer cells and delivers a
higher dose of radiation in a shorter time than is possible with
external beam treatments. Internal radiation therapy is
typically used for cancers of the lung, esophagus, breast,
uterus, thyroid, cervix and prostate. Implants may be removed
after a short time or left in place permanently (with the
radioactivity of the implant dissipating over a short time
frame). Temporary implants may be either low-dose rate or
high-dose rate. Low-dose rate implants are left in place for
several days; high-dose rate implants are removed after a few
minutes.
Since all of our treatment centers are clustered into local
markets, our treatment centers are distinguished from those of
many of our competitors by our ability to offer advanced
radiation therapy services. Our advanced radiation treatment
services include: image guided radiation therapy, intensity
modulated radiation therapy,
3-D
conformal treatment planning, stereotactic radiosurgery and
high-dose and low-dose rate brachytherapy.
E-9
The following table sets forth the forms of radiation therapy
services and treatments that we offer:
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Technologies:
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Description:
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Image Guided Radiation Therapy (IGRT)
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Enables radiation oncologists to utilize imaging at time of
treatment to localize tumors and to accurately mirror the
contour of a tumor from any angle.
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Intensity Modulated Radiation Therapy (IMRT)
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Enables radiation oncologist to adjust the intensity of
radiation levels delivered to more effectively treat certain
cancers.
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Respiratory Gating
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Enables radiation oncologist to treat cancers in the lung and
upper abdomen with a noninvasive technique that accounts for
respiratory motion allowing more accurate treatment.
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3-D
Conformal Treatment Planning
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Enables radiation oncologist to utilize three dimensional images
of tumors to more accurately and effectively plan radiation
treatments.
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Stereotactic Radiosurgery
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Enables delivery of very high doses of radiation treatment to
certain lesions such as brain cancers.
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High-Dose Rate Remote Brachytherapy
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Enables radiation oncologist to treat cancer by internally
delivering higher doses of radiation directly to the cancer for
a few minutes.
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Low-Dose Rate Brachytherapy
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Enables radiation oncologist to treat cancer by internally
delivering lower doses of radiation directly to the cancer over
an extended period of time (e.g., prostate seed implants).
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Image Guided Radiation Therapy.
This
technology provides the radiation oncologist with a mechanism to
achieve increased precision in radiation therapy targeting. The
technique utilizes high-resolution x-rays, CT scans or
ultrasound imaging to pinpoint internal tumor sites before
treatment and overcomes the limitations of conventional skin
marking traditionally used for patient positioning. IGRT
represents the convergence of medical imaging and high precision
external beam therapy.
Intensity Modulated Radiation Therapy.
With
IMRT, radiation can be focused at thousands of pinpoints and
delivered by varying levels of beam intensity directly to a
tumor. Because IMRT uses variable intensity beams, it can be
used to treat tumors to higher doses and better spare normal
tissue. IMRT technology can be programmed to actually wrap and
angle beams of radiation around normal tissue and organs,
protecting good cells as it destroys the tumor. As
such, IMRT patients typically experience fewer side effects,
which helps them to maintain their strength and lead more normal
lifestyles during treatment.
Respiratory gating.
This noninvasive technique
allows radiation targeting and delivery to account for
respiratory motion in the treatment of cancers in the lung and
upper abdomen, protecting healthy structures while directing
higher doses of radiation to the tumor. Respiratory gating
matches radiation treatment to a patients respiratory
pattern. When a person breathes, the chest wall moves in and
out, and any structures inside the chest and upper abdomen also
move. In the past, when radiation beams were aimed at a target
inside those areas of the body, movement had to be accounted for
by planning a large treatment area. With respiratory gating,
radiation treatment is timed to an individuals breathing
pattern with the beam delivered only when the tumor is in the
targeted area.
3-D
Conformal Treatment
Planning.
3-D
conformal treatment planning and computer simulation produces an
accurate image of the tumor and surrounding organs so that
multiple radiation beams can be shaped exactly to the contour of
the treatment area. Because the radiation beams are precisely
focused, nearby normal tissue is spared from radiation. In
3-D
conformal treatment planning,
state-of-the-art
radiation therapy immobilization devices and computerized
dosimetric software are utilized so that CT scans can be
directly incorporated into the radiation therapy plan.
E-10
Stereotactic Radiosurgery / Stereotactic
Radiotherapy.
Stereotactic
radiosurgery / radiotherapy involves a single or a few
intense high-dose fraction(s) of radiation to a small area. This
form of therapy typically is used to treat tumors that cannot be
treated by other means, such as surgery or chemotherapy. Precise
calculations for radiation delivery are required. Treatment also
requires extensive clinical planning and is provided in
conjunction with the referring surgeon and under the direct
supervision of a radiation oncologist and a physicist.
Stereotactic radiosurgery often involves very careful
immobilization of the patient. For example, cranial radiosurgery
might involve the use of a neurosurgical head frame to assure
precise tumor localization. With recent advances in imaging
technologies, stereotactic technique can now be used to treat
extra-cranial cancers to a higher dose with target localization
and image verifications. These advances broaden the types of
cancers that can be successfully treated with stereotactic
radiosurgery.
Brachytherapy.
Brachytherapy involves the use
of surgical and fiberoptic procedures to place high-dose rate or
low-dose rate sources of radiation in the patients body.
This technique is used for implantation of sources into the
prostate, intraluminal therapy within the esophagus and
endobronchial therapy within the lungs. Prostate seed implants
involve the permanent placement of radioactive pellets within
the prostate gland.
High-Dose Rate Remote Brachytherapy.
In
high-dose rate remote brachytherapy, a computer sends the
radioactive source through a tube to a catheter or catheters
that have been placed near the tumor by the specialist working
with the radiation oncologist. The radioactivity remains at the
tumor for only a few minutes. In some cases, several remote
treatments may be required, and the catheters may stay in place
between treatments. High-dose rate remote brachytherapy is
available in most of our local markets and patients receiving
this treatment are able to return home after each treatment.
This form of brachytherapy has been used to treat cancers of the
cervix, breast, lung, biliary tree, prostate and esophagus.
MammoSite
®
Radiation Therapy is used for partial breast irradiation and
works by delivering radiation from inside the lumpectomy cavity
directly to the tissue where the cancer is most likely to recur.
Low-Dose Rate Brachytherapy.
We are actively
involved in radioactive seed implantation for prostate cancer,
the most frequent application of low-dose rate brachytherapy.
There are several advantages to low-dose rate brachytherapy in
the treatment of prostate cancer, including convenience to the
patient as the patient generally can resume normal daily
activities within hours after the procedure. This procedure is
performed by a team of physicians and staff with nearly a decade
of experience in prostate brachytherapy. During the procedure,
radioactive sources or seeds are inserted directly
into the prostate, minimizing radiation exposure to surrounding
tissues while permitting an escalation of the dose concentrated
in the area of the cancer.
E-11
All of our markets provide external beam treatments and
following is a list of the advanced services and treatments that
we offer within each of our 24 local markets as of
December 31, 2006:
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Stereotactic
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Brachytherapy
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Year
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Number of
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Extra-
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High
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Low
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Local market
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Established
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Centers
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IMRT
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3-D
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IGRT
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Cranial
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Cranial
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Dose
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Dose
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Lee County Florida
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1983
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5
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ü
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ü
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ü
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ü
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ü
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ü
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ü
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Charlotte/ Desoto Counties Florida
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1986
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2
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ü
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ü
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ü
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ü
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ü
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ü
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ü
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Sarasota/ Manatee Counties Florida
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1992
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4
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ü
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ü
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ü
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ü
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ü
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ü
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ü
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Collier County Florida
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1993
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2
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ü
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ü
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ü
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ü
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ü
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ü
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ü
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Broward County Florida
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1993
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4
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ü
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ü
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ü
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ü
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ü
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ü
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Dade County Florida
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1996
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2
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ü
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ü
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ü
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ü
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Las Vegas, Nevada
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1997
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9
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ü
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ü
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ü
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ü
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ü
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ü
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ü
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Westchester/ Bronx New York
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1997
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3
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ü
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ü
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ü
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ü
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ü
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ü
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ü
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Mohawk Valley, New York
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1998
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3
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ü
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ü
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ü
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ü
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ü
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ü
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Delmarva Peninsula
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1998
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3
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ü
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ü
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ü
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ü
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ü
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Northwest Florida
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2001
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3
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ü
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ü
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ü
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ü
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ü
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Western North Carolina
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2002
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7
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ü
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ü
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ü
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ü
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Palm Beach County Florida
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2002
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1
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ü
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ü
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ü
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ü
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ü
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Central Kentucky
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2003
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3
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ü
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ü
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ü
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ü
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ü
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Florida Keys
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2003
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1
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ü
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ü
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ü
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ü
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Southeastern Alabama
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2003
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2
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ü
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ü
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ü
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ü
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ü
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Central Maryland
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2003
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4
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ü
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ü
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ü
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ü
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South New Jersey
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2004
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3
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ü
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ü
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ü
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ü
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ü
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Rhode Island
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2004
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3
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ü
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ü
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ü
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ü
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ü
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ü
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Scottsdale, Arizona
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2005
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1
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ü
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ü
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ü
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ü
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ü
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ü
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Holyoke, Massachusetts
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2005
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1
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ü
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ü
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ü
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ü
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Palm Springs, California
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2005
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1
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ü
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ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
ü
|
|
Los Angeles, California
|
|
|
2006
|
|
|
|
2
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
ü
|
|
|
|
ü
|
|
Southeastern Michigan
|
|
|
2006
|
|
|
|
7
|
|
|
|
ü
|
|
|
|
ü
|
|
|
|
|
|
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|
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ü
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|
|
|
ü
|
|
Treatment
Centers
As of December 31, 2006, we owned, operated and managed
66 freestanding and 10 hospital-based treatment
centers in our 24 local markets of which:
|
|
|
|
|
22 were internally developed;
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|
|
|
44 were acquired; and
|
|
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|
10 are hospital-based.
|
Internally Developed.
As of December 31,
2006, we operated 22 internally developed treatment centers
located in California, Florida, Maryland, Nevada and Rhode
Island and although we did not internally develop any new
treatment centers in 2006, we plan to continue developing new
treatment centers within our local markets. Our team is
experienced in the design and construction of radiation
treatment centers, having developed 5 treatment centers in
the past three years. Our newly-developed treatment centers
typically achieve positive cash flow within six to twelve months
after opening. The following table sets forth the locations and
E-12
other information regarding each of our internally developed
radiation treatment centers in our local markets as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
Treatment Center
|
|
Year
|
|
|
Owned/Managed
|
|
|
Lee County Florida
|
|
|
|
|
|
|
|
|
Broadway
|
|
|
1983
|
|
|
|
Owned
|
|
Cape Coral
|
|
|
1984
|
|
|
|
Owned
|
|
Lakes Park
|
|
|
1987
|
|
|
|
Owned
|
|
Bonita Springs
|
|
|
2002
|
|
|
|
Owned
|
|
Lehigh Acres
|
|
|
2003
|
|
|
|
Owned
|
|
Charlotte/ Desoto Counties Florida
|
|
|
|
|
|
|
|
|
Port Charlotte
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|
|
1986
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|
|
|
Owned
|
|
Arcadia
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|
|
1993
|
|
|
|
Owned
|
|
Sarasota/ Manatee Counties Florida
|
|
|
|
|
|
|
|
|
Englewood
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|
|
1992
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|
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|
Owned
|
|
Sarasota
|
|
|
1996
|
|
|
|
Owned
|
|
Venice
|
|
|
1998
|
|
|
|
Owned
|
|
Bradenton
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|
|
2002
|
|
|
|
Owned
|
|
Collier County Florida
|
|
|
|
|
|
|
|
|
South Naples
|
|
|
1993
|
|
|
|
Owned
|
|
North Naples
|
|
|
1999
|
|
|
|
Owned
|
|
Northwest Florida
|
|
|
|
|
|
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|
|
Destin
|
|
|
2004
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|
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|
Owned
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|
Crestview
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|
|
2004
|
|
|
|
Owned
|
|
Palm Beach County Florida
|
|
|
|
|
|
|
|
|
West Palm Beach(1)
|
|
|
2002
|
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|
Owned
|
|
Las Vegas, Nevada
|
|
|
|
|
|
|
|
|
Henderson
|
|
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2000
|
|
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Managed
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Lake Mead
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|
|
2000
|
|
|
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Managed
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|
Central Maryland
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|
|
|
|
|
|
|
|
Owings Mills(2)
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|
|
2003
|
|
|
|
Owned
|
|
Rhode Island
|
|
|
|
|
|
|
|
|
Woonsocket(3)
|
|
|
2004
|
|
|
|
Owned
|
|
South County(4)
|
|
|
2005
|
|
|
|
Owned
|
|
Palm Springs, California
|
|
|
|
|
|
|
|
|
Palm Springs
|
|
|
2005
|
|
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Managed
|
|
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|
|
(1)
|
|
We own a 50.0% ownership interest in the limited liability
company (LLC) that provides radiation oncologists and
operates the treatment center; we also provide physics and
dosimetry services to the LLC.
|
|
(2)
|
|
We have a 90.0% ownership interest in this treatment center.
|
|
(3)
|
|
We have a 62.0% ownership interest in this treatment center.
|
|
(4)
|
|
We have a 63.5% ownership interest in this treatment center.
|
Acquired Treatment Centers.
As of
December 31, 2006, we operated 44 acquired treatment
centers located in Alabama, Arizona, California, Florida,
Kentucky, Maryland, Massachusetts, Michigan, Nevada, New Jersey,
New York, North Carolina, and West Virginia. Over the past three
years, we have acquired 24 treatment centers of which 11 were
acquired in 2006. We plan to continue to enter new markets
through the acquisition of established treatment centers that
provide us the opportunity to leverage our current
E-13
infrastructure. As part of our ongoing acquisition strategy, we
continually evaluate potential acquisition opportunities.
The following table sets forth the locations and other
information regarding each of the acquired radiation treatment
centers in our local markets as of December 31, 2006:
|
|
|
|
|
|
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|
|
Treatment Center
|
|
Year
|
|
|
Owned/Managed
|
|
|
Broward County Florida
|
|
|
|
|
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|
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Plantation
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|
|
1993
|
|
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Owned
|
|
Deerfield Beach
|
|
|
1994
|
|
|
|
Owned
|
|
Coral Springs
|
|
|
1994
|
|
|
|
Owned
|
|
Tamarac
|
|
|
1999
|
|
|
|
Owned
|
|
Northwest Florida
|
|
|
|
|
|
|
|
|
Fort Walton Beach
|
|
|
2001
|
|
|
|
Owned
|
|
Florida Keys
|
|
|
|
|
|
|
|
|
Key West
|
|
|
2003
|
|
|
|
Owned
|
|
Las Vegas, Nevada
|
|
|
|
|
|
|
|
|
Las Vegas (2 locations)
|
|
|
1997
|
|
|
|
Managed
|
|
Las Vegas (5 locations)
|
|
|
2005
|
|
|
|
Managed
|
|
Westchester/ Bronx New York
|
|
|
|
|
|
|
|
|
Riverhill
|
|
|
1998
|
|
|
|
Managed
|
|
Delmarva Peninsula
|
|
|
|
|
|
|
|
|
Berlin, Maryland(1)
|
|
|
1998
|
|
|
|
Owned
|
|
Western North Carolina
|
|
|
|
|
|
|
|
|
Asheville
|
|
|
2002
|
|
|
|
Managed
|
|
Clyde
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|
|
2002
|
|
|
|
Managed
|
|
Brevard
|
|
|
2002
|
|
|
|
Managed
|
|
Franklin
|
|
|
2002
|
|
|
|
Managed
|
|
Marion
|
|
|
2002
|
|
|
|
Managed
|
|
Rutherford
|
|
|
2002
|
|
|
|
Managed
|
|
Park Ridge
|
|
|
2003
|
|
|
|
Managed
|
|
Central Kentucky
|
|
|
|
|
|
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|
|
Danville
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|
|
2003
|
|
|
|
Owned
|
|
Louisville(2)
|
|
|
2003
|
|
|
|
Owned
|
|
Frankfort
|
|
|
2003
|
|
|
|
Owned
|
|
Southeastern Alabama
|
|
|
|
|
|
|
|
|
Dothan
|
|
|
2003
|
|
|
|
Managed
|
|
Opp
|
|
|
2006
|
|
|
|
Managed
|
|
South New Jersey
|
|
|
|
|
|
|
|
|
Woodbury
|
|
|
2004
|
|
|
|
Owned
|
|
Voorhees
|
|
|
2004
|
|
|
|
Owned
|
|
Willingboro
|
|
|
2004
|
|
|
|
Owned
|
|
Central Maryland
|
|
|
|
|
|
|
|
|
Martinsburg, West Virginia(3)
|
|
|
2005
|
|
|
|
Managed
|
|
Greenbelt, Maryland
|
|
|
2005
|
|
|
|
Managed
|
|
Belcamp, Maryland(4)
|
|
|
2005
|
|
|
|
Owned
|
|
Bel Air, Maryland
|
|
|
2006
|
|
|
|
Owned
|
|
E-14
|
|
|
|
|
|
|
|
|
Treatment Center
|
|
Year
|
|
|
Owned/Managed
|
|
|
Scottsdale, Arizona
|
|
|
|
|
|
|
|
|
Scottsdale
|
|
|
2005
|
|
|
|
Owned
|
|
Holyoke, Massachusetts
|
|
|
|
|
|
|
|
|
Holyoke
|
|
|
2005
|
|
|
|
Managed
|
|
Los Angeles, California
|
|
|
|
|
|
|
|
|
Santa Monica
|
|
|
2006
|
|
|
|
Managed
|
|
Beverly Hills
|
|
|
2006
|
|
|
|
Managed
|
|
Southeastern Michigan
|
|
|
|
|
|
|
|
|
Pontiac
|
|
|
2006
|
|
|
|
Managed
|
|
Madison Heights
|
|
|
2006
|
|
|
|
Managed
|
|
Clarkson
|
|
|
2006
|
|
|
|
Managed
|
|
Monroe
|
|
|
2006
|
|
|
|
Managed
|
|
Farmington Hills
|
|
|
2006
|
|
|
|
Managed
|
|
Eastpointe
|
|
|
2006
|
|
|
|
Managed
|
|
Macomb
|
|
|
2006
|
|
|
|
Managed
|
|
|
|
|
(1)
|
|
We have a 50.1% ownership interest in this treatment center
|
|
(2)
|
|
We have a 90.0% ownership interest in this treatment center.
|
|
(3)
|
|
We have a 60.0% ownership interest in this treatment center.
|
|
(4)
|
|
Belcamp treatment center included in the acquisition of the Bel
Air, Maryland treatment center, as we expect to combine the
external beam treatments.
|
Hospital-Based Treatment Centers.
As of
December 31, 2006, we operated 10 hospital-based
treatment centers. We provide services at all of our
hospital-based treatment centers pursuant to written agreements
with the hospitals. At the Florida treatment centers, we provide
the services of our radiation oncologists to the hospital and
receive the professional fees charged for such services. We also
provide physics and dosimetry services on a
fee-for-service
basis. In 1998, we entered into a joint venture arrangement with
a hospital in Mohawk Valley New York. We have a 37%
interest in the joint venture, which provides equipment for the
three treatment centers that provide service in the Mohawk
Valley local market. We also manage these treatment centers
pursuant to an agreement with the hospital. On May 15,
2002, we executed an administrative services agreement with a
hospital in Bronx, New York to provide administrative services
and do so for a monthly fixed fee. In addition, effective
March 1, 2006, we extended an administrative services
agreement with a hospital in Salisbury, Maryland to provide
administrative services for a
34-month
term for a monthly fixed fee. A professional corporation owned
by certain of our shareholders provides the radiation
oncologists for this treatment center and the treatment centers
in Mohawk Valley New York. In connection with our
hospital-based treatment center services, we provide technical
and administrative services. Professional services in New York
are provided by physicians employed by a professional
corporation owned by certain of our officers, directors and
principal shareholders. Professional services consist of
services provided by radiation oncologists to patients.
Technical services consist of the non-professional services
provided by us in connection with radiation treatments
administered to patients. Administrative services consist of
services provided by us to the hospital-based center. The
contracts under which the hospital based treatment centers are
provided service are generally three to seven years with terms
for renewal. The following table sets forth the
E-15
locations and other information regarding each of our
hospital-based radiation treatment centers in our local markets
as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Provided
|
Treatment Center
|
|
Year
|
|
|
Professional
|
|
Technical
|
|
Administrative
|
|
Dade County Florida
|
|
|
|
|
|
|
|
|
|
|
Hialeah
|
|
|
1996
|
|
|
ü
|
|
|
|
|
Aventura
|
|
|
1999
|
|
|
ü
|
|
ü
|
|
|
Westchester/ Bronx New York
|
|
|
|
|
|
|
|
|
|
|
Bronx(1)
|
|
|
2003
|
|
|
|
|
ü
|
|
ü
|
Northern Westchester(1)
|
|
|
2005
|
|
|
|
|
ü
|
|
ü
|
Mohawk Valley New York
|
|
|
|
|
|
|
|
|
|
|
Utica(1)
|
|
|
1998
|
|
|
|
|
ü
|
|
ü
|
Rome(1)
|
|
|
1999
|
|
|
|
|
ü
|
|
ü
|
Herkimer(1)
|
|
|
1999
|
|
|
|
|
ü
|
|
ü
|
Delmarva Peninsula
|
|
|
|
|
|
|
|
|
|
|
Salisbury, Maryland(2)
|
|
|
2003
|
|
|
|
|
ü
|
|
ü
|
Seaford, Delaware(2)
|
|
|
2003
|
|
|
|
|
ü
|
|
ü
|
Rhode Island
|
|
|
|
|
|
|
|
|
|
|
Providence(3)
|
|
|
2005
|
|
|
|
|
ü
|
|
ü
|
|
|
|
(1)
|
|
Professional services are provided by physicians employed by a
professional corporation owned by certain of our officers and
directors. Our wholly-owned New York subsidiary contracts with
the hospital through an administrative services agreement for
the provision of technical and administrative services.
|
|
(2)
|
|
Professional services are provided by physicians employed by a
professional corporation owned by certain of our officers and
directors. Our wholly-owned Maryland subsidiary contracts with
the hospital through an administrative services agreement for
the provision of technical and administrative services.
|
|
(3)
|
|
Professional services are provided by physicians employed by a
professional corporation owned by certain of our officers and
directors. Our wholly-owned Massachusetts subsidiary contracts
with the hospital through an administrative services agreement
for the provision of technical and administrative services.
|
Treatment
Center Structure
Arizona, Florida, Kentucky, Maryland, New Jersey, and Rhode
Island Treatment Centers.
In Arizona, Florida,
Kentucky, Maryland, New Jersey, and Rhode Island we employ or
contract with radiation oncologists and other healthcare
professionals. Substantially all of our Florida, Kentucky,
Maryland, New Jersey and Rhode Island radiation oncologists have
employment agreements with us. While we exercise legal control
over radiation oncologists we employ, we do not exercise control
over, or otherwise influence, their medical judgment or
professional decisions. Such radiation oncologists typically
receive a base salary, fringe benefits and may be eligible for
an incentive performance bonus. In addition to compensation, we
provide our radiation oncologists with uniform benefit plans,
such as disability, retirement, life and group health insurance
and medical malpractice insurance. The radiation oncologists are
required to hold a valid license to practice medicine in the
jurisdiction in which they practice and, with respect to
inpatient or hospital services, to become a member of the
medical staff at the contracting hospital with privileges in
radiation oncology. We are responsible for billing patients,
hospitals and third-party payers for services rendered by our
radiation oncologists. Most of our employment agreements
prohibit the physician from competing with us within a defined
geographic area and prohibit solicitation of our radiation
oncologists, other employees or patients for a period of one to
two years after termination of employment.
Alabama, California, Delaware, Massachusetts, Michigan,
Nevada, New York, North Carolina, and West Virginia
Treatment Centers.
Many states, including
Alabama, California, Delaware, Massachusetts, Michigan, Nevada,
New York, North Carolina, and West Virginia prohibit us from
employing radiation oncologists. As a
E-16
result, we operate our treatment centers in such states pursuant
to administrative services agreements between professional
corporations and our wholly-owned subsidiaries. In the states of
Alabama, California and Massachusetts, our treatment centers are
operated as physician office practices. We typically provide
technical services to these treatment centers in addition to our
administrative services. For the years ended December 31,
2005, and 2006 approximately 29.0% and 32.0% of our net patient
service revenue, respectively, was generated by professional
corporations with which we have administrative services
agreements. The professional corporations with which we have
administrative services agreements in California, Delaware,
Massachusetts, Michigan, Nevada, New York, North Carolina and
West Virginia are owned by certain of our executive officers,
directors and shareholders, who are licensed to practice
medicine in the respective state. In Alabama, the professional
corporation with which we have an administrative services
agreement is owned by a radiation oncologist licensed to
practice medicine in Alabama.
Our administrative services agreements generally obligate us to
provide certain treatment centers with equipment, staffing,
accounting services, billing and collection services,
management, technical and administrative personnel, assistance
in managed care contracting and assistance in marketing. Our
administrative services agreements typically provide for the
professional corporations to pay us a fixed monthly service fee,
which represents the fair market value of our services. It also
provides for the parties to meet annually to reevaluate the
value of our services and establish the fair market value. In
Alabama, California, and Nevada we are paid a fee based upon a
fixed percentage of global revenue. In Michigan, we are paid a
fee based upon a fixed percentage of net income. The terms of
our administrative services agreements with professional
corporations range from 20 to 25 years and typically
renew automatically for additional five-year periods. Under
related agreements in certain states, we have the right to
designate purchases of shares held by the physician owners of
the professional corporations to qualified individuals under
certain circumstances.
Our administrative services agreements contain restrictive
covenants that preclude the professional corporations from
hiring another management services organization for some period
after termination. The professional corporations are parties to
employment agreements with the radiation oncologists. The terms
of these employment agreements typically range from three to
five years depending on the physicians experience. The
employment agreements also typically require the radiation
oncologists to use their best efforts to network with referring
physicians and otherwise contain covenants not to compete.
Marketing
Our radiation oncologists are primarily referred patients by:
primary care physicians, medical oncologists, surgical
oncologists, urologists, pulmonologists, neurosurgeons and other
physicians within the medical community. Our radiation
oncologists are expected to actively develop their referral base
by establishing strong clinical relationships with referring
physicians. Our radiation oncologists develop these
relationships by describing the variety and advanced nature of
the therapies offered at our treatment centers, by providing
seminars on advanced treatment procedures and by involving the
referring physicians in those advanced treatment procedures.
Patient referrals to our radiation oncologists also are
influenced by managed care organizations with which we actively
pursue contractual agreements.
We create standardized educational and informational materials
for our treatment centers. In addition, we advertise our
treatment centers and radiation oncologists in select markets.
Employees
As of December 31, 2006, we employed approximately
1,240 persons. As of December 31, 2006, we were
affiliated with 86 radiation oncologists of which 65 are
employed by us. We do not employ any radiation oncologists in
Alabama, California, Delaware, Massachusetts, Michigan, Nevada,
New York, North Carolina or West Virginia. None of our employees
is a party to a collective bargaining agreement and we consider
our relationship with our employees to be good. There currently
is a nationwide shortage of radiation oncologists, medical
technicians and other medical support personnel, which makes
recruiting and retaining these employees difficult. We provide
competitive wages and benefits and offer our employees a
professional work
E-17
environment that we believe helps us recruit and retain the
staff we need to operate and manage our treatment centers. In
addition to our radiation oncologists we currently employ 11
gynecologic oncologists, 8 surgical oncologists and 17
urologists whose practices complement our business in four
markets in Florida and in our Michigan operations.
Seasonality
Our results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to fluctuate.
Many of the patients of our Florida treatment centers are
part-time residents in Florida during the winter months. Hence,
these treatment centers have historically experienced higher
utilization rates during the winter months than during the
remainder of the year. In addition, referrals are typically
lower in the summer months due to traditional vacation periods.
Insurance
We are subject to claims and legal actions in the ordinary
course of business. To cover these claims, we maintain
professional malpractice liability insurance and general
liability insurance in amounts we believe are sufficient for our
operations. We maintain professional malpractice liability
insurance that provides primary coverage on a claims-made basis
per incident and in annual aggregate amounts. Our professional
malpractice liability insurance coverage is provided by
Lexington Insurance Company and in turn reinsured by an
insurance company owned by certain of our officers and
directors. This insurance company is managed by an affiliate of
Aon Corporation. The malpractice insurance provided by this
insurance company varies in coverage limits for individual
physicians. The insurance company also carries excess
claims-made coverage through Lloyds of London in the
aggregate amount of $15.0 million.
In addition, we currently maintain multiple layers of umbrella
coverage through our general liability insurance policies in the
aggregate amount of $10.0 million. We maintain Directors
and Officers liability insurance in the aggregate amount of
$25.0 million.
Hazardous
Materials
We are subject to various federal, state and local laws and
regulations governing the use, discharge and disposal of
hazardous materials, including medical waste products. We
believe that all of our treatment centers comply with these laws
and regulations and we do not anticipate that any of these laws
will have a material adverse effect on our operations.
Although our linear accelerators and certain other equipment do
not use radioactive or other hazardous materials, our treatment
centers do provide specialized treatment involving the
implantation of radioactive material in the prostate and other
organs. The radioactive sources generally are obtained from, and
returned to, the suppliers, which have the ultimate
responsibility for their proper disposal. We, however, remain
subject to state and federal laws regulating the protection of
employees who may be exposed to hazardous material and the
proper handling, storage and disposal of that material.
Competition
The radiation therapy market is highly fragmented and our
business is highly competitive. Competition may result from
other radiation oncology practices, solo practitioners,
companies in other healthcare industry segments, large physician
group practices or radiation oncology physician practice
management companies, hospitals and other operators of other
radiation treatment centers, some of which may have greater
financial and other resources than us.
Intellectual
Property
We have not registered our service marks or any of our logos
with the United States Patent and Trademark Office. However,
some of our service marks and logos may be subject to other
common law intellectual property rights. To date, we have not
relied heavily on patents or other intellectual property in
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operating our business. Nevertheless, some of the information
technology purchased or used by us may be patented or subject to
other intellectual property rights. As a result, we may be found
to be, or actions may be brought against us alleging that we
are, infringing on the trademark, patent or other intellectual
property rights of others, which could give rise to substantial
claims against us. In the future, we may wish to obtain or
develop trademarks, patents or other intellectual property.
However, other practices and public entities, including
universities, may have filed applications for (or have been
issued) trademarks or patents that may be the same as or similar
to those developed or otherwise obtained by us or that we may
need in the development of our own intellectual property. The
scope and validity of such trademark, patent and other
intellectual property rights, the extent to which we may wish or
need to acquire such rights and the cost or availability of such
rights are presently unknown. In addition, we cannot provide
assurance that others will not obtain access to our intellectual
property or independently develop the same or similar
intellectual property to that developed or otherwise obtained by
us.
Government
Regulations
The healthcare industry is highly regulated and the federal and
state laws that affect our business are significant. Federal law
and regulations are based primarily upon the Medicare and
Medicaid programs, each of which is financed, at least in part,
with federal money. State jurisdiction is based upon the
states authority to license certain categories of
healthcare professionals and providers and the states
interest in regulating the quality of healthcare in the state,
regardless of the source of payment. The significant areas of
federal and state regulatory laws that could affect our ability
to conduct our business include those regarding:
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false and other improper claims;
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the Health Insurance Portability and Accountability Act of 1996,
or HIPAA;
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civil and monetary penalties law;
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privacy, security and code set regulations;
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anti-kickback
laws;
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the Stark Laws and other self-referral and financial inducement
laws;
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fee-splitting;
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corporate practice of medicine;
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anti-trust;
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licensing; and
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certificate of need.
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A violation of these laws could result in civil and criminal
penalties, the refund of monies paid by government
and/or
private payers, exclusion of the physician, the practice or us
from participation in Medicare and Medicaid programs
and/or
the
loss of a physicians license to practice medicine. We
believe we exercise care in our efforts to structure our
arrangements and our practices to comply with applicable federal
and state laws. We have a Medicare Compliance Committee that
periodically reviews our procedures and a Corporate Compliance
Program in place to review our practices. Although we believe we
are in material compliance with all applicable laws, these laws
are complex and a review of our practices by a court, or law
enforcement or regulatory authority could result in an adverse
determination that could harm our business. Furthermore, the
laws applicable to us are subject to change, interpretation and
amendment, which could adversely affect our ability to conduct
our business.
We estimate that approximately 53%, 50% and 52% of our net
patient service revenue for 2004, 2005 and 2006, respectively,
consisted of reimbursements from Medicaid and Medicare
government programs. In order to be certified to participate in
the Medicare and Medicaid programs, each provider must meet
applicable regulations of the Department of Health and Human
Services (HHS) relating to, among other things, the type of
facility, operating policies and procedures, maintenance
equipment, personnel, standards of
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medical care and compliance with applicable state and local
laws. Our radiation treatment centers are certified to
participate in the Medicare and Medicaid programs.
Federal
Law
The federal healthcare laws apply in any case in which we are
providing an item or service that is reimbursable under Medicare
or Medicaid. The principal federal laws that affect our business
include those that prohibit the filing of false or improper
claims with the Medicare or Medicaid programs, those that
prohibit unlawful inducements for the referral of business
reimbursable under Medicare or Medicaid and those that prohibit
the provision of certain services by a provider to a patient if
the patient was referred by a physician with which the provider
has certain types of financial relationships.
False and Other Improper Claims.
Under the
federal False Claims Act, the government may fine us if we
knowingly submit, or participate in submitting, any claims for
payment to the federal government that are false or fraudulent,
or that contain false or misleading information. A provider can
be found liable not only for submitting false claims with actual
knowledge, but also for doing so with reckless disregard or
deliberate ignorance of such falseness. In addition, knowingly
making or using a false record or statement to receive payment
from the federal government is also a violation. If we are ever
found to have violated the False Claims Act, we could be
required to make significant payments to the government
(including damages and penalties in addition to the
reimbursements previously collected) and could be excluded from
participating in Medicare, Medicaid and other federal healthcare
programs. Many states have similar false claims statutes.
Healthcare fraud is a priority of the United States Department
of Justice, Office of Inspector General and the Federal Bureau
of Investigation (FBI). They have devoted a
significant amount of resources to investigating healthcare
fraud.
While the criminal statutes generally are reserved for instances
evidencing fraudulent intent, the civil and administrative
penalty statutes are being applied by the federal government in
an increasingly broad range of circumstances. Examples of the
type of activity giving rise to liability for filing false
claims include billing for services not rendered,
misrepresenting services rendered (i.e., mis-coding) and
application for duplicate reimbursement. Additionally, the
federal government takes the position that a pattern of claiming
reimbursement for unnecessary services violates these statutes
if the claimant should have known that the services were
unnecessary. The federal government also takes the position that
claiming reimbursement for services that are substandard is a
violation of these statutes if the claimant should have known
that the care was substandard. Criminal penalties also are
available in the case of claims filed with private insurers if
the federal government shows that the claims constitute mail
fraud or wire fraud or violate a number of federal criminal
healthcare fraud statutes.
State Medicaid agencies also have certain fraud and abuse
authority. In addition, private insurers may bring actions under
state false claim laws. In certain circumstances, federal and
some state laws authorize private whistleblowers to bring false
claim or qui tam suits on behalf of the
government against providers and reward the whistleblower with a
portion of any final recovery. In addition, the federal
government has engaged a number of nongovernmental-audit
organizations to assist it in tracking and recovering false
claims for healthcare services.
Governmental investigations and whistleblower qui
tam suits against healthcare companies have increased
significantly in recent years and have resulted in substantial
penalties and fines.
We submit thousands of reimbursement claims to Medicare and
Medicaid each year and there can be no assurance that there are
no errors. We believe our billing and documentation practices
comply with applicable laws and regulations in all material
respects. Although we monitor our billing practices for
compliance with applicable laws, such laws are very complex and
we might not have sufficient regulation guidance to assist us in
our interpretation of these laws.
HIPAA Criminal Penalties.
The Health Insurance
Portability and Accountability Act of 1996, or HIPAA, created
criminal provisions, which impose criminal penalties for fraud
against any healthcare benefit program for theft or embezzlement
involving healthcare and for false statements in connection with
the payment of any
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health benefits. HIPAA also provided for broad prosecutorial
subpoena authority and authorized property forfeiture upon
conviction of a federal healthcare offense. Significantly, the
HIPAA provisions apply not only to federal programs, but also to
private health benefit programs. HIPAA also broadened the
authority of the Office of Inspector General (OIG) to exclude
participants from federal healthcare programs. Because of the
uncertainties as to how the HIPAA provisions will be enforced,
we currently are unable to predict their ultimate impact on us.
If the government were to seek any substantial penalties against
us, this could have a material adverse effect on us.
HIPAA Civil Penalties.
HIPAA broadened the
scope of certain fraud and abuse laws by adding several civil
statutes that apply to all healthcare services, whether or not
they are reimbursed under a federal healthcare program. HIPAA
established civil monetary penalties for certain conduct,
including upcoding and billing for medically unnecessary goods
or services.
HIPAA Administrative Simplifications.
HIPAA
includes statutory provisions which have authorized the
Department of Health and Human Services, or HHS to issue
regulations and standards for electronic transactions regarding
the privacy and security of healthcare information which apply
to us and our treatment centers.
The HIPAA regulations include:
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privacy regulations that protect individual privacy by limiting
the uses and disclosures of individually identifiable health
information and creating various privacy rights for individuals;
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security regulations that require covered entities to implement
administrative, physical and technological safeguards to ensure
the confidentiality, integrity and availability of individually
identifiable health information in electronic form; and
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transaction standards and regulations that prescribe specific
transaction formats and data code sets for specified electronic
healthcare transactions.
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If we fail to comply with the HIPAA regulations, we may be
subject to civil monetary penalties enforced by HHS and, in
certain circumstances, criminal penalties enforced by the
Department of Justice. Under HIPAA, covered entities may be
subject to civil monetary penalties in the amount of $100 per
violation, capped at a maximum of $25,000 per year for violation
of any particular standard. However, civil monetary penalties
may not be assessed if a covered entitys failure to comply
is based on reasonable cause and not willful neglect, and the
failure to comply is remedied within 30 days, or a longer
period determined to be appropriate by HHS. On April 17,
2003, HHS published an interim final rule regarding civil
monetary penalties. The rule largely deals with procedural
issues regarding imposition of penalties, and does not address
substantive issues regarding what violations will result in the
imposition of a civil monetary penalty and what factors will be
taken into account in determining the amount of a penalty. The
U.S. Department of Justice may seek to impose criminal
penalties for intentional violations of HIPAA. Criminal
penalties under HIPAA vary depending upon the nature of the
violation but could include fines of up to $250,000
and/or
imprisonment.
The HIPAA regulations related to privacy establish comprehensive
federal standards relating to the use and disclosure of
individually identifiable health information or protected health
information. The privacy regulations establish limits on the use
and disclosure of protected health information, provide for
patients rights, including rights to access, request
amendment of, and receive an accounting of certain disclosures
of protected health information, and require certain safeguards
to protect protected health information. In general, the privacy
regulations do not supersede state laws that are more stringent
or grant greater privacy rights to individuals. Thus, we must
reconcile the privacy regulations and other state privacy laws.
Our operations that are regulated by HIPAA were required to be
in compliance with the privacy regulations by April 14,
2003. We believe our operations are in material compliance with
the privacy regulations, but there can be no assurance that the
federal government would determine that we are in compliance.
The HIPAA security regulations establish detailed requirements
for safeguarding protected health information that is
electronically transmitted or electronically stored. We were
required to comply with the security regulations by
April 21, 2005. Some of the security regulations are
technical in nature, while others
E-21
may be addressed through policies and procedures. The technical
regulations required us to incur significant costs in ensuring
that our systems and facilities have in place all of the
administrative, technical and physical safeguards to meet all of
the implementation specifications. We believe our operations are
in material compliance with the security regulations, but there
can be no assurance that the federal government would determine
that we are in compliance.
The HIPAA transaction standards regulations are intended to
simplify the electronic claims process and other healthcare
transactions by encouraging electronic transmission rather than
paper submission. These regulations provide for uniform
standards for data reporting, formatting and coding that we must
use in certain transactions with health plans. Our compliance
date for these regulations was October 16, 2003 and we
implemented or upgraded our computer and information systems as
we believed necessary to comply with the new regulations.
Although we believe that we are in material compliance with
these HIPAA regulations with which compliance is currently
required, the HIPAA regulations are expected to continue to
impact us operationally and financially and will pose increased
regulatory risk.
Anti-Kickback
Law.
Federal law commonly known as the
Anti-kickback
Statute prohibits the knowing and willful offer,
solicitation, payment or receipt of anything of value (direct or
indirect, overt or covert, in cash or in kind) which is intended
to induce:
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the referral of an individual for a service for which payment
may be made by Medicare and Medicaid or certain other federal
healthcare programs; or
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the ordering, purchasing, leasing, or arranging for, or
recommending the purchase, lease or order of, any service or
item for which payment may be made by Medicare, Medicaid or
certain other federal healthcare programs.
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The law has been broadly interpreted by a number of courts to
prohibit remuneration which is offered or paid for otherwise
legitimate purposes if the circumstances show that one purpose
of the arrangement is to induce referrals. Even bona fide
investment interests in a healthcare provider may be questioned
under the
Anti-kickback
Statute if the government concludes that the opportunity to
invest was offered as an inducement for referrals. The penalties
for violations of this law include criminal sanctions including
fines
and/or
imprisonment and exclusion from federal healthcare programs.
The federal government has published regulations that provide
safe-harbors that protect from prosecution under the
Anti-kickback
Statute business transactions that meet certain requirements.
Failure to meet the requirements of a safe harbor, however, does
not necessarily mean a transaction violates the
Anti-kickback
Statute. There are several aspects of our relationships with
physicians to which the
Anti-kickback
Statute may be relevant. We claim reimbursement from Medicare or
Medicaid for services that are ordered, in some cases, by our
radiation oncologists who hold shares, or options to purchase
shares, of our common stock. In addition, other physicians who
are investors in us may refer patients to us for those services.
Although neither the existing nor potential investments in us by
physicians qualify for protection under the safe harbor
regulations, we do not believe that these activities fall within
the type of activities the
Anti-kickback
Statute was intended to prohibit. We also claim reimbursement
from Medicare and Medicaid for services referred from other
healthcare providers with whom we have financial arrangements.
While we believe that these arrangements generally fall within
applicable safe harbors or otherwise do not violate the law,
there can be no assurance that the government will agree, in
which event we could be harmed.
We believe our operations are in material compliance with
applicable Medicare and Medicaid and fraud and abuse laws and
seek to structure arrangements to comply with applicable safe
harbors where reasonably possible. There is a risk however, that
the federal government might investigate such arrangements and
conclude they violate the
Anti-kickback
Statute. If our arrangements were found to be illegal, we, the
physician groups
and/or
the
individual physicians would be subject to civil and criminal
penalties, including
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exclusion from the participation in government reimbursement
programs, and our arrangements would not be legally enforceable,
which could materially adversely affect us.
Additionally, the OIG issues advisory opinions that provide
advice on whether proposed business arrangements violate the
anti-kickback law. In Advisory Opinion
98-4,
the
OIG addressed physician practice management arrangements. In
Advisory Opinion
98-4,
the
OIG found that administrative services fees based on a
percentage of practice revenue may violate the
Anti-kickback
Statute. This Advisory Opinion suggests that OIG might challenge
certain prices below Medicare reimbursement rates or
arrangements based on a percentage of revenue. We believe that
the fees we charge for our services under the administrative
services agreements are commensurate with the fair market value
of the services. While we believe our arrangements are in
material compliance with applicable law and regulations,
OIGs advisory opinion suggests there is a risk of an
adverse OIG finding relating to practices reviewed in the
advisory opinion. Any such finding could have a material adverse
impact on us.
The Stark Self-Referral Law.
We are also
subject to federal and state statutes banning payments for
referral of patients and referrals by physicians to healthcare
providers with whom the physicians have a financial
relationship. The Stark Self-Referral Law
(Stark II) prohibits a physician from referring a
patient to a healthcare provider for certain designated health
services reimbursable by Medicare or Medicaid if the physician
has a financial relationship with that provider, including an
investment interest, a loan or debt relationship or a
compensation relationship. The designated services covered by
the law include radiology services, infusion therapy, radiation
therapy and supplies, outpatient prescription drugs and hospital
services, among others. In addition to the conduct directly
prohibited by the law, the statute also prohibits
circumvention schemes, that are designed to obtain
referrals indirectly that cannot be made directly. The penalties
for violating the law include:
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a refund of any Medicare or Medicaid payments for services that
resulted from an unlawful referral;
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civil fines; and
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exclusion from the Medicare and Medicaid programs.
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Stark II contains exceptions applicable to our operations.
For example, Stark II exempts any referrals of radiation
oncologists for radiation therapy if (1) the request is
part of a consultation initiated by another physician; and
(2) the tests or services are furnished by or under the
supervision of the radiation oncologist. We believe the services
rendered by our radiation oncologists will comply with this
exception.
Some physicians who are not radiation oncologists are employed
by companies owned by us or by professional corporations owned
by certain of our directors, officers and principal shareholders
with which we have administrative services agreements. To the
extent these professional corporations employ such physicians,
and they are deemed to have made referrals for radiation
therapy, their referrals will be permissible under Stark II
if they meet a separate exception for employees. The employment
exception requires, among other things, that the compensation be
consistent with the fair market value of the services provided,
and that it not take into account (directly or indirectly) the
volume or value of any referrals by the referring physician.
When physician employees who are not radiation oncologists have
ownership interests in our company, additional Stark II
exceptions may be applied, including the exception for in-office
ancillary services. Another potentially applicable Stark II
exception is one for physicians ownership of publicly
traded securities in a corporation with shareholders
equity exceeding $75 million as of the end of the most
recent fiscal year.
We believe that our current operations comply in all material
respects with Stark II, due to, among other things, various
exceptions stated in Stark II and regulations that exempt
either the referral or the financial relationship involved.
Nevertheless, to the extent physicians affiliated with us make
referrals to us and a financial relationship exists between the
referring physicians and us, the government might take the
position that the arrangement does not comply with
Stark II. Any such finding could have a material adverse
impact on us.
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State
Law
State
Anti-Kickback
Laws.
Many states in which we operate have laws
that prohibit the payment of kickbacks in return for the
referral of patients. Some of these laws apply only to services
reimbursable under the state Medicaid program. However, a number
of these laws apply to all healthcare services in the state,
regardless of the source of payment for the service. Although we
believe that these laws prohibit payments to referral sources
only where a principal purpose for the payment is for the
referral, the laws in most states regarding kickbacks have been
subjected to limited judicial and regulatory interpretation and,
therefore, no assurances can be given that our activities will
be found to be in compliance. Noncompliance with such laws could
have a material adverse effect upon us and subject us and the
physicians involved to penalties and sanctions.
State Self-Referral Laws.
A number of states
in which we operate, such as Florida, have enacted self-referral
laws that are similar in purpose to Stark II. However, each
state law is unique. The state laws and regulations vary
significantly from state to state, are often vague and, in many
cases, have not been widely interpreted by courts or regulatory
agencies. For example, some states only prohibit referrals where
the physicians financial relationship with a healthcare
provider is based upon an investment interest. Other state laws
apply only to a limited number of designated health services.
Finally, some states do not prohibit referrals, but merely
require that a patient be informed of the financial relationship
before the referral is made.
These statutes and regulations generally apply to services
reimbursed by both governmental and private payers. Violations
of these laws may result in prohibition of payment for services
rendered, loss of licenses as well as fines and criminal
penalties. State statutes and regulations affecting the referral
of patients to healthcare providers range from statutes and
regulations that are substantially the same as the federal laws
and safe harbor regulations to a simple requirement that
physicians or other healthcare professionals disclose to
patients any financial relationship the physicians or healthcare
professionals have with a healthcare provider that is being
recommended to the patients. We believe that we are in
compliance with the self-referral law of each state in which we
have a financial relationship with a physician. However, adverse
judicial or administrative interpretations of any of these laws
could have a material adverse effect on our operating results
and financial condition. In addition, expansion of our
operations into new jurisdictions, or new interpretations of
laws in existing jurisdictions, could require structural and
organizational modifications of our relationships with
physicians to comply with that jurisdictions laws. Such
structural and organizational modifications could have a
material adverse effect on our operating results and financial
condition.
Fee-Splitting Laws.
Many states in which we
operate 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. Most of the states with fee-splitting
laws only prohibit a physician from sharing fees with a referral
source. However, some states have a broader prohibition against
any splitting of a physicians fees, regardless of whether
the other party is a referral source. Some states have
interpreted management agreements between entities and
physicians as unlawful fee-splitting. In most cases, it is not
considered to be fee-splitting when the payment made by the
physician is reasonable reimbursement for services rendered on
the physicians behalf.
In certain states, we receive fees from professional
corporations owned by certain of our shareholders under
administrative services agreements. We believe we structured
these fee provisions to comply with applicable state laws
relating to fee-splitting. However, there can be no certainty
that, if challenged, either us or the professional corporations
will be found to be in compliance with each states
fee-splitting laws, and, if challenged successfully, this could
have a material adverse effect upon us.
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, our radiation oncologists could be subject to
civil and criminal penalties, professional discipline 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, increased expenses in the operation
of such practices and reduced influence over the business
decisions of such practices.
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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 fee-splitting prohibitions may require structural
and organizational modification to the form of relationships
that we currently have with physicians, affiliated practices and
hospitals. Any modifications could result in less profitable
relationships with physicians, affiliated practices and
hospitals, less influence over the business decisions of
physicians and affiliated practices and failure to achieve our
growth objectives.
Corporate Practice of Medicine.
We are not
licensed to practice medicine. The practice of medicine is
conducted solely by our licensed radiation oncologists and other
licensed physicians. The manner in which licensed physicians can
be organized to perform and bill for medical services is
governed by the laws of the state in which medical services are
provided and by the medical boards or other entities authorized
by such states to oversee the practice of medicine. Most states
prohibit any person or entity other than a licensed professional
from holding him, her or itself out as a provider of diagnoses,
treatment or care of patients. Many states extend this
prohibition to bar companies not wholly-owned by licensed
physicians from employing physicians, a practice commonly
referred to as the Corporate Practice of Medicine,
to maintain physician independence and clinical judgment.
Business corporations are generally not permitted under certain
state laws to exercise control over the medical judgments or
decisions of physicians, or engage in certain practices such as
fee-splitting with physicians. In states where we are not
permitted to own a medical practice, we perform only non-medical
and administrative and support services, do not represent to the
public or clients that we offer professional medical services
and do not exercise influence or control over the practice of
medicine.
Corporate Practice of Medicine laws vary widely regarding the
extent to which a licensed physician can affiliate with
corporate entities for the delivery of medical services. Florida
is an example of a state that requires all practicing physicians
to meet requirements for safe practice, but it has no provisions
setting forth how physicians can be organized. In Florida, it is
not uncommon for business corporations to own medical practices.
New York, by contrast, prohibits physicians from sharing revenue
received in connection with the furnishing of medical care,
other than with a partner, employee or associate in a
professional corporation, subcontractor or physician consultant
relationship. We have developed arrangements which we believe
are in compliance with the Corporate Practice of Medicine laws
in the states in which we operate.
We believe our operations and contractual arrangements as
currently conducted are in material compliance with existing
applicable laws. However, we cannot assure you that we will be
successful if our existing organization and our contractual
arrangements with the professional corporations are challenged
as constituting the unlicensed practice of medicine. In
addition, we might not be able to enforce certain of our
arrangements, including non-competition agreements and
transition and stock pledge agreements. While the precise
penalties for violation of state laws relating to the corporate
practice of medicine vary from state to state, violations could
lead to fines, injunctive relief dissolving a corporate offender
or criminal felony charges. There can be no assurance that
review of our business and the professional corporations by
courts or regulatory authorities will not result in a
determination that could adversely affect their operations or
that the healthcare regulatory environment will not change so as
to restrict existing operations or their expansion. In the event
of action by any regulatory authority limiting or prohibiting us
or any affiliate from carrying on our business or from expanding
our operations and our affiliates to certain jurisdictions,
structural and organizational modifications of us may be
required, which could adversely affect our ability to conduct
our business.
Antitrust Laws.
In connection with the
Corporate Practice of Medicine laws referred to above, certain
of the physician practices with which we are affiliated are
necessarily organized as separate legal entities. As such, the
physician practice entities may be deemed to be persons separate
both from us and from each other under the antitrust laws and,
accordingly, subject to a wide range of laws that prohibit
anticompetitive conduct among separate legal entities. These
laws may limit our ability to enter into agreements with
separate practices that compete with one another. In addition,
where we also are seeking to acquire or affiliate with
established
E-25
and reputable practices in our target geographic markets and any
market concentration could lead to antitrust claims.
We believe we are in material compliance with federal and state
antitrust laws and intend to comply with any state and federal
laws that may affect the development of our business. There can
be no assurance, however, that a review of our business by
courts or regulatory authorities would not adversely affect the
operations of us and our affiliated physician practice entities.
State Licensing.
As a provider of radiation
therapy services in the states in which we operate, we must
maintain current occupational and use licenses for our treatment
centers as healthcare facilities and machine registrations for
our linear accelerators and simulators. Additionally, we must
maintain radioactive material licenses for each of our treatment
centers which utilize radioactive sources. We believe that we
possess or have applied for all requisite state and local
licenses and are in material compliance with all state and local
licensing requirements.
Certificate of Need.
Many states in which we
operate have Certificate of Need (CON) laws that require
physicians or health care facilities seeking to initiate or
expand services to submit an application to the state. In some
states, approval must be obtained before initiating projects
requiring capital expenditures above a certain dollar amount,
introducing new services
and/or
expanding services. The CON program is intended to prevent
unnecessary duplication of services and can be a competitive
process whereby only one proposal among competing applicants who
wish to provide a particular health service is chosen or a
proposal by one applicant is challenged by another provider who
may prevail in getting the state to deny the addition of the
service.
In certain states these CON statutes and regulations apply to
our related physician corporations and in others it applies to
hospitals where we have management agreements or joint venture
relationships.
We believe that we have applied for all requisite state CON
approvals or notified state authorities as required by statute
and are in material compliance with state requirements. There
can be no assurance, however, that a review of our business or
proposed new practices by regulatory authorities would not
adversely affect the operations of us and our affiliated
physician practice entities.
Reimbursement
and Cost Containment
Reimbursement.
We provide a full range of both
professional and technical services. Those services include the
initial consultation, clinical treatment planning, simulation,
medical radiation physics, dosimetry, treatment devices, special
services and clinical treatment management procedures.
The initial consultation is charged as a professional fee for
evaluation of the patient prior to the decision to treat the
patient with radiation therapy. The clinical treatment planning
also is reimbursed as a technical and professional component.
Simulation of the patient prior to treatment involves both a
technical and a professional component, as the treatment plan is
verified with the use of a simulator accompanied by the
physicians approval of the plan. The medical radiation
physics, dosimetry, treatment devices and special services also
include both professional and technical components. The basic
dosimetry calculation is accomplished, treatment devices are
specified and approved, and the physicist consults with the
radiation oncologist, all as professional and technical
components of the charge. Special blocks, wedges, shields, or
casts are fabricated, all as a technical and professional
component.
The delivery of the radiation treatment from the linear
accelerator is a technical charge. The clinical treatment
administrative services fee is the professional fee charged
weekly for the physicians management of the patients
treatment. Global fees containing both professional and
technical components also are charged for specialized treatment
such as hyperthermia, clinical intracavitary hyperthermia,
clinical brachytherapy, interstitial radioelement applications,
and remote after-loading of radioactive sources.
Coding and billing for radiation therapy is complex. We maintain
a staff of coding professionals responsible for interpreting the
services documented on the patients charts to determine
the appropriate coding of services for billing of third-party
payers. This staff provides coding and billing services for all
of
E-26
our treatment centers except for four treatment centers in New
York. In addition, we do not provide coding and billing services
to hospitals where we are providing only the professional
component of radiation treatment services. We provide training
for our coding staff and believe that our coding and billing
expertise result in appropriate and timely reimbursement.
Cost Containment.
We derived approximately
53%, 50% and 52% of our net patient service revenue for the
years ended December 31, 2004, 2005 and 2006, respectively,
from payments made by government sponsored healthcare programs,
principally Medicare. These programs are subject to substantial
regulation by the federal and state governments. Any change in
payment regulations, policies, practices, interpretations or
statutes that place limitations on reimbursement amounts, or
changes in reimbursement coding, or practices could materially
and adversely affect our financial condition and results of
operations.
In recent years, the federal government has sought to constrain
the growth of spending in the Medicare and Medicaid programs.
Through the Medicare program, the federal government has
implemented a resource-based relative value scale (RBRVS)
payment methodology for physician services. RBRVS is a fee
schedule that, except for certain geographical and other
adjustments, pays similarly situated physicians the same amount
for the same services. The RBRVS is adjusted each year and is
subject to increases or decreases at the discretion of Congress.
Changes in the RBRVS may result in reductions in payment rates
for procedures provided by the Company.
RBRVS-type
payment systems also have been adopted by certain private
third-party payers and may become a predominant payment
methodology. Broader implementation of such programs could
reduce payments by private third-party payers and could
indirectly reduce our operating margins to the extent that the
cost of providing management services related to such procedures
could not be proportionately reduced. To the extent our costs
increase, we may not be able to recover such cost increases from
government reimbursement programs. In addition, because of cost
containment measures and market changes in non-governmental
insurance plans, we may not be able to shift cost increases to
non-governmental payers. Changes in the RBRVS could result in a
reduction from historical levels in per patient Medicare revenue
received by us; however, we do not believe such reductions
would, if implemented, result in a material adverse effect
on us.
In addition to current governmental regulation, both federal and
state governments periodically propose legislation for
comprehensive reforms affecting the payment for and availability
of healthcare services. Aspects of certain of such healthcare
proposals, such as reductions in Medicare and Medicaid payments,
if adopted, could adversely affect us. Other aspects of such
proposals, such as universal health insurance coverage and
coverage of certain previously uncovered services, could have a
positive impact on our business. It is not possible at this time
to predict what, if any, reforms will be adopted by Congress or
state legislatures, or when such reforms would be adopted and
implemented. As healthcare reform progresses and the regulatory
environment accommodates reform, it is likely that changes in
state and federal regulations will necessitate modifications to
our agreements and operations. While we believe we will be able
to restructure in accordance with applicable laws and
regulations, we cannot assure that such restructuring in all
cases will be possible or profitable.
Although governmental payment reductions have not materially
affected us in the past, it is possible that such changes in the
future could have a material adverse effect on our financial
condition and results of operations. In addition, Medicare,
Medicaid and other government sponsored healthcare programs are
increasingly shifting to some form of managed care.
Additionally, funds received under all healthcare reimbursement
programs are subject to audit with respect to the proper billing
for physician services. Retroactive adjustments of revenue from
these programs could occur. We expect that there will continue
to be proposals to reduce or limit Medicare and Medicaid payment
for services.
Rates paid by private third-party payers, including those that
provide Medicare supplemental insurance, are based on
established physician, clinic and hospital charges and are
generally higher than Medicare payment rates. Changes in the mix
of our patients between non-governmental payers and government
sponsored healthcare programs, and among different types of
non-government payer sources, could have a material adverse
effect on us.
E-27
Reevaluations and Examination of
Billing.
Payers periodically reevaluate the
services they cover. In some cases, government payers such as
Medicare and Medicaid also may seek to recoup payments
previously made for services determined not to be covered. Any
such action by payers would have an adverse affect on our
revenue and earnings.
Due to the uncertain nature of coding for radiation therapy
services, we could be required to change coding practices or
repay amounts paid for incorrect practices either of which could
have a materially adverse effect on our operating results and
financial condition.
Other Regulations.
In addition, we are subject
to licensing and regulation under federal, state and local laws
relating to the collecting, storing, handling and disposal of
infectious and hazardous waste and radioactive materials as well
as the safety and health of laboratory employees. We believe our
operations are in material compliance with applicable federal
and state laws and regulations relating to the collection,
storage, handling, treatment and disposal of all infectious and
hazardous waste and radioactive materials. Nevertheless, there
can be no assurance that our current or past operations would be
deemed to be in compliance with applicable laws and regulations,
and any noncompliance could result in a material adverse effect
on us. We utilize licensed vendors for the disposal of such
specimen and waste.
In addition to our comprehensive regulation of safety in the
workplace, the federal Occupational Safety and Health
Administration (OSHA) has established extensive requirements
relating to workplace safety for healthcare employees, whose
workers may be exposed to blood-borne pathogens, such as HIV and
the hepatitis B virus. These regulations require work practice
controls, protective clothing and equipment, training, medical
follow-up,
vaccinations and other measures designed to minimize exposure
to, and transmission of, blood-borne pathogens.
Healthcare reform.
The healthcare industry
continues to attract much legislative interest and public
attention. In recent years, an increasing number of legislative
proposals have been introduced or proposed in Congress and in
some state legislatures that would effect major changes in the
healthcare system. Proposals that have been considered include
changes in Medicare, Medicaid and other programs, cost controls
on hospitals and mandatory health insurance coverage for
employees. The costs of implementing some of these proposals
would be financed, in part, by reduction in payments to
healthcare providers under Medicare, Medicaid, and other
government programs. We cannot predict the course of future
healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs and the
effect that any legislation, interpretation, or change may have
on us.
E-28
Investing in our common stock involves risk. 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.
Our payer mix is highly focused toward Medicare patients due to
the high proportion of cancer patients over the age of 65. We
estimate that approximately 53%, 50% and 52% of our net patient
service revenue for 2004, 2005 and 2006, 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
payers. 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 1.6%; in 2004, it increased by 1.5%; in 2005, the rate
increased an additional 1.5%; and in 2006 the CF remained
unchanged at 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
payers decrease, our revenue and profitability could be
adversely affected.
We estimate that approximately 46%, 47% and 46% of our net
patient service revenue for 2004, 2005 and 2006, respectively,
was derived from commercial payers such as managed care
organizations and private health insurance programs. These
commercial payers generally pay us for the services rendered to
an insured patient based upon predetermined rates. Managed care
organizations typically pay at lower rates than private health
insurance programs. While commercial payer rates are generally
higher than government program reimbursement rates, commercial
payer 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 payers 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 payers 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 2004,
2005 and 2006, we paid an aggregate of $8.1 million,
$7.3 million and $11.8 million, respectively under our
related party agreements and we received $26.7 million,
$24.8 million and $35.0 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.
E-29
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:
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administrative services agreements with professional
corporations that are owned by certain of our directors,
officers and principal shareholders;
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leases we have entered into with entities owned by certain of
our directors, officers, and principal shareholders; and
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medical malpractice insurance which we acquire from an entity
owned by certain of our directors, officers, and principal
shareholders.
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In California, Maryland, Massachusetts, Michigan, 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, M.D., a director, is a licensed physician
in the states of California, Michigan, 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, M.D., our Chief
Executive Officer and President, Daniel E. Dosoretz, M.D.,
our Medical Director, James H. Rubenstein, M.D. 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 14 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. Katin, Dosoretz, Rubenstein and Sheridan. We
renewed this coverage in October 2004, 2005 and 2006 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.
E-30
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, Michigan, Nevada, New York and North Carolina,
have laws prohibiting business corporations from employing
physicians. Our treatment centers in Alabama, Massachusetts,
Michigan, 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 2004, 2005 and 2006, $45.8 million, $62.2 million
and $88.2 million, respectively, of our net patient service
revenue was derived from administrative services agreements, as
opposed to $117.9 million, $155.4 million and
$195.9 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.
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. The loss of any such senior radiation oncologists
could negatively impact us.
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.
E-31
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. Dosoretz and Rubenstein. 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 64%,
57% and 55% of our total revenues during 2004, 2005 and 2006,
respectively. Our treatment centers are also concentrated in the
states of Michigan, Nevada, New York and North Carolina, none of
which individually currently account for more than 15% of our
total revenues, but in the aggregate accounted for approximately
23%, 23% and 20% of our total revenues in 2004, 2005 and 2006,
respectively. This concentration makes us particularly sensitive
to regulatory laws, including those related to false and
improper claims, anti-kickback laws, self-referral laws,
fee-splitting, corporate practice of medicine, anti-trust,
licensing and certificate of need, as well as economic and other
conditions which could impact us. 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 began operating our first radiation treatment center in 1983,
and have grown to provide radiation therapy at 76 treatment
centers. 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:
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our ability to obtain desirable locations for treatment centers
in suitable markets;
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our ability to identify, recruit and retain or affiliate with a
sufficient number of radiation oncologists and other healthcare
professionals;
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our ability to obtain adequate financing to fund our growth
strategy; and
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our ability to successfully operate under applicable government
regulations.
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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. We believe there are a
limited number of qualified people in our business and the
industry in which we compete. As such, there can be no assurance
that we will be able to identify and retain the key
E-32
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.
Over the past three years we have acquired 24 treatment centers
and developed 5 treatment centers. When we acquire or develop
additional treatment centers, we may:
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be unable to successfully operate the treatment centers;
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have difficulty integrating their operations and personnel;
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be unable to retain radiation oncologists or key management
personnel;
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be unable to collect the accounts receivable of an acquired
treatment center;
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acquire treatment centers with unknown or contingent
liabilities, including liabilities for failure to comply with
healthcare laws and regulations;
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experience difficulties with transitioning or integrating the
information systems of acquired treatment centers;
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be unable to contract with third-party payers or attract
patients to our treatment centers; and / or
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experience losses and lower gross revenues and operating margins
during the initial periods of operating our newly-developed
treatment centers.
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Larger acquisitions, such as our recent acquisition of 7
treatment centers in Southeastern Michigan, can substantially
increase our potential exposure to business risks. 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 may from time to time explore acquisition opportunities
outside of the United States when favorable opportunities are
available to us. In addition to the risks set forth herein,
foreign acquisitions involve unique risks including the
particular economic, political and regulatory risks associated
with the specific country, currency risks, the relative
uncertainty regarding laws and regulations and the potential
difficulty of integrating operations across different cultures
and languages.
We currently plan to continue to acquire and develop new
treatment centers in existing and new local markets. We may not
be able to structure economically beneficial arrangements in new
markets as a result of healthcare laws applicable to such market
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. In addition, we
may incur significant transaction fees and expenses even for
potential transactions that are not consummated. 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 53%, 50% and 52% of our net patient service
revenue for 2004, 2005 and 2006, respectively, consisted of
payments from Medicare and Medicaid programs. In billing for our
services to third-party payers, we must follow complex
documentation, coding and billing rules. These rules are based
on federal and state laws, rules and regulations, various
government pronouncements,
E-33
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. Such a
challenge could result in a material adverse effect on our
business.
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:
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employing physicians;
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practicing medicine, which, in some states, includes managing or
operating a radiation treatment center;
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certain types of fee arrangements with physicians;
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owning or controlling equipment used in a medical practice;
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setting fees charged for physician services;
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maintaining a physicians patient records; or
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controlling the content of physician advertisements.
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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, Michigan, 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:
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qualification of medical and support persons;
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pricing of services by healthcare providers;
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the adequacy of medical care, equipment, personnel, operating
policies and procedures;
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clinic licensure and certificates of need;
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maintenance and protection of records; or
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environmental protection, health and safety.
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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
E-34
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.
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 $25,000,
imprisonment of up to five years, civil penalties under the
Civil Monetary Penalties Law of up to $50,000 for each
violation, plus three times the remuneration involved, civil
penalties under the False Claims Act of up to $11,000 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 76 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
E-35
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 9%, 7% and 4% of total revenues
for 2004, 2005 and 2006, 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 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
payers. Violation of these federal and state laws and
regulations
E-36
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 payer programs and requirements to refund
amounts previously received from government and private payers.
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
jurisdictions laws. Such structural and organizational
modifications could result in lower profitability and failure to
achieve our growth objectives.
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:
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protect individual privacy by limiting the uses and disclosures
of patient information;
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require the implementation of security safeguards to ensure the
confidentiality, integrity and availability of individually
identifiable health information in electronic form; and
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prescribe specific transaction formats and data code sets for
certain electronic healthcare transactions.
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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 $100 per violation with a
maximum penalty of $25,000 per each requirement violated per
calendar year and criminal penalties with fines up to $250,000
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
E-37
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, 2006, we had outstanding debt of
$205.2 million. Approximately $123.0 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:
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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;
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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;
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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
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competitors with greater access to capital could have a
significant advantage over us.
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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. Our information systems
require maintenance and upgrading to meet our needs, which could
significantly increase our administrative expenses. Furthermore,
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.
E-38
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. As a result, we may become responsible for
substantial damage awards that are uninsured.
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.
We have recently noticed an increase in multi-state competitors
in some of the markets in which we operate. 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 27.8% and 36.7% of the
total assets on our balance sheet as of December 31, 2005
and 2006, respectively. As a result of our acquisition activity,
goodwill significantly increased to approximately
$138.8 million from approximately $66.5 million as of
December 31, 2005. 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.
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,
E-39
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, 2007 certain of our officers beneficially
owned approximately 44.6% 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:
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elect our entire board of directors;
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control our management and policies;
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agree to mergers, consolidations and the sale of all or
substantially all of our assets;
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prevent or cause a change in control; and
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amend our amended and restated articles of incorporation and
bylaws at any time.
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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:
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variations in our financial performance;
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changes in recommendations or financial estimates by securities
analysts, or our failure to meet or exceed estimates;
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announcements by us or our competitors of material events;
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future sales of our common stock;
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investor perceptions of us and the healthcare industry;
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announcements regarding purported class action lawsuits by
plaintiff lawfirms; and
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general economic trends and market conditions.
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As a result, you may not be able to resell your shares at or
above the price you paid.
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, 2007, our senior management shareholders
beneficially owned approximately 45.0% 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.
E-40
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:
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10,000,000 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;
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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;
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the ability of our board of directors to amend our bylaws
without shareholder approval;
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special meetings of shareholders cannot be called by a
shareholder;
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obligations to make certain payments under executive employment
agreements in the event of a change in control; and
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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.
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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
E-41
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.
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 55% of our total revenues
during 2006. In 2005, 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.
We are
not currently in compliance with the NASDAQ requirement that a
majority of our board of directors be comprised of independent
members.
NASDAQ Marketplace Rules require that the majority of our board
of directors be comprised of independent members. As a result of
the recent death of independent director James Charles Weeks in
early January of this year, we are currently not in compliance
with this requirement. We have a cure period from NASDAQ that
gives until the later of out next annual shareholders meeting or
July 9, 2007 to regain compliance. We plan to add a new
independent member to our board as soon as practicable. If we
fail to regain compliance in a timely manner, we could face
delisting which could adversely impact the trading market for
our stock.
Forward looking statements.
Some of the
information set forth in this report contains
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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.
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Item 1B.
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Unresolved
Staff Comments
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None
E-42
Our executive and administrative offices are located in
Fort Myers, Florida. These offices contain approximately
33,000 square feet of space. In December 2005, we entered
into a lease for additional administrative office space in
Florence, Kentucky for approximately 5,600 square feet.
These offices will be adequate for our current primary needs, we
also believe that we will require significant additional space
to meet our future needs and such future expansion is in the
preliminary stages.
Our radiation treatment centers typically range in size from
5,000 to 12,000 square feet. We currently operate 76
radiation treatment centers in Alabama, Arizona, California,
Delaware, Florida, Kentucky, Maryland, Massachusetts, Michigan,
Nevada, New Jersey, New York, North Carolina, Rhode Island and
West Virginia. We own the real estate on which 18 of our
treatment centers are located. We lease land and space at 48
treatment center locations, of which in 14 of these locations,
certain of our directors, officers, principal shareholders,
shareholders and employees have an ownership interest. These
leases expire at various dates between 2007 and 2044 and 40 of
these leases have one or two renewal options of five or
10 years. Also, 10 of our treatment center locations are in
hospital-based facilities. We consider all of our offices and
treatment centers to be well-suited to our present requirements.
However, as we expand to additional treatment centers, or where
additional capacity is necessary in a treatment center,
additional space will be obtained where feasible.
Information with respect to our treatment centers and our other
properties can be found in Item 1 of this report under the
caption, Business Treatment Centers.
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Item 3.
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Legal
Proceedings
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Information concerning this item is included under the caption
Legal Proceedings in Note 14 Commitments and Contingencies
of the Notes to Consolidated Financial Statements contained in
this report.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the stockholders during
the fourth quarter ended December 31, 2006.
E-43
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock is quoted on the NASDAQ Global Select Market
under the symbol RTSX. The high and low common stock
sale prices per share were as follows:
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High
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Low
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2005
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First Quarter
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$
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19.84
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$
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14.31
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Second Quarter
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$
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27.46
|
|
|
$
|
19.05
|
|
Third Quarter
|
|
$
|
31.86
|
|
|
$
|
25.08
|
|
Fourth Quarter
|
|
$
|
38.93
|
|
|
$
|
28.09
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
35.03
|
|
|
$
|
22.84
|
|
Second Quarter
|
|
$
|
30.13
|
|
|
$
|
23.00
|
|
Third Quarter
|
|
$
|
31.98
|
|
|
$
|
26.17
|
|
Fourth Quarter
|
|
$
|
34.47
|
|
|
$
|
28.83
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter (through February 1, 2007)
|
|
$
|
32.89
|
|
|
$
|
29.32
|
|
On February 1, 2007, the last reported sales price for our
common stock on the NASDAQ Global Select Market was $29.32 per
share. As of February 1, 2007, there were
23,427,078 shares of our common stock held by approximately
3,000 beneficial owners and 56 holders of record as reported by
our transfer agent.
We have never declared or paid dividends on our common stock
since becoming a public company in June 2004. We intend to
retain future earnings to finance the growth and development of
our business and, accordingly, do not currently intend to
declare or pay any dividends on our common stock. Our board of
directors will evaluate our future earnings, results of
operations, financial condition and capital requirements in
determining whether to declare or pay cash dividends. In
addition, our credit facilities impose restrictions on our
ability to pay dividends. Please refer to the Liquidity
and Capital Resources section in Part II,
Item 7,
Managements Discussion and Analysis of
Financial Condition and Results of Operations
in this report
for more information.
E-44
Equity
Compensation Plan Information
Equity
Compensation Table
We have outstanding stock options and restricted stock shares
under our 1997 stock option plan and our 2004 stock incentive
plan each of which was adopted by our board of directors and
approved by our shareholders prior to our initial public
offering. We do not have any equity compensation plans that have
not been approved by our shareholders. The following table sets
forth information as of December 31, 2006, with respect to
our equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Remaining Available for
|
|
|
|
|
|
|
Number of Shares of
|
|
|
|
|
|
Future Issuance Under Equity
|
|
|
|
Number of Shares of
|
|
|
Common Stock to be
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Common Stock to be
|
|
|
Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
(Excluding Shares Reflected
|
|
|
|
Issued Upon Vesting
|
|
|
of Outstanding
|
|
|
Outstanding
|
|
|
in the First and
|
|
Plan Category
|
|
of Restrictions
|
|
|
Options and Rights
|
|
|
Options
|
|
|
Second Column)
|
|
|
Equity Compensation Plans Approved
by Shareholders 1997 and 2004 stock incentive plans
|
|
|
6,000
|
|
|
|
1,625,494
|
|
|
$
|
10.67
|
|
|
|
3,382,812
|
(1)(2)
|
Equity Compensation Plans Not
Approved by Shareholders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1)
|
|
In addition to the shares reserved for issuance under our
2004 stock incentive plan, such plan also includes annual
increases in the number of shares available for issuance under
the 2004 stock incentive plan on the first day of each fiscal
year beginning with our fiscal year beginning in 2005 and ending
after our fiscal year beginning in 2014, equal to the lesser
of:
|
|
|
|
|
|
5% of the outstanding shares of common stock on the first day
of our fiscal year;
|
|
|
|
1,000,000 shares; or
|
|
|
|
an amount our board may determine.
|
|
|
|
(2)
|
|
This number was increased by 1,000,000 shares on
January 1, 2007 pursuant to the automatic increase formula
described in footnote (1).
|
We did not sell any unregistered securities during fiscal 2006
except as otherwise previously disclosed in our quarterly
reports on
Form 10-Q
or our current reports on
Form 8-K.
We did not repurchase any of our equity securities during the
fourth quarter of fiscal 2006.
E-45
|
|
Item 6.
|
Selected
Financial Data
|
The historical consolidated statements of income data for the
years ended December 31, 2002, 2003, 2004, 2005 and 2006
and the related historical consolidated balance sheet data as of
December 31, 2002, 2003, 2004, 2005 and 2006 are derived
from our audited consolidated financial statements.
The historical results presented below are not necessarily
indicative of the results to be expected for any future period.
You should read the information set forth below in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and the related notes included
elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share amounts):
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
106,252
|
|
|
$
|
131,147
|
|
|
$
|
163,719
|
|
|
$
|
217,590
|
|
|
$
|
284,067
|
|
Other revenue
|
|
|
4,868
|
|
|
|
7,533
|
|
|
|
7,654
|
|
|
|
9,660
|
|
|
|
9,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
111,120
|
|
|
|
138,680
|
|
|
|
171,373
|
|
|
|
227,250
|
|
|
|
293,982
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
57,248
|
|
|
|
72,146
|
|
|
|
87,059
|
|
|
|
116,300
|
|
|
|
147,697
|
|
Medical supplies
|
|
|
2,312
|
|
|
|
2,226
|
|
|
|
3,608
|
|
|
|
5,678
|
|
|
|
7,569
|
|
Facility rent expenses
|
|
|
3,744
|
|
|
|
4,656
|
|
|
|
5,347
|
|
|
|
7,720
|
|
|
|
9,432
|
|
Other operating expenses
|
|
|
7,194
|
|
|
|
8,690
|
|
|
|
7,561
|
|
|
|
9,748
|
|
|
|
12,761
|
|
General and administrative expenses
|
|
|
10,475
|
|
|
|
16,400
|
|
|
|
19,671
|
|
|
|
23,538
|
|
|
|
30,209
|
|
Depreciation and amortization
|
|
|
4,283
|
|
|
|
5,202
|
|
|
|
6,860
|
|
|
|
10,837
|
|
|
|
16,967
|
|
Provision for doubtful accounts
|
|
|
3,365
|
|
|
|
3,375
|
|
|
|
5,852
|
|
|
|
6,792
|
|
|
|
9,425
|
|
Interest expense, net
|
|
|
2,615
|
|
|
|
2,053
|
|
|
|
3,435
|
|
|
|
5,290
|
|
|
|
10,036
|
|
Impairment loss
|
|
|
|
|
|
|
284
|
|
|
|
|
|
|
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
91,236
|
|
|
|
115,032
|
|
|
|
139,393
|
|
|
|
187,129
|
|
|
|
244,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
19,884
|
|
|
|
23,648
|
|
|
|
31,980
|
|
|
|
40,121
|
|
|
|
49,886
|
|
Minority interests in net losses (earnings) of consolidated
entities
|
|
|
23
|
|
|
|
(7
|
)
|
|
|
55
|
|
|
|
480
|
|
|
|
(580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting
principle and income taxes
|
|
|
19,907
|
|
|
|
23,641
|
|
|
|
32,035
|
|
|
|
40,601
|
|
|
|
49,306
|
|
Cumulative effect of change in accounting principle
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
18,944
|
|
|
|
23,641
|
|
|
|
32,035
|
|
|
|
40,601
|
|
|
|
49,306
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
22,847
|
|
|
|
15,631
|
|
|
|
18,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,944
|
|
|
$
|
23,641
|
|
|
$
|
9,188
|
|
|
$
|
24,970
|
|
|
$
|
30,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.14
|
|
|
$
|
1.39
|
|
|
$
|
0.45
|
|
|
$
|
1.10
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.04
|
|
|
$
|
1.28
|
|
|
$
|
0.44
|
|
|
$
|
1.05
|
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share amounts):
|
|
|
Pro forma income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes, as reported
|
|
$
|
18,944
|
|
|
$
|
23,641
|
|
|
$
|
32,035
|
|
|
|
|
|
|
|
|
|
Pro forma provision for income taxes(1)
|
|
|
7,966
|
|
|
|
9,456
|
|
|
|
12,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
10,978
|
|
|
$
|
14,185
|
|
|
$
|
19,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per common share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.84
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.60
|
|
|
$
|
0.77
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,653,542
|
|
|
|
16,974,471
|
|
|
|
20,292,117
|
|
|
|
22,725,819
|
|
|
|
23,137,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
18,265,182
|
|
|
|
18,470,880
|
|
|
|
21,031,968
|
|
|
|
23,703,653
|
|
|
|
23,993,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands):
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,294
|
|
|
$
|
2,606
|
|
|
$
|
5,019
|
|
|
$
|
8,980
|
|
|
$
|
15,413
|
|
Total assets
|
|
|
102,783
|
|
|
|
128,036
|
|
|
|
168,177
|
|
|
|
263,345
|
|
|
|
399,094
|
|
Total debt
|
|
|
51,342
|
|
|
|
59,811
|
|
|
|
66,103
|
|
|
|
123,463
|
|
|
|
205,244
|
|
Total shareholders equity
|
|
|
37,208
|
|
|
|
49,578
|
|
|
|
66,321
|
|
|
|
95,383
|
|
|
|
134,808
|
|
|
|
|
(1)
|
|
Reflects combined federal and state income taxes on a pro forma
basis, as if we had been taxed as a C Corporation. See the
consolidated statements of income and comprehensive income and
note 18 Pro forma disclosure of the notes to
the consolidated financial statements.
|
E-47
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the Selected Financial Data and the
consolidated financial statements and related notes included
elsewhere in this
Form 10-K.
This section of the
Form 10-K
contains forward-looking statements that involve substantial
risks and uncertainties, such as statements about our plans,
objectives, expectations and intentions. We use words such as
expect, anticipate, plan,
believe, seek, estimate,
intend, future and similar expressions
to identify forward-looking statements. In particular,
statements that we make in this section relating to the
sufficiency of anticipated sources of capital to meet our cash
requirements are forward-looking statements. Our actual results
could differ materially from those anticipated in these
forward-looking statements for many reasons, including as a
result of some of the factors described below and in the section
titled Risk Factors. You are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this
Form 10-K.
Overview
We own, operate and manage treatment centers focused principally
on providing radiation treatment alternatives ranging from
conventional external beam radiation to newer,
technologically-advanced options. We believe we are the largest
company in the United States focused principally on providing
radiation therapy. We opened our first radiation treatment
center in 1983 and as of December 31, 2006 we provided
radiation therapy services in 76 treatment centers. Our
treatment centers are clustered into 24 local markets in
15 states, including Alabama, Arizona, California,
Delaware, Florida, Kentucky, Maryland, Massachusetts, Michigan,
Nevada, New Jersey, New York, North Carolina, Rhode Island, and
West Virginia. Of these 76 treatment centers, 22 treatment
centers were internally developed, 44 were acquired and 10
involve hospital-based treatment centers. We have recently
expanded our affiliation with physician specialties in other
areas including gynecological and surgical oncology and urology
in a limited number of our local markets to strengthen our
clinical working relationships.
We use a number of metrics to assist management in evaluating
financial condition and operating performance, and the most
important follow:
|
|
|
|
|
The number of treatments delivered per day in our freestanding
centers
|
|
|
|
The average revenue per treatment in our freestanding centers
|
|
|
|
The ratio of funded debt to earnings before interest, taxes,
depreciation and amortization (leverage ratio)
|
The principal costs of operating a treatment center are
(1) the salary and benefits of the physician and technical
staff, and (2) equipment and facility costs. The capacity
of each physician and technical position is limited to a number
of delivered treatments while equipment and facility costs for a
treatment center are generally fixed. These capacity factors
cause profitability to be very sensitive to treatment volume.
Profitability will tend to increase as the available staff and
equipment capacities are utilized.
The average revenue per treatment is sensitive to the mix of
services used in treating a patients tumor. The
reimbursement rates set by Medicare and commercial payers tend
to be higher for the more advanced treatment technologies,
reflecting their higher complexity. This metric is used by
management to evaluate the utilization of newer technologies to
improve outcomes for patients. A key part of our business
strategy is to implement advanced technologies once supporting
economics are available. For example, we implemented a pilot
stereotactic radiosurgery program using kV x-rays in one of our
centers in 2006 and, with expanded reimbursement for the
technology available January 1, 2007, we are accelerating
the implementation of this new technology across our local
markets.
The reimbursement for radiation therapy services includes a
professional component for the physicians service and a
technical component to cover the costs of the machine, facility
and services provided by the
E-48
technical staff. In our freestanding centers we provide both
services while in a hospital-based center the hospital, rather
than us, provides the technical services. Fees that we receive
from the hospital for services they purchase from us are
included in other revenue in our consolidated statements of
income and comprehensive income. Net patient service revenue in
our consolidated statements of income and comprehensive income
is derived from our freestanding centers and from the
professional services provided by our doctors in hospital-based
centers and by our physicians in other specialties in their
practice offices.
For the year ended December 31, 2006, our total revenues
and net income grew by 29.4% and 21.4%, respectively, over the
prior year. For the year ended December 31, 2006, we had
total revenues of $294.0 million and net income of
$30.3 million.
Our results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to fluctuate.
Many of the patients of our Florida treatment centers are
part-time residents in Florida during the winter months. Hence,
these treatment centers have historically experienced higher
utilization rates during the winter months than during the
remainder of the year. In addition, referrals are typically
lower in the summer months due to traditional vacation periods.
The following table summarizes our growth in treatment centers
and the local markets in which we operate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Treatment centers at beginning of period
|
|
|
51
|
|
|
|
56
|
|
|
|
68
|
|
Internally developed
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
Internally (consolidated)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Acquired
|
|
|
3
|
|
|
|
10
|
|
|
|
10
|
*
|
Hospital-based
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment centers at period end
|
|
|
56
|
|
|
|
68
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local markets at period end
|
|
|
19
|
|
|
|
22
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Excludes the acquisition of the Bel Air, Maryland radiation
treatment center, as we expect to combine the external beam
treatments done at our Belcamp, Maryland radiation treatment
center.
|
During the first quarter of 2005, we incurred an impairment loss
of $1.2 million related to the consolidation of two
Yonkers, New York based treatment centers within our
Westchester/Bronx local market. During the second quarter of
2005, we incurred expenses of approximately $0.3 million
associated with the transition of an internally developed
freestanding center to a hospital-based radiation treatment
center at Northern Westchester Hospital within our
Westchester/Bronx local market.
E-49
The following table summarizes key operating statistics of our
results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
2006
|
|
|
% Change
|
|
|
Number of treatment days
|
|
|
63
|
|
|
|
63
|
|
|
|
|
|
|
|
255
|
|
|
|
254
|
|
|
|
|
|
Total treatments freestanding centers
|
|
|
83,713
|
|
|
|
96,895
|
|
|
|
15.7
|
%
|
|
|
325,723
|
|
|
|
373,218
|
|
|
|
14.6
|
%
|
Treatments per day freestanding centers
|
|
|
1,329
|
|
|
|
1,538
|
|
|
|
15.7
|
%
|
|
|
1,278
|
|
|
|
1,469
|
|
|
|
15.0
|
%
|
Percentage change in revenue per treatment
freestanding centers same practice basis
|
|
|
18.2
|
%
|
|
|
9.0
|
%
|
|
|
|
|
|
|
12.1
|
%
|
|
|
14.0
|
%
|
|
|
|
|
Percentage change in treatments per day freestanding
centers same practice basis
|
|
|
2.1
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
1.6
|
%
|
|
|
2.9
|
%
|
|
|
|
|
Local markets at period end
|
|
|
22
|
|
|
|
24
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment centers freestanding
|
|
|
56
|
|
|
|
66
|
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment centers hospital
|
|
|
12
|
|
|
|
10
|
|
|
|
(16.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
76
|
|
|
|
11.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days sales outstanding for the quarter
|
|
|
54
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in total revenues same practice
basis
|
|
|
16.8
|
%
|
|
|
10.7
|
%
|
|
|
|
|
|
|
15.2
|
%
|
|
|
15.0
|
%
|
|
|
|
|
Net patient service revenue professional services
only (in thousands)
|
|
$
|
4,211
|
|
|
$
|
6,699
|
|
|
|
|
|
|
$
|
15,688
|
|
|
$
|
26,088
|
|
|
|
|
|
Our revenue growth is primarily driven by entering new markets,
increasing the utilization at our existing centers and by
benefiting from demographic and population trends in most of our
local markets. New centers are added to existing markets based
on capacity, convenience, and competitive considerations. Our
net income growth is primarily driven by revenue growth and the
leveraging of our technical and administrative infrastructures.
For the year ended December 31, 2006, net patient service
revenue comprised 96.6% of our total revenues. In a state where
we can employ radiation oncologists, we derive our net patient
service revenue through fees earned for the provision
of the professional and technical component fees of radiation
therapy services. In states where we do not employ radiation
oncologists, we derive our administrative services fees
principally from administrative services agreements with
professional corporations. In 34 of our freestanding radiation
treatment centers we employ the physicians, and in 32 we operate
pursuant to administrative services agreements. In accordance
with Financial Accounting Standards Board revised Interpretation
No. 46R (FIN No. 46R), we consolidate the
operating results of certain of the professional corporations
for which we provide administrative services into our own
operating results. In 2006, 32.0% of our net patient service
revenue was generated by professional corporations with which we
have administrative services agreements.
In states which prohibit us from employing physicians, we have
long-term administrative services agreements with professional
corporations owned by certain of our directors, officers and
principal shareholders, who are licensed to practice medicine in
such states. We have entered into these administrative services
agreements in order to comply with the laws of such states. Our
administrative services agreements generally obligate us to
provide treatment center facilities, staff and equipment,
accounting services, billing and collection services, management
and administrative personnel, assistance in managed care
contracting and assistance in marketing services. We receive a
monthly fee for our services based one of the following models:
1) on a fixed fee arrangement 2) on a percentage of
net revenues 3) on a percentage of net income and
4) fixed fee per treatment. Fees related to administrative
services agreements that are based on a fixed rate are set at
the beginning of each year on the basis of the estimated cost of
these services plus a profit margin. We engage an independent
consultant to complete a fair market value review of the fees
paid by related party professional
E-50
service corporations to the Company under the terms of these
agreements each year. The consulting firm completed its review
of 2006 fees under these agreements and determined that the fees
are at fair market value. Independent consultants are utilized
by the Companys audit committee in determining fair market
fees upon any renewal or for new administrative services
agreements with affiliates.
In our net patient service revenue for the years ended
December 31, 2006, 2005, and 2004, revenue from the
professional-only component of radiation therapy and revenue
from the practices of medical specialties other than radiation
oncology, comprised approximately 8.9%, 6.9%, and 5.5%
respectively of our total revenues.
For the year ended December 31, 2006, other revenue
comprised approximately 3.4% of our total revenues. Other
revenue is primarily derived from management services provided
to hospital radiation therapy departments, technical services
provided to hospital radiation therapy departments, billing
services provided to non-affiliated physicians and income for
equipment leased by joint venture entities.
Medicare is a major funding source for the services we provide
and government reimbursement developments can have a material
effect on operating performance. These developments include the
reimbursement amount for each CPT service (current procedural
terminology) that we provide and the specific CPT services
covered by Medicare. The Centers for Medicare and Medicaid
Services (CMS), the government agency responsible for
administering the Medicare program, administers an annual
process for considering changes in reimbursement rates and
covered services. We have played and will continue to play a
role in that process both directly and through the radiation
oncology professional societies.
Other material factors that we believe will also impact our
future financial performance include:
|
|
|
|
|
Continued advances in technology and the related capital
requirements.
|
|
|
|
Continued affiliation with physician specialties other than
radiation oncology.
|
|
|
|
Increased costs associated with changes in the accounting for
stock compensation.
|
|
|
|
Proposed changes in accounting for business combinations
requiring that all acquisition-related costs be expensed as
incurred.
|
|
|
|
Increased costs associated with being a public company including
compliance with Sarbanes-Oxley Section 404 reporting on
internal control.
|
Acquisitions
and Developments
We expect to continue to acquire and develop treatment centers
in connection with the implementation of our growth strategy.
Over the past three years, we have acquired 24 treatment centers
and internally developed 5 treatment centers.
On June 23, 2004 we acquired the assets of Devoto
Construction, Inc., which was owned by certain of our directors
and officers for approximately $3,528,000 with the issuance of
271,385 shares of our common stock. Devoto Construction,
Inc. performs remodeling and real property improvements at our
medical facilities and specializes in the construction of
radiation medical facilities.
In September 2004, we acquired three treatment centers in the
state of New Jersey for a total consideration of
$10.6 million, and we opened three internally developed
treatment centers. One of these internally developed treatment
centers replaced services we had previously provided through a
hospital-based center.
On April 1, 2005, we sold a 49.9% interest in a joint
venture that was formed to operate a treatment center located in
Berlin, Maryland. The interest was sold to a healthcare
enterprise operating in the area for $1.8 million. We
realized a gain of approximately $982,000 on the sale of the
interest.
On April 1, 2005, we acquired a 60% interest in a single
radiation therapy treatment center located in Martinsburg, West
Virginia for approximately $0.7 million. We operate the
facility as part of our Central Maryland local market. Under the
terms of the agreement, we partner with a university hospital
system and
E-51
manage the facility. We have implemented an intensity modulated
radiation therapy (IMRT) program and other advanced technologies
at the facility.
In May 2005, we acquired five radiation treatment centers
located in Clark County, Nevada from Associated Radiation
Oncologists, Inc. for $25.9 million, plus a three-year
contingent earn-out. We expanded the availability of advanced
radiation therapy treatment modalities in the service area. This
acquisition expanded our presence in Nevada where we operated
four centers before the acquisition.
In June 2005, we acquired four radiation treatment centers
located in the markets of Scottsdale, Arizona, Holyoke,
Massachusetts, and two centers in Maryland for approximately
$16.2 million. This acquisition provided our first entrance
into two new local markets in Arizona and Massachusetts. The two
centers purchased in Maryland will further expand our presence
in our Central Maryland local market. We have expanded the
availability of advanced radiation therapy treatment modalities
in certain of the service areas.
During the second quarter of 2005 we were awarded a contract to
develop a state of the art radiation center at the prestigious
Roger Williams Hospital in Providence, Rhode Island. As of
June 1, 2005 we were providing professional services at the
hospital. We have also obtained a certificate of need and are
developing a joint venture freestanding radiation therapy center
with the hospital.
In September 2005, we opened for business our South County,
Rhode Island treatment center and began treating patients at the
facility. The center is our third center opened in our Rhode
Island local market.
In November 2005, we opened for business our Palm Springs,
California treatment center and began treating patients at the
facility. The center was our 68th treatment center in operation
and represented our entrance into our 22nd local market.
In December 2005, we acquired the assets of a urology practice
with four office locations in southwest Florida for
approximately $348,000. The urology practice provides additional
service and treatment protocols to our patients with prostate
cancer and other urological diseases.
In January 2006, we acquired the assets of a radiation treatment
center located in Opp, Alabama for approximately
$1.8 million. The center purchased in Alabama will further
expand our presence in its Southeastern Alabama local market. We
expanded the availability of advanced radiation therapy
treatment modalities in this service area.
In May 2006, we acquired the assets of a radiation treatment
center located in Santa Monica, California for approximately
$12.0 million. The center purchased in California will
further expand our presence into a second local market in the
California area.
In August 2006, we acquired the assets of a radiation treatment
center located in Bel Air, Maryland for approximately
$6.8 million. The center purchased in Maryland will further
expand our presence in our Central Maryland local market.
In September 2006, we acquired the assets of a radiation
treatment center located in Beverly Hills, California for
approximately $19.1 million. The center purchased in
California will further expand our presence into our Los Angeles
local market complementing the Santa Monica radiation center we
purchased in May 2006.
In November 2006, we acquired a cluster network of radiation
treatment centers in Southeastern Michigan for approximately
$47.1 million, including real estate of approximately
$6.2 million. The acquisition provides us an entrance into
a new local market. The seven-facility network consists of two
full service facilities, five satellite facilities and
Certificates of Need to operate a total of eight linear
accelerators.
During the fourth quarter of 2006, we acquired the assets of
several urology and surgery practices within southwest Florida
to expand our affiliations with other physicians to strengthen
our clinical working relationships.
The operations of the foregoing acquisitions have been included
in the accompanying consolidated statements of income and
comprehensive income from the respective dates of each
acquisition. When we
E-52
acquire a treatment center, the purchase price is allocated to
the assets acquired and liabilities assumed based upon their
respective fair values.
In January 2007, we acquired a 67.5% interest in a single
radiation therapy treatment center located in Gettysburg
Pennsylvania for approximately $750,000 and we also acquired a
urology group practice in southwest Florida for approximately
$688,000.
Sources
of Revenue By Payer
We receive payments for our services rendered to patients from
the government Medicare and Medicaid programs, commercial
insurers, managed care organizations and our patients directly.
Generally, our revenue is determined by a number of factors,
including the payer mix, the number and nature of procedures
performed and the rate of payment for the procedures. The
following table sets forth the percentage of our net patient
service revenue we earned by category of payer in our last three
fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Payer
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Medicare
|
|
|
51.6
|
%
|
|
|
48.6
|
%
|
|
|
50.1
|
%
|
Commercial
|
|
|
45.5
|
|
|
|
47.3
|
|
|
|
46.4
|
|
Medicaid
|
|
|
1.4
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Self pay
|
|
|
1.5
|
|
|
|
2.3
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net patient service revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
and Medicaid
Since cancer disproportionately affects elderly people, a
significant portion of our net patient service revenue is
derived from the Medicare program, as well as related
co-payments. Medicare reimbursement rates are determined by the
Centers for Medicare and Medicaid Services (CMS) and are lower
than our normal charges. Medicaid reimbursement rates are
typically lower than Medicare rates; Medicaid payments represent
approximately 2% of our net patient service revenue.
Medicare reimbursement rates are determined by a formula which
takes into account an industry wide conversion factor (CF)
multiplied by relative values determined on a per procedure
basis (RVUs). The CF and RVUs may change on an annual basis. In
2003, the CF increased by 1.6%; in 2004, it increased by 1.5%;
in 2005, the rate increased an additional 1.5%; and in 2006 the
CF remained unchanged at the 2005 level. The net result of
changes to the CF and RVUs over the last several years has not
had a significant impact on our business, but it is difficult to
forecast the future impact of any changes. We depend on payments
from government sources and any changes in Medicare or Medicaid
programs could result in a decrease in our total revenues and
net income.
On November 1, 2006, CMS released its final rule for the
2007 Medicare physician fee schedule. The final rule included
specific reimbursement codes for stereotactic procedures and
provides for a four-year transition to a new practice expense
methodology for establishing practice expense values for
services paid under the Medicare physician fee schedule.
Based on our review of the 2007 fee schedule, we do not expect
the fee schedule to have a material impact on the total
reimbursement of services provided to Medicare beneficiaries.
Commercial
Commercial sources include private health insurance as well as
related payments for co-insurance and co-payments. We enter into
contracts with private health insurance and other health benefit
groups by granting discounts to such organizations in return for
the patient volume they provide.
Most of our commercial revenue is from managed care business and
is attributable to contracts where a set fee is negotiated
relative to services provided by our treatment centers. We do
not have any contracts that
E-53
individually represent over 10% of our total net patient service
revenue. We receive our managed care contracted revenue under
two primary arrangements. Approximately 98% of our managed care
business is attributable to contracts where a fee schedule is
negotiated for services provided at our treatment centers.
Approximately 2% of our net patient service revenue is
attributable to contracts where we bear utilization risk.
Although the terms and conditions of our managed care contracts
vary considerably, they are typically for a one-year term and
provide for automatic renewals. If payments by managed care
organizations and other private third-party payers decrease,
then our total revenues and net income could decrease.
Self
Pay
Self pay consists of payments for treatments by patients not
otherwise covered by third-party payers, such as government or
commercial sources. Because the incidence of cancer is much
higher in those over the age of 65, most of our patients have
access to Medicare or other insurance and therefore the self-pay
portion of our business is less than it would be in other
circumstances.
Billing
and Collections
Our billing system utilizes a fee schedule for billing patients,
third-party payers and government sponsored programs, including
Medicare and Medicaid. Fees billed to government sponsored
programs, including Medicare and Medicaid, are automatically
adjusted to the allowable payment amount at time of billing. For
all other payers, the actual contractual adjustment is recorded
upon the receipt of payment. As a result, an estimate of
contractual allowances is made on a monthly basis to reflect the
estimated realizable value of net patient service revenue. The
development of the estimate of contractual allowances is based
on historical cash collections related to gross charges
developed by facility and payer in order to calculate average
collection percentages by facility and payer. The development of
the collection percentages are applied to gross accounts
receivable in determining an estimate of contractual allowances
at the end of a reporting period.
Insurance information is requested from all patients either at
the time the first appointment is scheduled or at the time of
service. A copy of the insurance card is scanned into our system
at the time of service so that it is readily available to staff
during the collection process. Patient demographic information
is collected for both our clinical and billing systems.
It is our policy to collect co-payments from the patient at the
time of service. Insurance information is obtained and the
patient is informed of their co-payment responsibility prior to
the commencement of treatment.
Charges are posted to the billing system by our office financial
managers. After charges are posted, edits are performed, any
necessary corrections are made and billing forms are generated,
then sent electronically to our clearinghouse. Any bills not
able to be processed through the clearinghouse are printed and
mailed from our central billing office. Statements are
automatically generated from our billing system and mailed to
the patient on a monthly basis for any amounts still
outstanding. Daily, weekly and monthly accounts receivable
analysis reports are utilized by staff and management to
prioritize accounts for collection purposes, as well as to
identify trends and issues. Strategies to respond proactively to
these issues are developed at weekly and monthly team meetings.
Our write-off process is manual and our process for collecting
accounts receivable is dependent on the type of payer as set
forth below.
Self-Pay Balances.
We administer self-pay
account balances through our central billing office and our
policy is to send outstanding self-pay patient claims to
collection agencies at designated points in the collection
process. In some cases monthly payment arrangements are made
with patients for the account balance remaining after insurance
payments have been applied. These accounts are reviewed monthly
to ensure payments continue to be made in a timely manner. Once
it has been determined by our staff that the patient is not
responding to our collection attempts, a final notice is mailed.
This generally occurs more than 120 days after the date of
the original bill. If there is no response to our final notice,
after 30 days the account is assigned to a collection
agency, as appropriate, recorded as a bad debt and written off.
Balances under $50
E-54
are written off but not sent to the collection agency. All
accounts are specifically identified for write-offs and accounts
are written off prior to being submitted to the collection
agency.
Medicare, Medicaid and Commercial Payer
Balances.
Our central billing office staff
expedites the payment process from insurance companies and other
payers via electronic inquiries, phone calls and automated
letters to ensure timely payment. Our billing system generates
standard aging reports by date of billing in increments of
30 day intervals. The collection team utilizes these
reports to assess and determine the payers requiring additional
focus and collection efforts. Our accounts receivable exposure
on Medicare, Medicaid and commercial payer balances are largely
limited to contractual adjustments. Our exposure to bad debts on
balances relating to these types of payers over the years has
been
de minimus
.
In the event of denial of payment, we follow the payers
standard appeals process, both to secure payment and to lobby
the payers, as appropriate, to modify their medical policies to
expand coverage for the newer and more advanced treatment
services that we provide which, in many cases, is the
payers reason for denial of payment. If all reasonable
collection efforts with these payers have been exhausted by our
central billing office staff, the account receivable is
written-off to the contractual allowance.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. We
continuously evaluate our critical accounting policies and
estimates. We base our estimates on historical experience and on
various assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ materially from these estimates under different
assumptions or conditions.
Our accounting policies are described in note 2 of the
notes to our consolidated financial statements. We believe the
following critical accounting policies are important to the
portrayal of our financial condition and results of operations
and require our managements subjective or complex judgment
because of the sensitivity of the methods, assumptions and
estimates used in the preparation of our consolidated financial
statements.
Principles of Consolidation.
Financial
Accounting Standards Board revised Interpretation No. 46R
(FIN No. 46R),
Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51
, requires a
company to consolidate variable interest entities if the company
is the primary beneficiary of the activities of those entities.
Certain of our radiation oncology practices are variable
interest entities as defined by FIN No. 46R, and we
have a variable interest in each of these practices through our
administrative services agreements. Through our variable
interests in these practices, we would absorb a majority of the
net losses of these practices, should they occur. Based on these
determinations, we have included the radiation oncology
practices in our consolidated financial statements for all
periods presented. All of our significant intercompany accounts
and transactions have been eliminated.
Net Patient Service Revenue and Allowances for Contractual
Discounts.
We have agreements with third-party
payers that provide us payments at amounts different from our
established rates. Net patient service revenue is reported at
the estimated net realizable amounts due from patients,
third-party payers and others for services rendered. Net patient
service revenue is recognized as services are provided. Medicare
and other governmental programs reimburse physicians based on
fee schedules, which are determined by the related government
agency. We also have agreements with managed care organizations
to provide physician services based on negotiated fee schedules.
Accordingly, the revenues reported in our consolidated financial
statements are recorded at the amount that is expected to be
received.
We derive a significant portion of our revenues from Medicare,
Medicaid and other payers that receive discounts from our
standard charges. We must estimate the total amount of these
discounts to prepare our consolidated financial statements. The
Medicare and Medicaid regulations and various managed care
contracts
E-55
under which these discounts must be calculated are complex and
subject to interpretation and adjustment. The development of the
estimate of contractual allowances is based on historical cash
collections related to gross charges developed by facility and
payer in order to calculate average collection percentages by
facility and payer. The development of the collection
percentages are applied to gross accounts receivable in
determining an estimate of contractual allowances at the end of
a reporting period.
The estimate for contractual allowances is also based on our
interpretation of the applicable regulations or contract terms.
These interpretations sometimes result in payments that differ
from our original estimates. Additionally, updated regulations
and contract renegotiations occur frequently, necessitating
regular review and reassessment of the estimation process.
Changes in estimates related to the allowance for contractual
discounts affect revenues reported in our consolidated
statements of income and comprehensive income.
Adjustments to revenue related to changes in prior period
estimates decreased patient service revenue by approximately
$1,869,000, $1,149,000, and $5,800,000 for the years ended
December 31, 2004, 2005 and 2006, respectively or
approximately 1.1%, 0.5%, and 2.0% of the net patient service
revenue for the years ended December 31, 2004, 2005 and
2006, respectively.
During 2004, 2005 and 2006, approximately 53%, 50%, and 52%,
respectively, of net patient service revenue related to services
rendered under the Medicare and Medicaid programs. In the
ordinary course of business, we are potentially subject to a
review by regulatory agencies concerning the accuracy of
billings and sufficiency of supporting documentation of
procedures performed. Laws and regulations governing the
Medicare and Medicaid programs are extremely complex and subject
to interpretation. As a result, there is at least a reasonable
possibility that estimates will change by a material amount in
the near term.
Accounts Receivable and Allowances for Doubtful
Accounts.
Accounts receivable are reported net of
estimated allowances for doubtful accounts and contractual
adjustments. Accounts receivable are uncollateralized and
primarily consist of amounts due from third-party payers and
patients. To provide for accounts receivable that could become
uncollectible in the future, we establish an allowance for
doubtful accounts to reduce the carrying amount of such
receivables to their estimated net realizable value. The credit
risk for concentrations of receivables (other than Medicare) is
limited due to the large number of insurance companies and other
payers that provide payments for our services. We do not believe
that there are any significant concentrations of receivables
from any particular payer that would subject us to any
significant credit risk in the collection of our accounts
receivable.
Following is an aging of accounts receivable by payer
classification as of December 31, 2006 and 2005:
Aging by payer class at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled and
|
|
|
31-120
|
|
|
over
|
|
Payer
|
|
Total AR
|
|
|
< 30 days
|
|
|
days
|
|
|
120 days
|
|
|
Medicare and Medicaid
|
|
|
31%
|
|
|
|
16%
|
|
|
|
9%
|
|
|
|
6%
|
|
Commercial
|
|
|
41%
|
|
|
|
15%
|
|
|
|
14%
|
|
|
|
12%
|
|
Patient self-pay
|
|
|
24%
|
|
|
|
2%
|
|
|
|
5%
|
|
|
|
17%
|
|
Other
|
|
|
4%
|
|
|
|
3%
|
|
|
|
1%
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
36%
|
|
|
|
29%
|
|
|
|
35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging by payer class at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled and
|
|
|
31-120
|
|
|
over
|
|
Payer
|
|
Total AR
|
|
|
< 30 days
|
|
|
days
|
|
|
120 days
|
|
|
Medicare and Medicaid
|
|
|
25%
|
|
|
|
13%
|
|
|
|
7%
|
|
|
|
5%
|
|
Commercial
|
|
|
37%
|
|
|
|
12%
|
|
|
|
14%
|
|
|
|
11%
|
|
Patient self-pay
|
|
|
23%
|
|
|
|
2%
|
|
|
|
7%
|
|
|
|
14%
|
|
Other
|
|
|
15%
|
|
|
|
11%
|
|
|
|
4%
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
38%
|
|
|
|
32%
|
|
|
|
30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-56
The amount of the provision for doubtful accounts is based upon
our assessment of historical and expected net collections,
business and economic conditions, trends in Federal and state
governmental healthcare coverage and other collection
indicators. The primary tool used in our assessment is an
annual, detailed review of historical collections and write-offs
of accounts receivable. The results of our detailed review of
historical collections and write-offs, adjusted for changes in
trends and conditions, are used to evaluate the allowance amount
for the current period. Accounts receivable are written-off
after collection efforts have been followed in accordance with
our policies.
Goodwill and Other Intangible Assets.
Goodwill
represents the excess of purchase price over the estimated fair
market value of net assets we have acquired in business
combinations. On June 29, 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 142,
Goodwill and Other Intangible
Assets,
which changed the accounting for goodwill and
intangible assets. Under SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized but
are reviewed annually, or more frequently if impairment
indicators arise, for impairment. No goodwill impairment was
recognized for the years ended December 31, 2004, 2005 and
2006.
Intangible assets consist of noncompete agreements and licenses
and are amortized over the life of the agreements (which
typically range from 2 to 10 years) using the straight-line
method.
Impairment of Long-Lived Assets.
In accordance
with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, we review our long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets
may not be fully recoverable. Assessment of possible impairment
of a particular asset is based on our ability to recover the
carrying value of such asset based on our estimate of its
undiscounted future cash flows. If these estimated future cash
flows are less than the carrying value of such asset, an
impairment charge is recognized for the amount by which the
assets carrying value exceeds its estimated fair value.
During 2004, we recorded a charge of $1.2 million for the
write down to fair value of certain of our analog linear
accelerators and treatment simulators. The adjustment to machine
inventories was precipitated by the decision to discontinue the
installation of this type of equipment in favor of digital
machines with migration capability and combination
CT-simulators. This amount is included in general and
administrative expenses in the statement of income and
comprehensive income for the year ended December 31, 2004.
During 2005, we incurred an impairment loss of $1.2 million
related to the consolidation of two Yonkers, New York based
treatment centers within our Westchester/Bronx local market. No
impairments were recorded for long-lived assets for the year
ended December 31, 2006.
Stock Based Compensation.
Effective
January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123R,
Share-Based Payment
(SFAS 123R) for the
Companys 2004 Stock Incentive Plan (2004 Option Plan). The
Company previously accounted for the 2004 Option Plan under the
recognition and measurement provisions of Accounting Principles
Board Opinion No. 25,
Accounting for Stock Issued to
Employees
(APB 25) and related interpretations and
disclosure requirements established by Statement of Financial
Accounting Standards No. 123,
Accounting for Stock-Based
Compensation
(SFAS 123), as amended by Statement of
Financial Accounting Standards No. 148,
Accounting for
Stock-Based Compensation Transitions and Disclosure
(SFAS 148).
On November 3, 2005, the Board of Directors of the Company,
upon the recommendation of the Compensation Committee consisting
solely of independent directors, approved the acceleration of
vesting of all nonqualified outstanding non-vested stock options
previously granted under the Companys equity compensation
plans. As a result of the acceleration, nonqualified non-vested
stock options to purchase an aggregate of 1.2 million
shares of the Companys common stock, which would otherwise
have vested over periods of two to four years, became
immediately exercisable. The affected stock options have an
exercise price of $13.00 per share.
The primary purpose of the acceleration of the nonqualified
non-vested stock options was to enable the Company to avoid
recognizing compensation expense associated with these stock
options in future periods in its statement of income and
comprehensive income, upon adoption of SFAS No. 123R.
Under SFAS No. 123R, the compensation expense
associated with these accelerated options that would have been
recognized in the Companys income statement commencing
with the implementation of SFAS 123R and continuing through
E-57
2009 would have been approximately $2.4 million. Because of
the accelerated vesting, the adoption of SFAS No. 123R
had no impact on net income.
Certain stock options granted prior to the Companys
initial public offering were valued under SFAS 123 using
the minimum value method in the pro-forma disclosures. The
minimum value method excludes volatility in the calculation of
fair value of stock based compensation. In accordance with
SFAS No. 123R, options granted that were valued using
the minimum value method must be transitioned to SFAS 123R
using the prospective method. This means that these options will
continue to be accounted for under the same accounting
principles (recognition and measurement) originally applied to
those awards in the income statement, which for the Company was
APB 25. Additionally, pro forma information previously required
under SFAS 123 and SFAS 148 will no longer be
presented for these options.
The Company adopted SFAS 123R using the modified
prospective transition method for all other stock based
compensation awards. Under this transition method, compensation
cost recognized in 2006 includes: (a) the compensation cost
for all share-based awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS 123 and (b) the compensation cost of all
share-based awards granted subsequent to December 31, 2005,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. Results for prior periods have
not been restated.
Income Taxes.
We make estimates in recording
our provision for income taxes, including determination of
deferred tax assets and deferred tax liabilities and any
valuation allowances that might be required against the deferred
tax assets. We believe that future income will enable us to
realize these benefits; therefore, we have not recorded any
valuation allowance against our deferred tax asset.
New
Pronouncements
In June 2006 the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. This interpretation also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently
evaluating the potential impact that the adoption of this
interpretation will have on its financial position and results
of operations.
E-58
Results
of Operations
The following table presents summaries of results of operations
for the three months ended December 31, 2005 and 2006
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
62,137
|
|
|
|
96.5
|
%
|
|
$
|
75,825
|
|
|
|
97.3
|
%
|
Other revenue
|
|
|
2,236
|
|
|
|
3.5
|
|
|
|
2,103
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
64,373
|
|
|
|
100.0
|
%
|
|
|
77,928
|
|
|
|
100.0
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
34,485
|
|
|
|
53.6
|
|
|
|
40,191
|
|
|
|
51.6
|
|
Medical supplies
|
|
|
1,382
|
|
|
|
2.1
|
|
|
|
1,833
|
|
|
|
2.4
|
|
Facility rent expenses
|
|
|
2,148
|
|
|
|
3.3
|
|
|
|
2,608
|
|
|
|
3.3
|
|
Other operating expenses
|
|
|
2,728
|
|
|
|
4.2
|
|
|
|
3,535
|
|
|
|
4.5
|
|
General and administrative expenses
|
|
|
6,808
|
|
|
|
10.6
|
|
|
|
7,869
|
|
|
|
10.1
|
|
Depreciation and amortization
|
|
|
3,173
|
|
|
|
4.9
|
|
|
|
4,831
|
|
|
|
6.2
|
|
Provision for doubtful accounts
|
|
|
1,009
|
|
|
|
1.6
|
|
|
|
2,227
|
|
|
|
2.9
|
|
Interest expense, net
|
|
|
1,726
|
|
|
|
2.7
|
|
|
|
3,285
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
53,459
|
|
|
|
83.0
|
|
|
|
66,379
|
|
|
|
85.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
10,914
|
|
|
|
17.0
|
|
|
|
11,549
|
|
|
|
14.8
|
|
Minority interests in net losses (earnings) of consolidated
entities
|
|
|
(144
|
)
|
|
|
(0.2
|
)
|
|
|
164
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,770
|
|
|
|
16.8
|
|
|
|
11,713
|
|
|
|
15.0
|
|
Income tax expense
|
|
|
4,116
|
|
|
|
6.4
|
|
|
|
4,510
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,654
|
|
|
|
10.4
|
%
|
|
$
|
7,203
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents summaries of results of operations
for the years ended December 31, 2004, 2005 and 2006
(dollars in thousands). This information has been derived from
the consolidated statements of income and comprehensive income
included elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
163,719
|
|
|
|
95.5
|
%
|
|
$
|
217,590
|
|
|
|
95.7
|
%
|
|
$
|
284,067
|
|
|
|
96.6
|
%
|
Other revenue
|
|
|
7,654
|
|
|
|
4.5
|
|
|
|
9,660
|
|
|
|
4.3
|
|
|
|
9,915
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
171,373
|
|
|
|
100.0
|
|
|
|
227,250
|
|
|
|
100.0
|
|
|
|
293,982
|
|
|
|
100.0
|
|
E-59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
87,059
|
|
|
|
50.8
|
|
|
|
116,300
|
|
|
|
51.2
|
|
|
|
147,697
|
|
|
|
50.2
|
|
Medical supplies
|
|
|
3,608
|
|
|
|
2.1
|
|
|
|
5,678
|
|
|
|
2.5
|
|
|
|
7,569
|
|
|
|
2.6
|
|
Facility rent expenses
|
|
|
5,347
|
|
|
|
3.1
|
|
|
|
7,720
|
|
|
|
3.4
|
|
|
|
9,432
|
|
|
|
3.2
|
|
Other operating expenses
|
|
|
7,561
|
|
|
|
4.4
|
|
|
|
9,748
|
|
|
|
4.3
|
|
|
|
12,761
|
|
|
|
4.3
|
|
General and administrative expenses
|
|
|
19,671
|
|
|
|
11.5
|
|
|
|
23,538
|
|
|
|
10.4
|
|
|
|
30,209
|
|
|
|
10.3
|
|
Depreciation and amortization
|
|
|
6,860
|
|
|
|
4.0
|
|
|
|
10,837
|
|
|
|
4.8
|
|
|
|
16,967
|
|
|
|
5.8
|
|
Provision for doubtful accounts
|
|
|
5,852
|
|
|
|
3.4
|
|
|
|
6,792
|
|
|
|
3.0
|
|
|
|
9,425
|
|
|
|
3.2
|
|
Interest expense, net
|
|
|
3,435
|
|
|
|
2.0
|
|
|
|
5,290
|
|
|
|
2.3
|
|
|
|
10,036
|
|
|
|
3.4
|
|
Impairment loss
|
|
|
|
|
|
|
0.0
|
|
|
|
1,226
|
|
|
|
0.5
|
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
139,393
|
|
|
|
81.3
|
|
|
|
187,129
|
|
|
|
82.4
|
|
|
|
244,096
|
|
|
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
31,980
|
|
|
|
18.7
|
|
|
|
40,121
|
|
|
|
17.6
|
|
|
|
49,886
|
|
|
|
17.0
|
|
Minority interests in net losses (earnings) of consolidated
entities
|
|
|
55
|
|
|
|
0.0
|
|
|
|
480
|
|
|
|
0.2
|
|
|
|
(580
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32,035
|
|
|
|
18.7
|
|
|
|
40,601
|
|
|
|
17.8
|
|
|
|
49,306
|
|
|
|
16.8
|
|
Income tax expense
|
|
|
22,847
|
|
|
|
13.3
|
|
|
|
15,631
|
|
|
|
6.9
|
|
|
|
18,983
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,188
|
|
|
|
5.4
|
%
|
|
$
|
24,970
|
|
|
|
10.9
|
%
|
|
$
|
30,323
|
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes, as reported
|
|
$
|
32,035
|
|
|
|
18.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income taxes
|
|
|
12,814
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
19,221
|
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Three Months Ended December 31, 2005 and
2006
Total revenues.
Total revenues increased by
$13.5 million, or 21.1%, from $64.4 million for the
three months ended December 31, 2005 to $77.9 million
for the three months ended December 31, 2006. Approximately
$8.9 million of this increase resulted from our expansion
into new local markets during 2005 and 2006 through the
acquisition of 11 new treatment centers and the opening of 1 new
de novo centers as follows:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Sites
|
|
|
Location
|
|
Market
|
|
Type
|
|
November 2005
|
|
|
1
|
|
|
Palm Springs, California
|
|
Palm Springs, California
|
|
De novo
|
January 2006
|
|
|
1
|
|
|
Opp, Alabama
|
|
Southeastern Alabama
|
|
Acquisition
|
May 2006
|
|
|
1
|
|
|
Santa Monica, California
|
|
Los Angeles, California
|
|
Acquisition
|
August 2006
|
|
|
1
|
|
|
Bel Air, Maryland
|
|
Central Maryland
|
|
Acquisition
|
September 2006
|
|
|
1
|
|
|
Beverly Hills, California
|
|
Los Angeles, California
|
|
Acquisition
|
November 2006
|
|
|
7
|
|
|
Southeastern Michigan
|
|
Southeastern Michigan
|
|
Acquisition
|
Approximately $4.6 million of the total revenue increase
was driven by service mix improvements, volume growth and
pricing in our existing local markets.
Salaries and benefits.
Salaries and benefits
increased by $5.7 million, or 16.5%, from
$34.5 million for the three months ended December 31,
2005 to $40.2 million for the three months ended
December 31, 2006. Salaries and benefits as a percentage of
total revenues decreased from 53.6% for the three months ended
December 31, 2005 to 51.6% for the three months ended
December 31, 2006. Salaries and benefits consist of
E-60
all compensation and benefits paid, including the costs of
employing our physicians, medical physicists, dosimetrists,
radiation therapists, engineers, corporate administration and
other treatment center support staff. Additional staffing of
personnel and physicians due to our expansion and acquisitions
of treatment centers into new local markets during the latter
part of 2005 and in 2006 contributed to a $4.5 million
increase in salaries and benefits. Within our existing local
markets, salaries and benefits increased $1.2 million due
to increases in our physician performance based bonus programs,
additional staffing and increases in the cost of our health
insurance benefits, offset by reductions in our executive bonus
program.
Medical supplies.
Medical supplies increased
by $0.4 million, or 32.6%, from $1.4 million for the
three months ended December 31, 2005 to $1.8 million
for the three months ended December 31, 2006. Medical
supplies as a percentage of total revenues increased from 2.1%
for the three months ended December 31, 2005 to 2.4% for
the three months ended December 31, 2006. Medical supplies
consist of patient positioning devices, radioactive seed
supplies, supplies used for other brachytherapy services and
pharmaceuticals used in the delivery of radiation therapy
treatments and chemotherapy medical supplies. The increase in
medical supplies was primarily due to the increased utilization
of pharmaceuticals used in connection with the delivery of
radiation therapy treatments, pharmaceuticals used in urology
services, and chemotherapy medical supplies from new markets and
services entered into in 2005 and 2006. These pharmaceuticals
and chemotherapy medical supplies are principally reimbursable
by third-party payers.
Facility rent expenses.
Facility rent expenses
increased by $0.5 million, or 21.4%, from $2.1 million
for the three months ended December 31, 2005 to
$2.6 million for the three months ended December 31,
2006. Facility rent expenses as a percentage of total revenues
was 3.3% for the three months ended December 31, 2005 and
for the three months ended December 31, 2006. Facility rent
expenses consist of rent expense associated with our treatment
center locations. The majority of the increase related to the
expansion into new local markets in California, Rhode Island and
Southeastern Michigan and the acquisition of new treatment
centers in existing local markets in Central Maryland and
Southeastern Alabama.
Other operating expenses.
Other operating
expenses increased by $0.8 million or 29.6%, from
$2.7 million for the three months ended December 31,
2005 to $3.5 million for the three months ended
December 31, 2006. Other operating expenses as a percentage
of total revenue increased from 4.2% for the three months ended
December 31, 2005 to 4.5% for the three months ended
December 31, 2006. Other operating expenses consist of
repairs and maintenance of equipment, equipment rental and
contract labor. Approximately $0.5 million of the increase
was related to the expansion into new local markets in
California, Rhode Island and Southeastern Michigan, and the
acquisition of new treatment centers in existing local markets
in Central Maryland and Southeastern Alabama and
$0.3 million increase in our remaining existing local
markets, primarily attributable to an increase in the number of
service contracts for maintenance of our advanced treatment
technologies.
General and administrative expenses.
General
and administrative expenses increased by $1.1 million or
15.6%, from $6.8 million for the three months ended
December 31, 2005 to $7.9 million for the three months
ended December 31, 2006. General and administrative
expenses principally consist of professional service fees,
office supplies and expenses, insurance and travel costs.
General and administrative expenses as a percentage of total
revenues decreased from 10.6% for the three months ended
December 31, 2005 to 10.1% for the three months ended
December 31, 2006. The increase of $1.1 million in
general and administrative expenses was due to an increase of
approximately $0.7 million relating to the growth in the
number of our local markets primarily attributable to the
additional travel expenses associated with the acquisitions of
treatment centers, and approximately $0.5 million in our
existing local markets. The increase in the existing local
markets was primarily attributable to approximately
$0.4 million in malpractice insurance costs. During the
fourth quarter of 2005, we wrote off approximately
$0.1 million of deferred financing costs as a result of our
refinancing under the fourth amended and restated senior credit
facility.
Depreciation and amortization.
Depreciation
and amortization increased by $1.6 million, or 52.3%, from
$3.2 million for the three months ended December 31,
2005 to $4.8 million for the three months ended
December 31, 2006. Depreciation and amortization expense as
a percentage of total revenues increased from 4.9% for the three
months ended December 31, 2005 to 6.2% for the three months
ended December 31, 2006.
E-61
An increase in capital expenditures related to our investment in
advanced radiation treatment technologies in certain local
markets increased our depreciation and amortization by
approximately $0.8 million. Approximately $0.4 million
of the increase was attributable to the expansion into new local
markets in California, Rhode Island and Southeastern Michigan
and the acquisition of new treatment centers in existing local
markets in Central Maryland and Southeastern Alabama. The
remaining portion of the increase was attributable to growth in
our existing markets.
Provision for doubtful accounts.
Provision for
doubtful accounts increased by $1.2 million, or 120.7%,
from $1.0 million for the three months ended
December 31, 2005 to $2.2 million for the three months
ended December 31, 2006. Provision for doubtful accounts as
a percentage of total revenues increased from 1.6% for the three
months ended December 31, 2005 to 2.9% for the three months
ended December 31, 2006. The increase is primarily
attributable to the additional provision for doubtful accounts
added to the third quarter 2005 estimates as a result of the
major acquisitions completed during the second quarter of 2005
and were updated as a result of our review of the provision for
doubtful accounts during the fourth quarter of 2006.
Interest expense, net.
Interest expense, net
increased by $1.6 million, or 90.3%, from $1.7 million
for the three months ended December 31, 2005 to
$3.3 million for the three months ended December 31,
2006. Interest expense as a percentage of total revenues
increased from 2.7% in 2005 to 4.2% in 2006. Included in
interest expense, net is an insignificant amount of interest
income. The increase is primarily attributable to increased
borrowings under our senior credit facility for our expansion
into new markets during 2005 and 2006 and borrowings under
capital lease financing arrangements for our investment in
advanced radiation treatment technologies in certain local
markets.
Net income.
Net income increased by
$0.5 million, or 8.3%, from $6.7 million in net income
for the three months ended December 31, 2005 to
$7.2 million for the three months ended December 31,
2006. Net income represents 10.4% and 9.2% of total revenues for
the three months ended December 31, 2005 and 2006,
respectively.
Comparison
of the Years Ended December 31, 2005 and 2006
Total revenues.
Total revenues increased by
$66.7 million, or 29.4%, from $227.3 million in 2005
to $294.0 million in 2006. Approximately $37.4 million
of this increase resulted from our expansion into new local
markets during 2005 and 2006 through the acquisition of
21 new treatment centers and the opening of 2 new de
novo centers as follows:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Sites
|
|
|
Location
|
|
Market
|
|
Type
|
|
April 2005
|
|
|
1
|
|
|
Martinsburg, West Virginia
|
|
Central Maryland
|
|
Acquisition
|
May 2005
|
|
|
5
|
|
|
Las Vegas, Nevada
|
|
Las Vegas, Nevada
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Holyoke, Massachusetts
|
|
Holyoke, Massachusetts
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Scottsdale, Arizona
|
|
Scottsdale, Arizona
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Greenbelt, Maryland
|
|
Central Maryland
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Belcamp, Maryland
|
|
Central Maryland
|
|
Acquisition
|
September 2005
|
|
|
1
|
|
|
South County, Rhode Island
|
|
Rhode Island
|
|
De novo
|
November 2005
|
|
|
1
|
|
|
Palm Springs, California
|
|
Palm Springs, California
|
|
De novo
|
January 2006
|
|
|
1
|
|
|
Opp, Alabama
|
|
Southeastern Alabama
|
|
Acquisition
|
May 2006
|
|
|
1
|
|
|
Santa Monica, California
|
|
Los Angeles, California
|
|
Acquisition
|
August 2006
|
|
|
1
|
|
|
Bel Air, Maryland
|
|
Central Maryland
|
|
Acquisition
|
September 2006
|
|
|
1
|
|
|
Beverly Hills, California
|
|
Los Angeles, California
|
|
Acquisition
|
November 2006
|
|
|
7
|
|
|
Southeastern Michigan
|
|
Southeastern Michigan
|
|
Acquisition
|
Approximately $29.3 million of the total revenue increase
was driven by service mix improvements, volume growth and
pricing in our existing local markets.
E-62
Salaries and benefits.
Salaries and benefits
increased by $31.4 million, or 27.0%, from
$116.3 million in 2005 to $147.7 million in 2006.
Salaries and benefits as a percentage of total revenues
decreased from 51.2% in 2005 to 50.2% in 2006. Additional
staffing of personnel and physicians due to our expansion and
acquisitions of treatment centers into new local markets during
the latter part of 2005 and 2006 contributed to a
$20.6 million increase in salaries and benefits. Within our
existing local markets, salaries and benefits increased
$10.8 million due to increases in our performance based
bonus programs, additional staffing and increases in the cost of
our health insurance benefits. The $10.8 million increase
in existing local markets includes a one-time severance payment
to a former executive of approximately $0.5 million.
Medical supplies.
Medical supplies increased
by $1.9 million, or 33.3%, from $5.7 million in 2005
to $7.6 million in 2006. Medical supplies as a percentage
of total revenues increased from 2.5% in 2005 to 2.6% in 2006.
The increase in medical supplies was primarily due to the
increased utilization of pharmaceuticals used in connection with
the delivery of radiation therapy treatments, pharmaceuticals
used in urology services, and chemotherapy medical supplies from
new markets and services entered into in 2005 and 2006. These
pharmaceuticals and chemotherapy medical supplies are
principally reimbursable by third-party payers.
Facility rent expenses.
Facility rent expenses
increased by $1.7 million, or 22.2%, from $7.7 million
in 2005 to $9.4 million in 2006. Facility rent expenses as
a percentage of total revenues decreased from 3.4% in 2005 to
3.2% in 2006. Facility rent expenses consist of rent expense
associated with our treatment center locations. Approximately
$1.8 million of the increase related to the expansion into
new local markets and $0.2 million increase in our existing
local markets, offset by a reduction in facility rent expense of
approximately $0.3 million relating to costs for the
re-location of our Briarcliff Manor operations to a hospital in
our Westchester/Bronx local market during the second quarter of
2005.
Other operating expenses.
Other operating
expenses increased by $3.1 million or 30.9%, from
$9.7 million in 2005 to $12.8 million in 2006. Other
operating expenses as a percentage of total revenues was 4.3% in
2005 and 2006. Other operating expenses consist of repairs and
maintenance of equipment, equipment rental and contract labor.
Approximately $2.3 million of the increase was related to
the expansion into new local markets and $0.8 million
increase in our remaining existing local markets, primarily
attributable to an increase in the number of service contracts
for maintenance of our advanced treatment technologies.
General and administrative expenses.
General
and administrative expenses increased by $6.7 million or
28.3%, from $23.5 million in 2005 to $30.2 million in
2006. General and administrative expenses principally consist of
professional service fees, office supplies and expenses,
insurance and travel costs. General and administrative expenses
as a percentage of total revenues decreased from 10.4% in 2005
to 10.3% in 2006. The increase of $6.7 million in general
and administrative expenses was due to an increase of
approximately $2.9 million relating to the growth in the
number of our local markets, primarily attributable to the
additional travel expenses associated with the acquisitions of
treatment centers, and approximately $4.3 million in our
existing local markets offset by a decrease of $0.5 million
due to the write-off of deferred financing costs in March 2005.
The increase in the existing local markets was primarily
attributable to approximately $2.5 million in malpractice
insurance costs and approximately $0.9 million in
professional fees.
Depreciation and amortization.
Depreciation
and amortization increased by $6.2 million, or 56.6%, from
$10.8 million in 2005 to $17.0 million in 2006.
Depreciation and amortization expense as a percentage of total
revenues increased from 4.8% in 2005 to 5.8% in 2006. An
increase in capital expenditures related to our investment in
advanced radiation treatment technologies in certain local
markets increased our depreciation and amortization by
approximately $2.5 million. Approximately $3.0 million
of the increase was attributable to the expansion into new local
markets in California, Rhode Island, West Virginia, Arizona,
Massachusetts and Southeastern Michigan and the acquisition of
new treatment centers in existing local markets in Central
Maryland, Las Vegas, Nevada and Southeastern Alabama. The
remaining portion of the increase was attributable to growth in
our existing markets.
Provision for doubtful accounts.
Provision for
doubtful accounts increased by $2.6 million, or 38.8%, from
$6.8 million in 2005 to $9.4 million in 2006.
Provision for doubtful accounts as a percentage of total
revenues increased from 3.0% in 2005 to 3.2% in 2006.
Approximately $1.3 million of the increase related to the
expansion into new local markets in California, Rhode Island,
West Virginia, Arizona, Massachusetts and
E-63
Southeastern Michigan and the acquisition of new treatment
centers in existing local markets in Central Maryland, Las
Vegas, Nevada and Southeastern Alabama and the balance within
our remaining existing local markets as a result of the growth
in our accounts receivable due to services of advanced new
technology procedures.
Interest expense, net.
Interest expense, net
increased by $4.7 million, or 89.7%, from $5.3 million
in 2005 to $10.0 million in, 2006. Interest expense as a
percentage of total revenues increased from 2.3% in 2005 to 3.4%
in 2006. Included in interest expense, net is an insignificant
amount of interest income. The increase is primarily
attributable to increased borrowings under our senior credit
facility for our expansion into new markets during 2005 and 2006
and borrowings under capital lease financing arrangements of
approximately $37.4 million for our investment in advanced
radiation treatment technologies in certain local markets
throughout 2005 and 2006.
Impairment loss.
During the first quarter of
2005, we incurred an impairment loss of $1.2 million
related to the consolidation of two Yonkers, New York based
treatment centers within our Westchester/Bronx local market.
Net income.
Net income increased by
$5.3 million, or 21.4%, from $25.0 million in 2005 to
$30.3 million in 2006. Net income represents 10.9% and
10.3% of total revenues in 2005 and 2006, respectively.
Comparison
of the Years Ended December 31, 2004 and 2005
Total revenues.
Total revenues increased by
$55.9 million, or 32.6%, from $171.4 million in 2004
to $227.3 million in 2005. Approximately $29.8 million
of this increase resulted from our expansion into new local
markets during 2004 and 2005 through the acquisition of 13 new
treatment centers and the opening of 5 new de novo centers as
follows:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Sites
|
|
|
Location
|
|
Market
|
|
Type
|
|
January 2004
|
|
|
1
|
|
|
Destin Florida
|
|
Northwest Florida
|
|
De novo
|
June 2004
|
|
|
1
|
|
|
Crestview Florida
|
|
Northwest Florida
|
|
De novo
|
September 2004
|
|
|
3
|
|
|
South New Jersey
|
|
South New Jersey
|
|
Acquisition
|
November 2004
|
|
|
1
|
|
|
Woonsocket, Rhode Island
|
|
Rhode Island
|
|
De novo
|
April 2005
|
|
|
1
|
|
|
Martinsburg, West Virginia
|
|
Central Maryland
|
|
Acquisition
|
May 2005
|
|
|
5
|
|
|
Las Vegas, Nevada
|
|
Las Vegas, Nevada
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Holyoke, Massachusetts
|
|
Holyoke, Massachusetts
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Scottsdale, Arizona
|
|
Scottsdale, Arizona
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Greenbelt, Maryland
|
|
Central Maryland
|
|
Acquisition
|
June 2005
|
|
|
1
|
|
|
Belcamp, Maryland
|
|
Central Maryland
|
|
Acquisition
|
September 2005
|
|
|
1
|
|
|
South County, Rhode Island
|
|
Rhode Island
|
|
De novo
|
November 2005
|
|
|
1
|
|
|
Palm Springs, California
|
|
Palm Springs, California
|
|
De novo
|
Approximately $25.1 million of this increase was driven by
service mix improvements, volume growth and pricing in our
existing local markets. Total revenues in 2005 also included a
gain of approximately $1.0 million from the sale of a 49.9%
interest in a joint venture that was formed to operate a
treatment center located in Berlin, Maryland. In 2005 our
professional component fees comprised $15.7 million of our
total revenue.
Salaries and benefits.
Salaries and benefits
increased by $29.2 million, or 33.6%, from
$87.1 million in 2004 to $116.3 million in 2005.
Salaries and benefits as a percentage of total revenue increased
from 50.8% in 2004 to 51.2% in 2005. Additional staffing of
personnel and physicians due to our expansion into new local
markets during the fourth quarter of 2004 and the acquisitions
of new treatment centers acquired in 2005 contributed to a
$13.4 million increase in salaries and benefits. Within our
existing local markets, salaries and benefits increased
$15.8 million due to increases in staffing, pay rates and
the cost of our health insurance benefits.
E-64
Medical supplies.
Medical supplies increased
by $2.1 million, or 57.4%, from $3.6 million in 2004
to $5.7 million in 2005. Medical supplies as a percentage
of total revenues increased from 2.1% in 2004 to 2.5% in 2005.
Medical supplies consist of patient positioning devices,
radioactive seed supplies, supplies used for other brachytherapy
services and pharmaceuticals used in the delivery of radiation
therapy treatments and chemotherapy medical supplies.
Approximately $1.3 million of the increase in medical
supplies was primarily due to the increased utilization of
pharmaceuticals used in connection with the delivery of
radiation therapy treatments and chemotherapy medical supplies.
These pharmaceuticals and chemotherapy medical supplies are
principally reimbursable by third-party payers.
Facility rent expenses.
Facility rent expenses
increased by $2.3 million, or 44.4%, from $5.4 million
in 2004 to $7.7 million in 2005. Facility rent expenses as
a percentage of total revenues increased from 3.1% in 2004 to
3.4% in 2005. Approximately $1.5 million of the increase
related to the expansion into new local markets in New Jersey,
Rhode Island, West Virginia, Arizona and Massachusetts and the
acquisition of new treatment centers in existing local markets
in Western Maryland and Las Vegas, Nevada. Approximately
$0.3 million relates to costs for the re-location of our
Briarcliff Manor operations to a hospital in our
Westchester/Bronx local market.
Other operating expenses.
Other operating
expenses increased by $2.1 million or 28.9%, from
$7.6 million in 2004 to $9.7 million in 2005. Other
operating expenses as a percentage of total revenues decreased
from 4.4% in 2004 to 4.3% in 2005. Approximately
$1.7 million of the increase related to the expansion into
new local markets in New Jersey, Rhode Island, West Virginia,
Arizona and Massachusetts and the acquisition of new treatment
centers in existing local markets in Western Maryland and Las
Vegas, Nevada. Within our existing local markets, other
operating expenses increased $0.4 million due to increases
in the cost of repairs and maintenance of equipment.
General and administrative expenses.
General
and administrative expenses increased by $3.8 million, or
19.7%, from $19.7 million in 2004 to $23.5 million in
2005. General and administrative expenses principally consist of
professional service fees, office supplies and expenses,
insurance and travel costs. General and administrative expenses
as a percentage of total revenues decreased from 11.5% in 2004
to 10.4% in 2005. Approximately $2.3 million of the
increase incurred was associated with operating as a public
company. These expenses included legal fees, professional
service fees including Sarbanes-Oxley compliance costs,
accounting fees and increased directors and officers insurance
premiums, public relations and board expenses. Additional
increases in general and administrative expenses included
approximately $1.4 million relating to the growth in the
number of our local markets, and $0.9 million in our
existing local markets offset by a one time charge of
$1.2 million for the write down of certain of our analog
Linac and simulator inventory during the third quarter of 2004.
Depreciation and amortization.
Depreciation
and amortization increased by $4.0 million, or 58.0%, from
$6.9 million in 2004 to $10.8 million in 2005.
Depreciation and amortization expense as a percentage of total
revenues increased from 4.0% in 2004 to 4.8% in 2005. An
increase in capital expenditures related to our investment in
advanced radiation treatment technologies in certain local
markets increased our depreciation and amortization by
approximately $1.2 million. Approximately $2.4 million
of the increase was attributable to the expansion into new local
markets in New Jersey, Rhode Island, West Virginia, Arizona and
Massachusetts and the acquisition of new treatment centers in
existing local markets in Western Maryland and Las Vegas,
Nevada. The remaining portion of the increase was attributable
to growth in our existing markets.
Provision for doubtful accounts.
Provision for
doubtful accounts increased by $0.9 million, or 16.1%, from
$5.9 million in 2004 to $6.8 million in 2005.
Provision for doubtful accounts as a percentage of total
revenues decreased from 3.4% in 2004 to 3.0% in 2005. The
increase of $0.9 million in the provision for doubtful
accounts was primarily related to the expansion into new local
markets in New Jersey, Rhode Island, West Virginia, Arizona and
Massachusetts and the acquisition of new treatment centers in
existing local markets in Western Maryland and Las Vegas, Nevada.
Interest expense, net.
Interest expense, net
increased by $1.9 million, or 54.0%, from $3.4 million
in 2004 to $5.3 million in 2005. Interest expense as a
percentage of total revenues increased from 2.0% in 2004 to 2.3%
in 2005. Included in interest expense, net is an insignificant
amount of interest income.
E-65
Approximately $1.6 million of the increase is as a result
of the increased borrowings for our expansion into new markets.
Approximately $0.4 million of the increase is as a result
of an increase in rates and the remainder of the increase is due
to interest on additional capital leases entered into in late
2004 and 2005 of approximately $0.5 million, offset by the
interest cost savings on the Term B loan of approximately
$0.5 million paid off in June 2004.
Impairment loss.
During the first quarter of
2005, we incurred an impairment loss of $1.2 million
related to the consolidation of two Yonkers, New York based
treatment centers within our Westchester/Bronx local market.
Net income and pro forma net income.
Net
income increased by $5.8 million, or 29.9%, from
$19.2 million in pro forma net income in 2004 to
$25.0 million in 2005. Net income and pro forma net income
represent 10.9% and 11.2% of total revenues in 2005 and 2004,
respectively. Net income is discussed on a pro forma basis due
to a provision for income taxes to reflect the estimated
corporate income tax expense based on the assumption the Company
was a C corporation at the beginning of 2004 and provides for
income taxes utilizing an effective rate of approximately 40.0%.
Liquidity
and Capital Resources
Our principal capital requirements are for working capital,
acquisitions, medical equipment replacement and expansion and de
novo treatment center development. We fund acquisitions through
draws on our revolving credit facility. Working capital and
medical equipment are funded through cash from operations,
supplemented, as needed, by five-year fixed rate lease lines of
credit. Borrowings under these lease lines of credit are
recorded on the balance sheets. The construction of de novo
treatment centers is funded directly by third parties and then
leased by us. We finance our operations, capital expenditures
and acquisitions through a combination of borrowings, cash
generated from operations and seller financing.
Prior to our initial public offering, we used real estate
entities owned by members of the board of directors and
executive management, and by employees to finance the
construction of certain of our treatment centers and the
development of our corporate headquarters. The rents were
determined on the basis of the debt service incurred by the
entities and a return on the equity component of the
projects funding. Prior to completing our initial public
offering in June 2004, we engaged an independent consultant to
complete a fair market rent analysis for the real estate leases
with these entities. The consultant determined that, with one
exception, the rents are at fair market value. We negotiated a
rent reduction for the one exception to bring it to fair market
value as determined by the consultant. Since becoming a public
company, an independent consultant has been utilized to assist
the Companys audit committee in determining fair market
rental for any renewal or new rental arrangements with any
affiliated party.
Cash
Flows From Operating Activities
Net cash provided by operating activities for the years ended
December 31, 2004, 2005 and 2006 was $28.2 million,
$22.3 million and $36.0 million, respectively.
Net cash provided by operating activities decreased by
$5.9 million from $28.2 million in 2004 to
$22.3 million in 2005. The decrease of $5.9 million
was affected by income tax payments made in 2005 of
approximately $17.6 million, as compared to tax payments of
approximately $6.0 million made in 2004, offset by an
increase in our net income. Accounts receivable increased by
$21.6 million from the prior year due primarily to our
expansion into new local markets in New Jersey, Rhode Island,
West Virginia, Arizona, and Massachusetts and in existing local
markets in Florida, Maryland and Nevada.
Net cash provided by operating activities increased by
$13.7 million from $22.3 million in 2005 to
$36.0 million in 2006. Net cash provided by operating
activities was affected by an increase in accounts receivable of
$12.5 million from the prior year due primarily to our
expansion into new local markets in California, Rhode Island,
West Virginia, Arizona, Massachusetts, and Michigan and in
existing local markets in Florida, Maryland, Nevada and
Southeastern Alabama. Cash flow from operating activities was
also
E-66
impacted by approximately $1.2 million in prepayments for
maintenance service contracts of our advanced treatment
technologies and approximately $3.4 million in prepayments
for our medical malpractice premiums.
Cash
Flows From Investing Activities
Net cash used in investing activities for 2004, 2005, and 2006
was $25.2 million, $63.3 million, and
$96.6 million, respectively.
Net cash used in investing activities increased by
$38.1 million from $25.2 million in 2004 to
$63.3 million in 2005. Net cash used in investing
activities was impacted by approximately $43.2 million from
the acquisitions of radiation center assets during 2005 and
approximately $19.8 million in additional purchases of
property and equipment related to new equipment and equipment
upgrades. In addition, approximately $3.1 million of
purchases of marketable securities for investments in municipal
bonds and preferred stock during 2005 and proceeds of
approximately $1.8 million from the sale of an equity
interest in a joint venture contributed to the change in our
investing activities.
Net cash used in investing activities increased by
$33.3 million from $63.3 million in 2005 to
$96.6 million in 2006. Net cash used in investing
activities was impacted by approximately $81.0 million from
the acquisitions of radiation center assets during 2006 as
compared to approximately $43.2 million of acquisitions in
2005. Approximately $19.7 million in additional purchases
of property and equipment related to new equipment and equipment
upgrades impacted the change in our investing activities.
Approximately $5.5 million for the sale of marketable
securities during 2006 as compared to the purchases of
marketable securities of $3.1 million in 2005 contributed
to the change in our investing activities. The sale of the
marketable securities in 2006 was used to fund a portion of the
purchase price of our Santa Monica facility in May 2006.
Historically, our capital expenditures have been primarily for
equipment, leasehold improvements and information technology
equipment. Total capital expenditures, inclusive of amounts
financed through capital lease arrangements and exclusive of the
purchase of radiation treatment centers, were
$23.2 million, $34.6 million and $42.4 million in
2004, 2005 and 2006, respectively. Historically, we have funded
our capital expenditures with cash flows from operations,
borrowings under the senior credit facility and borrowings under
our lease line of credit. Over the next 12 to 18 months, we
estimate $28 to $37 million in capital spending focused on
expanding existing local markets and updating the technology in
our centers acquired in 2006. To the extent that we acquire or
internally develop new radiation treatment centers, we may need
to increase our expected capital expenditures on a proportionate
basis.
Cash
From Financing Activities
Net cash used in financing activities for the year ended
December 31, 2004 was $0.5 million. Net cash provided
by financing activities for the year ended December 31,
2005 and 2006 was $45.0 million and $67.1 million,
respectively.
Net cash used in financing activities for the year ended
December 31, 2004 was impacted from the borrowing of
approximately $59.1 million under our senior secured credit
facility, offset by distributions to shareholders of
approximately $46.4 million in 2004, which included a
one-time distribution of $40.0 million. We incurred
approximately $1.6 million in fees as a result of entering
into our third amended and restated senior secured credit
facility on March 31, 2004. We received net proceeds of
approximately $46.8 million from the completion of an
initial public offering of our common stock on June 23,
2004. Repayments of debt of approximately $61.3 million
included the application of approximately $44.0 of the net
proceeds used to repay outstanding indebtedness under our senior
secured credit facility and approximately $2.8 million of
the net proceeds used to repay outstanding indebtedness to
certain of our directors, officers and related parties. The
receipt of $2.3 million from the exercise of stock options,
the receipt of $0.9 million from payments of notes
receivable from shareholders and payments of $1.9 million
in loan costs relating to our senior secured credit facility
also impacted cash flow from financing activities during 2004.
E-67
In the first quarter of 2004, we borrowed approximately
$40.0 million under our senior credit facility, for a
planned one-time distribution to our shareholders in April 2004
and we borrowed approximately $7.7 million for the
acquisition of the two New Jersey centers in the third quarter
of 2004 and other borrowings of approximately $11.4 million.
In 2005, we borrowed approximately $50.6 million under our
senior secured credit facility, of which $43.2 million was
for the acquisition of radiation center assets during the second
quarter of 2005. Net cash provided by financing activities was
also impacted by approximately $53.2 million reduction in
repayments of debt as a result of our receipt of proceeds of
approximately $46.8 million in June 2004 from our initial
public offering of common stock, which was utilized to repay
indebtedness in 2004. Costs relating to the refinancing of the
senior secured credit facility were approximately
$1.5 million in 2005 as compared to $1.9 million in
2004. The receipt of $2.7 million from the exercise of
stock options and the receipt of $1.3 million from payments
of notes receivable from shareholders also impacted cash flow
from financing activities during 2005. Distributions to
shareholders were approximately $46.4 million in 2004; no
distributions have been made since our initial public offering
in June 2004.
Net cash provided by financing activities increased by
$22.1 million from $45.0 million in 2005 to
$67.1 million in 2006. The increase in cash provided by
financing activities was primarily attributable to the borrowing
of approximately $50.6 million for the acquisition of the
treatment centers in 2005 compared to $68.5 million in
borrowings in 2006. Repayments of debt of approximately
$10.3 million in 2006, primarily for capital lease
obligations, and prepayments of $1.8 million under our
senior secured credit facility impacted cash flow from financing
activities during 2006. The receipt of $6.0 million from
the exercise of stock options and the tax benefit of
$2.9 million from stock option exercise also impacted cash
flow from financing activities during 2006. Costs relating to
the refinancing of the senior secured credit facility were
approximately $1.5 million in 2005.
Credit
Facility and Available Lease Lines
On March 18, 2005 we amended our third amended and restated
senior secured credit facility principally to increase the Term
A loan to $35 million and increase our revolving credit
commitment from $80 million to $140 million. Per the
amendment, the interest rate spreads on the Term A loan and on
the revolver were reduced overall by 25 basis points. The
amendment extended the maturity date of the Term A loan and the
revolver to March 15, 2010.
On April 26, 2005 we amended our third amended and restated
senior secured credit facility principally to increase the
aggregate amount of permitted acquisitions from $25 million
to $45 million and to obtain consent on the purchase of
five radiation treatment centers located in Clark County, Nevada
from Associated Radiation Oncologists, Inc. As a result of our
refinancing in March and April 2005, we wrote-off approximately
$579,000 of financing costs capitalized in connection with our
previous credit facility.
On December 16, 2005, we entered into a fourth amended and
restated senior secured credit facility principally to provide
for a $100 million Term B loan. Our fourth amended and
restated senior secured credit facility provides, subject to our
compliance with covenants and customary conditions, for
$290.0 million in borrowings consisting of: (i) a
$100 million Term B loan, (ii) a $50 million
accordion feature, which allows the us to increase the aggregate
principal amount of the Term B loan to $150 million, and
(iii) a $140 million revolver. We used the proceeds of
the $100 million Term B loan to pay off our pre-existing
Term A loan as well as the borrowings drawn on our
$140 million revolver.
On November 14, 2006, we amended our fourth amended and
restated senior secured credit facility to exclude the
acquisition of the radiation centers in Southeastern Michigan
from the total permitted acquisition amount threshold of
$62 million in 2006, increase the amount of our 2006
permitted capital expenditures to $50 million, and increase
the amount of purchase money indebtedness outstanding at any
time from $40 million to $70 million.
The Term B loan requires quarterly payments of $250,000 and
matures on December 16, 2012. The Term B loan initially
bears interest either at LIBOR plus a spread of 200 basis
points or a specified base rate plus a
E-68
spread of 50 basis points, with the opportunity to
permanently reduce the spread by 25 basis points on LIBOR
and base rate loans after six months, provided our leverage
ratio is below 2.00 to 1.00. At June 30, 2006, our leverage
ratio was below 2.00 to 1.00 and we reduced our interest rate on
the Term B loan by 25 basis points.
Our senior secured credit facility matures on March 15,
2010 and is secured by a pledge of substantially all of our
tangible and intangible assets, and requires us to make
mandatory prepayments of outstanding borrowings. Mandatory
prepayments include prepayments to the Term B portion of the
senior secured credit facility from proceeds from asset
dispositions and debt and equity issuances, limited to a
percentage of the proceeds
and/or
an
excess amount above a dollar threshold. Beginning with the year
ended December 31, 2006, we are required to prepay the Term
B portion of the senior secured credit facility of up to 50% of
excess cash flow if our leverage is equal to or greater than
2.75 to 1.00. To date we have not been required to make such
prepayments. The revolving credit facility also requires that we
comply with various other covenants, including, but not limited
to, limitations on our leverage, restrictions on new
indebtedness, the ability to merge or consolidate, asset sales,
capital expenditures, acquisitions and dividends. Borrowings
under the senior secured credit facility bear interest at LIBOR
plus a spread ranging from 125 to 250 basis points or a
specified base rate plus a spread ranging from 0 to
100 basis points, with the exact spread determined upon the
basis of our leverage ratio, as defined. We are required to pay
a quarterly unused commitment fee at a rate ranging from 25 to
50 basis points on our revolving line of credit determined
upon the basis of our leverage ratio, as defined.
Our fourth amended and restated senior secured credit facility:
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is secured by a pledge of substantially all of our tangible and
intangible assets, including accounts receivable, inventory and
capital stock of our existing and future subsidiaries, and
requires that borrowings and other amounts due under it will be
guaranteed by our existing and future domestic subsidiaries;
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requires us to make mandatory prepayments of outstanding
borrowings, with a corresponding reduction in the maximum amount
of borrowings available under the senior secured credit
facility, with net proceeds from insurance recoveries and asset
sales, and with the net proceeds from the issuance of equity or
debt securities, subject to specified exceptions;
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includes a number of restrictive covenants including, among
other things, limitations on our leverage, capital and
acquisitions expenditures, and requirements that we maintain
minimum ratios of cash flow to fixed charges and of cash flow to
interest;
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limits our ability to pay dividends on our capital
stock; and
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contains customary events of default, including an event of
default upon a change in our control.
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In connection with entering into our fourth amended and restated
senior secured credit facility in 2005, we incurred fees and
expenses of approximately $860,000, which have been recorded as
deferred financing costs and are being amortized over the term
of the related debt instruments. Additionally, in 2005 we
wrote-off approximately $124,000 of financing costs capitalized
in connection with our previous credit facility.
The revolving credit facility requires that we comply with
certain financial covenants, including:
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Level at
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December 31,
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Requirement
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2006
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Maximum permitted consolidated leverage ratio
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<3.25 to 1.00
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2.42 to 1.00
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Minimum permitted consolidated fixed charge coverage ratio
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>1.50 to 1.00
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2.38 to 1.00
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Minimum permitted consolidated interest coverage ratio
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>3.75 to 1.00
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6.32 to 1.00
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The maximum permitted consolidated leverage ratio required is
<3.50 to 1.00 through September 30, 2006, <3.25
to 1.00 from October 1, 2006 through December 31, 2007
and <3.00 to 1.00 thereafter.
E-69
The revolving credit facility also requires that we comply with
various other covenants, including, but not limited to,
restrictions on new indebtedness, the ability to merge or
consolidate, asset sales, capital expenditures, acquisitions and
dividends, with which we were in compliance as of
December 31, 2006.
The following table sets forth the amounts outstanding under our
revolving credit facility and Term B loan, the effective
interest rates on such outstanding amounts for the quarter and
amounts available for additional borrowing hereunder, as of
December 31, 2006:
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Amount Available
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Effective
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Letters
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Amount
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for Additional
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Senior Secured Credit Facility
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Interest Rate
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of Credit
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Outstanding
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Borrowing
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(Dollars in thousands)
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Revolving credit facility
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6.9
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%
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$
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300
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$
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66,700
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$
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73,000
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Term B loan
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7.1
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98,550
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50,000
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Total
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$
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300
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$
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165,250
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$
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123,000
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As of December 31, 2006, we had $205.2 million of
outstanding debt, $12.3 million of which was classified as
current. Of the $205.2 million of outstanding debt,
$165.3 million was outstanding to lenders under our fourth
amended and restated senior secured credit facility, and
$39.9 million was outstanding under capital leases and
other miscellaneous indebtedness. As of December 31, 2006,
of the outstanding borrowings under our fourth amended and
restated senior secured credit facility, $1.0 million was
classified as current.
We currently maintain a lease line of credit with a financial
institution for the purpose of leasing medical equipment in the
total commitment amount of $10 million. As of
December 31, 2006, we had $8.5 million available under
the lease line of credit.
We believe available borrowings under our current credit
facility and lease lines, together with our cash flows from
operations, will be sufficient to fund our currently anticipated
requirements for at least the next twelve months. After such
time period or in the event our requirements increase, to the
extent available borrowings and cash flows from operations are
insufficient to fund future requirements, we may be required to
seek additional financing through additional increases in our
credit facility, negotiate credit facilities with other lenders
or institutions or seek additional capital through private
placements or public offerings of equity or debt securities. No
assurances can be given that we will be able to extend or
increase the existing credit facility, secure additional bank
borrowings or complete additional debt or equity financings on
terms favorable to us or at all. Any such financing may be
dilutive in ownership, preferences, rights, or privileges to our
shareholders. If we are unable to obtain funds when needed or on
acceptable terms, we will be required to curtail our acquisition
and development program. Our ability to meet our funding needs
could be adversely affected if we suffer adverse results of
operations, or if we violate the covenants and restrictions to
which we are subject under our current credit facility.
Reimbursement,
Legislative And Regulatory Changes
Legislative and regulatory action has resulted in continuing
changes in reimbursement under the Medicare and Medicaid
programs that will continue to limit payments we receive under
these programs.
Within the statutory framework of the Medicare and Medicaid
programs, there are substantial areas subject to legislative and
regulatory changes, administrative rulings, interpretations, and
discretion which may further affect payments made under those
programs, and the federal and state governments may, in the
future, reduce the funds available under those programs or
require more stringent utilization and quality reviews of our
treatment centers or require other changes in our operations.
Additionally, there may be a continued rise in managed care
programs and future restructuring of the financing and delivery
of healthcare in the United States. These events could have an
adverse effect on our future financial results.
Inflation
While inflation was not a material factor in either revenue or
operating expenses during the periods presented, the healthcare
industry is labor-intensive. Wages and other expenses increase
during periods of
E-70
inflation and labor shortages, such as the nationwide shortage
of dosimetrists and radiation therapists. In addition, suppliers
pass along rising costs to us in the form of higher prices. We
have implemented cost control measures to curb increases in
operating costs and expenses. We have to date offset increases
in operating costs by increasing reimbursement or expanding
services. However, we cannot predict our ability to cover, or
offset, future cost increases.
Commitments
The following table discloses aggregate information about our
contractual obligations and the periods in which payments are
due as of December 31, 2006:
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Payments Due by Period
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Less Than
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After
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Contractual Cash Obligations
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Total
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1 Year
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2-3 Years
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4-5 Years
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5 Years
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(In thousands)
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Long-term debt
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$
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165,250
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$
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1,000
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$
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2,000
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$
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68,700
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$
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93,550
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Capital lease obligations
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39,994
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11,285
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18,290
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10,419
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Interest on Senior Credit Facility(1)
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56,375
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11,495
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22,990
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14,975
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6,915
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Interest on capital lease obligations(2)
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10,736
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2,595
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4,974
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3,167
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Operating leases
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128,329
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11,086
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21,088
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19,637
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76,518
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Total contractual cash obligations
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$
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400,684
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$
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37,461
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$
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69,342
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$
|
116,898
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$
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176,983
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(1)
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$20 million of the Term B loan is fixed through an interest
rate swap agreement at 4.87% plus an applicable margin through
December 31, 2009. The variable portion of the Senior
Credit Facility utilized the rates in effect at
December 31, 2006 plus the applicable margin through the
maturity date of December 2012 for the Term B portion and March
2010 for the Revolving Credit portion.
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(2)
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Interest on capital lease obligations is at fixed rates ranging
from 3.9% to 11.4%.
|
Off
Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
Seasonality
Our results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to fluctuate.
Many of the patients of our Florida treatment centers are
part-time residents in Florida during the winter months. Hence,
these treatment centers have historically experienced higher
utilization rates during the winter months than during the
remainder of the year. In addition, referrals are typically
lower in the summer months due to traditional vacation periods.
Recently
Issued Accounting Pronouncements
In June 2006 the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. This interpretation also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently
E-71
evaluating the potential impact that the adoption of this
interpretation will have on its financial position and results
of operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest Rate Sensitivity.
We are exposed to
various market risks as a part of our operations, and we
anticipate that this exposure will increase as a result of our
planned growth. In an effort to mitigate losses associated with
these risks, we may at times enter into derivative financial
instruments. These derivative financial instruments may take the
form of forward sales contracts, option contracts, and interest
rate swaps. We have not and do not intend to engage in the
practice of trading derivative securities for profit.
Interest Rate Swap.
On April 1, 2005, and
August 31, 2005, we entered into interest rate swap
agreements with notional amounts of $5.0 million and
$11.0 million, respectively. These interest rate swap
agreements were terminated on December 16, 2005, as a
result of the refinancing of the fourth amended and restated
senior credit facility.
On December 30, 2005, we entered into an interest rate swap
agreement with a notional amount of $20 million. This
interest rate swap transaction involves the exchange of floating
for fixed rate interest payments over the life of the agreement
without the exchange of the underlying principal amounts. The
differential to be paid or received is accrued and is recognized
as an adjustment to interest expense. These agreements are
indexed to 90 day LIBOR. The following table summarizes the
terms of the swap:
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fixed Rate
|
|
Term in Months
|
|
|
Maturity
|
|
$20.0 million
|
|
4.87% (plus a margin)
|
|
|
48
|
|
|
December 31, 2009
|
The fixed rate does not include the margin, which is currently
175 basis points. In addition, further changes in interest
rates by the Federal Reserve may increase or decrease our
interest cost on the outstanding balance of the credit facility
not subject to interest rate protection. Our swap transaction
involves the exchange of floating for fixed rate interest
payments over the life of the agreement without the exchange of
the underlying principal amounts. The differential to be paid or
received is accrued and is recognized as an adjustment to
interest expense. We use derivative financial instruments to
reduce interest rate volatility and associated risks arising
from the floating rate structure of our senior credit facility
and do not hold or issue them for trading purposes.
Interest Rates.
As of December 31, 2006,
we have interest rate exposure on $145.3 million of our
senior secured credit facility. Our debt obligations subject to
floating rates at December 31, 2006 include
$145.3 million of variable rate debt at an approximate
average interest rate of 7.0% as of December 31, 2006. A
100 basis point change in interest rates on our variable
rate debt would have resulted in interest expense fluctuating
approximately $1.5 million on a calendar year basis.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Information with respect to this Item is contained in our
consolidated financial statements beginning with the Index on
Page F-1
of this report which is incorporated herein by reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures.
We carried out an evaluation,
under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by
this report pursuant to Exchange Act
Rule 13a-15.
Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by
this report.
E-72
Changes in Internal Control Over Financial
Reporting.
There has been no change in our
internal control over financial reporting during the fourth
quarter of 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Managements
Annual Report on Internal Control Over Financial
Reporting.
Our management is responsible for establishing and maintaining
effective internal control over financial reporting, as such
term is defined in Exchange Act
Rule 13a-15(f).
Our internal control system was designed under the supervision
of our President and Chief Executive Officer and Executive Vice
President and Chief Financial Officer and with the participation
of management in order to provide reasonable assurance regarding
the reliability of our financial reporting and our preparation
of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed and
tested, have inherent limitations, including among other things,
the possibility of human error, circumvention or disregard.
Therefore, even those systems of internal control that have been
determined to be effective can provide only reasonable assurance
that the objectives of the internal control system are met and
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision of our President and Chief Executive
Officer and Executive Vice President and Chief Financial Officer
and with the participation of management, we conducted an
assessment of the effectiveness of our internal control over
financial reporting based on the criteria set forth in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on an assessment
of such criteria, management concluded that, as of
December 31, 2006, we maintained effective internal control
over financial reporting.
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included below.
Attestation
Report of the Independent Registered Public Accounting
Firm
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Shareholders of
Radiation Therapy Services, Inc. and Subsidiaries
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting, that Radiation Therapy Services, Inc.
and subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
The Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
E-73
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Radiation
Therapy Services, Inc. and subsidiaries maintained effective
internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion,
Radiation Therapy Services, Inc. and subsidiaries maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Radiation Therapy Services, Inc.
and subsidiaries as of December 31, 2005 and 2006, and the
related consolidated statements of income and comprehensive
income, shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2006 and
our report dated February 12, 2007 expressed an unqualified
opinion thereon.
Certified Public Accountants
Tampa, Florida
February 12, 2007
|
|
Item 9B.
|
Other
Information
|
None
E-74
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Executive
Officers
Information required to be included by this item with respect to
our executive officers is incorporated by reference to the
information contained under the caption Management
and The Board of Directors and Corporate Governance
included in our proxy statement relating to our annual meeting
of shareholders, which we expect to file with the Securities and
Exchange Commission within 120 days after December 31,
2006.
Our board of directors expects its members, as well as our
officers and employees, to act ethically at all times and to
acknowledge in writing their adherence to the policies
comprising our Code of Conduct and as applicable, in our Code of
Ethics for Senior Financial Officers and Chief Executive Officer
(Code of Ethics). The Code of Ethics is posted on
our website located at
www.rtsx.com
under the heading
Corporate Governance. We intend to disclose any
amendments to our Code of Ethics and any waiver from a provision
of such code, as required by the SEC, on our website within five
business days following such amendment or waiver.
Directors
Information required to be included by this item with respect to
our directors is incorporated by reference to the information
contained under the caption Election of Directors
included in our proxy statement relating to our annual meeting
of shareholders, which we expect to file with the Securities and
Exchange Commission within 120 days after December 31,
2006.
Compliance
with Section 16(a) of the Exchange Act
Information required to be included by this item with respect to
compliance with Section 16(a) of the Securities Exchange
Act of 1934 is incorporated by reference to the information
contained under the caption Section 16(a) Beneficial
Ownership Reporting Compliance included in our proxy
statement relating to our annual meeting of shareholders, which
we expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2006.
|
|
Item 11.
|
Executive
Compensation
|
This information is incorporated by reference to the information
required to be included by this item contained under the
captions Election of Directors Information
Regarding the Board of Directors Compensation of
Directors, Compensation Discussion and
Analysis, Executive Compensation,
Compensation Committee Report on Executive
Compensation and Compensation Committee Interlocks
and Insider Participation included in our proxy statement
relating to our annual meeting of shareholders, which we expect
to file with the Securities and Exchange Commission within
120 days after December 31, 2006.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Except for the disclosure under the caption Equity
Compensation Plan which is included in Item 5 of
Part II of this report, this information is incorporated by
reference to the information required to be included by this
item contained under the caption Principal Shareholders
and Security Ownership of Management included in our proxy
statement relating to our annual meeting of shareholders, which
we expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2006.
|
|
Item 13.
|
Certain
Relationships and Related Party Transactions, and Director
Independence
|
This information is incorporated by reference to the information
required to be included by this item contained under the caption
Certain Relationships and Related Party Transactions
included in our proxy
E-75
statement relating to our annual meeting of shareholders, which
we expect to file with the Securities and Exchange Commission
within 120 days after December 31, 2006.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
This information is incorporated by reference to the information
required to be included by this item contained under the caption
Ratification of Independent Registered Public Accounting
Firm included in our proxy statement relating to our
annual meeting of shareholders, which we expect to file with the
Securities and Exchange Commission within 120 days after
December 31, 2006.
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Index to Consolidated Financial Statements, Financial
Statement Schedules and Exhibits:
(1)
Consolidated Financial Statements:
See Item 8 in this report.
The consolidated financial statements required to be included in
Part II, Item 8, are indexed on
Page F-1
and submitted as a separate section of this report.
(2)
Consolidated Financial Statement
Schedules:
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes in this report.
(3)
Exhibits
The Exhibits are incorporated by reference to the
Exhibit Index following this Annual Report on
Form 10-K.
E-76
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
|
|
|
E-78
|
Consolidated Financial Statements:
|
|
|
|
|
E-79
|
|
|
E-80
|
|
|
E-81
|
|
|
E-83
|
|
|
E-84
|
E-77
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders of Radiation Therapy Services, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Radiation Therapy Services, Inc. and subsidiaries (the
Company) as of December 31, 2005 and 2006, and
the related consolidated statements of income and comprehensive
income, shareholders equity and cash flows for each of the
three years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Radiation Therapy Services, Inc. and
subsidiaries at December 31, 2005 and 2006, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Radiation Therapy Services, Inc. and
subsidiaries internal control over financial reporting as
of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 12, 2007 expressed an
unqualified opinion thereon.
/s/
Ernst
& Young LLP
Certified Public Accountants
Tampa, Florida
February 12, 2007
E-78
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net patient service revenue
|
|
$
|
163,719,027
|
|
|
$
|
217,590,469
|
|
|
$
|
284,066,539
|
|
Other revenue
|
|
|
7,654,283
|
|
|
|
9,659,844
|
|
|
|
9,915,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
171,373,310
|
|
|
|
227,250,313
|
|
|
|
293,981,953
|
|
Salaries and benefits
|
|
|
87,059,350
|
|
|
|
116,299,899
|
|
|
|
147,696,630
|
|
Medical supplies
|
|
|
3,608,467
|
|
|
|
5,678,516
|
|
|
|
7,569,011
|
|
Facility rent expenses
|
|
|
5,346,745
|
|
|
|
7,720,023
|
|
|
|
9,432,417
|
|
Other operating expenses
|
|
|
7,560,469
|
|
|
|
9,748,650
|
|
|
|
12,761,111
|
|
General and administrative expenses
|
|
|
19,671,484
|
|
|
|
23,537,783
|
|
|
|
30,209,527
|
|
Depreciation and amortization
|
|
|
6,859,570
|
|
|
|
10,836,880
|
|
|
|
16,966,523
|
|
Provision for doubtful accounts
|
|
|
5,852,325
|
|
|
|
6,792,402
|
|
|
|
9,424,524
|
|
Interest expense, net
|
|
|
3,435,121
|
|
|
|
5,290,034
|
|
|
|
10,035,949
|
|
Impairment loss
|
|
|
|
|
|
|
1,225,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
139,393,531
|
|
|
|
187,130,040
|
|
|
|
244,095,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
31,979,779
|
|
|
|
40,120,273
|
|
|
|
49,886,261
|
|
Minority interests in net losses (earnings) of consolidated
entities
|
|
|
55,123
|
|
|
|
480,212
|
|
|
|
(580,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32,034,902
|
|
|
|
40,600,485
|
|
|
|
49,305,762
|
|
Income tax expense
|
|
|
22,846,460
|
|
|
|
15,631,187
|
|
|
|
18,982,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9,188,442
|
|
|
|
24,969,298
|
|
|
|
30,323,044
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative interest rate swap agreements
|
|
|
45,748
|
|
|
|
4,629
|
|
|
|
31,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
9,234,190
|
|
|
$
|
24,973,927
|
|
|
$
|
30,354,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share outstanding basic
|
|
$
|
0.45
|
|
|
$
|
1.10
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share outstanding diluted
|
|
$
|
0.44
|
|
|
$
|
1.05
|
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,292,117
|
|
|
|
22,725,819
|
|
|
|
23,137,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
21,031,968
|
|
|
|
23,703,653
|
|
|
|
23,993,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro forma income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, as reported
|
|
$
|
32,034,902
|
|
|
|
|
|
|
|
|
|
Pro forma income taxes
|
|
|
12,813,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
19,220,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share outstanding
basic
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share outstanding
diluted
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
E-79
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,979,994
|
|
|
$
|
15,413,071
|
|
Marketable securities, at market
|
|
|
5,450,000
|
|
|
|
|
|
Accounts receivable, less allowances for doubtful accounts of
$12,490,077 and $17,554,344 at December 31, 2005 and 2006,
respectively
|
|
|
40,301,195
|
|
|
|
52,763,835
|
|
Income taxes receivable
|
|
|
2,560,007
|
|
|
|
937,614
|
|
Prepaid expenses
|
|
|
3,152,555
|
|
|
|
8,273,294
|
|
Current portion of lease receivable
|
|
|
647,013
|
|
|
|
427,304
|
|
Inventories
|
|
|
1,280,208
|
|
|
|
1,612,983
|
|
Deferred income taxes
|
|
|
2,144,431
|
|
|
|
5,583,488
|
|
Other
|
|
|
1,199,881
|
|
|
|
2,526,482
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
65,715,284
|
|
|
|
87,538,071
|
|
Lease receivable, less current portion
|
|
|
580,728
|
|
|
|
153,424
|
|
Equity investments in joint ventures
|
|
|
803,151
|
|
|
|
1,215,070
|
|
Property and equipment, net
|
|
|
113,397,349
|
|
|
|
152,379,018
|
|
Goodwill, net
|
|
|
66,537,332
|
|
|
|
138,785,329
|
|
Intangible assets, net
|
|
|
6,773,910
|
|
|
|
7,599,040
|
|
Other assets
|
|
|
9,538,020
|
|
|
|
11,423,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
263,345,774
|
|
|
$
|
399,093,657
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,676,418
|
|
|
$
|
10,603,640
|
|
Accrued expenses
|
|
|
11,433,668
|
|
|
|
14,679,249
|
|
Current portion of long-term debt
|
|
|
6,506,254
|
|
|
|
12,284,849
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,616,340
|
|
|
|
37,567,738
|
|
Long-term debt, less current portion
|
|
|
116,956,991
|
|
|
|
192,959,189
|
|
Other long-term liabilities
|
|
|
2,284,341
|
|
|
|
2,583,956
|
|
Deferred income taxes
|
|
|
18,489,169
|
|
|
|
24,070,363
|
|
Minority interest in consolidated entities
|
|
|
6,616,190
|
|
|
|
7,104,345
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
167,963,031
|
|
|
|
264,285,591
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 10,000,000 shares
authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 75,000,000 shares
authorized, 22,831,481 and 23,366,883 shares issued and
outstanding at December 31, 2005 and 2006, respectively
|
|
|
2,283
|
|
|
|
2,337
|
|
Additional paid-in capital
|
|
|
72,730,328
|
|
|
|
81,464,715
|
|
Unearned compensation on nonvested stock
|
|
|
(241,715
|
)
|
|
|
|
|
Retained earnings
|
|
|
23,359,652
|
|
|
|
53,682,696
|
|
Notes receivable from shareholders
|
|
|
(481,124
|
)
|
|
|
(386,363
|
)
|
Accumulated other comprehensive income, net of tax
|
|
|
13,319
|
|
|
|
44,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
95,382,743
|
|
|
|
134,808,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
263,345,774
|
|
|
$
|
399,093,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
E-80
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,188,442
|
|
|
$
|
24,969,298
|
|
|
$
|
30,323,044
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,606,314
|
|
|
|
9,876,475
|
|
|
|
15,050,551
|
|
Amortization
|
|
|
253,256
|
|
|
|
960,405
|
|
|
|
1,915,972
|
|
Deferred rent expense
|
|
|
149,214
|
|
|
|
282,844
|
|
|
|
426,539
|
|
Write down of machine parts inventory
|
|
|
1,222,745
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit)
|
|
|
17,207,467
|
|
|
|
(862,729
|
)
|
|
|
2,113,837
|
|
Stock based compensation
|
|
|
407,918
|
|
|
|
118,722
|
|
|
|
50,010
|
|
Tax benefit from stock option exercise
|
|
|
|
|
|
|
|
|
|
|
(2,937,922
|
)
|
Impairment loss
|
|
|
|
|
|
|
1,225,853
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
5,852,325
|
|
|
|
6,792,402
|
|
|
|
9,424,524
|
|
Loss on the sale of property and equipment
|
|
|
91,807
|
|
|
|
120,281
|
|
|
|
66,299
|
|
Gain on sale of equity interest in joint venture
|
|
|
|
|
|
|
(982,182
|
)
|
|
|
|
|
Minority interest in net (losses) earnings of consolidated
entities
|
|
|
(55,123
|
)
|
|
|
(480,212
|
)
|
|
|
580,499
|
|
Write off of loan costs
|
|
|
335,734
|
|
|
|
703,061
|
|
|
|
|
|
Equity interest in net (income) loss of joint ventures
|
|
|
(193,014
|
)
|
|
|
467,872
|
|
|
|
127,740
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,871,018
|
)
|
|
|
(21,620,091
|
)
|
|
|
(21,887,164
|
)
|
Income taxes receivable
|
|
|
(425,763
|
)
|
|
|
(2,134,244
|
)
|
|
|
(669,685
|
)
|
Inventories
|
|
|
(262,489
|
)
|
|
|
(134,096
|
)
|
|
|
(332,775
|
)
|
Prepaid expenses
|
|
|
30,234
|
|
|
|
(273,725
|
)
|
|
|
(4,985,869
|
)
|
Accounts payable
|
|
|
(992,972
|
)
|
|
|
1,292,220
|
|
|
|
3,779,047
|
|
Accrued expenses
|
|
|
(2,345,910
|
)
|
|
|
1,930,787
|
|
|
|
2,917,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
28,199,167
|
|
|
|
22,252,941
|
|
|
|
35,961,679
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(16,917,861
|
)
|
|
|
(19,826,056
|
)
|
|
|
(19,666,802
|
)
|
Acquisition of radiation centers
|
|
|
(8,069,302
|
)
|
|
|
(43,229,546
|
)
|
|
|
(80,988,921
|
)
|
Proceeds from sale of property and equipment
|
|
|
951,010
|
|
|
|
29,931
|
|
|
|
6,683
|
|
Proceeds from the sale of equity interest in joint venture
|
|
|
|
|
|
|
1,813,979
|
|
|
|
|
|
Receipts of principal payments on notes receivable from
shareholders
|
|
|
662,168
|
|
|
|
|
|
|
|
|
|
(Purchases) sales of marketable securities, net
|
|
|
(2,400,000
|
)
|
|
|
(3,050,000
|
)
|
|
|
5,450,000
|
|
(Loans to) repayments from employees
|
|
|
(466,237
|
)
|
|
|
340,265
|
|
|
|
(79,425
|
)
|
Contribution of capital to joint venture entities
|
|
|
|
|
|
|
(84,124
|
)
|
|
|
(539,659
|
)
|
Distribution received from joint venture
|
|
|
|
|
|
|
235,000
|
|
|
|
|
|
Change in lease receivable
|
|
|
597,112
|
|
|
|
655,503
|
|
|
|
647,013
|
|
Change in other assets
|
|
|
409,563
|
|
|
|
(147,175
|
)
|
|
|
(1,421,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-81
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net cash used in investing activities
|
|
|
(25,233,547
|
)
|
|
|
(63,262,223
|
)
|
|
|
(96,592,792
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
59,100,000
|
|
|
|
50,617,000
|
|
|
|
68,500,000
|
|
Principal repayments of debt
|
|
|
(61,331,299
|
)
|
|
|
(8,093,418
|
)
|
|
|
(10,304,343
|
)
|
Proceeds from public offering of common stock, net of expenses
|
|
|
46,781,061
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
37,905
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
2,316,346
|
|
|
|
2,683,418
|
|
|
|
5,988,224
|
|
Tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
2,937,922
|
|
Payments of notes receivable from shareholders
|
|
|
877,630
|
|
|
|
1,286,407
|
|
|
|
94,761
|
|
Minority interest in partnership distribution
|
|
|
|
|
|
|
(70,000
|
)
|
|
|
(92,374
|
)
|
Distributions to shareholders
|
|
|
(46,441,155
|
)
|
|
|
|
|
|
|
|
|
Payments of loan costs
|
|
|
(1,893,778
|
)
|
|
|
(1,452,739
|
)
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(553,290
|
)
|
|
|
44,970,668
|
|
|
|
67,064,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,412,330
|
|
|
|
3,961,386
|
|
|
|
6,433,077
|
|
Cash and cash equivalents, beginning of year
|
|
|
2,606,278
|
|
|
|
5,018,608
|
|
|
|
8,979,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
5,018,608
|
|
|
$
|
8,979,994
|
|
|
$
|
15,413,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,994,528
|
|
|
$
|
5,284,254
|
|
|
$
|
10,368,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
5,975,000
|
|
|
$
|
17,585,942
|
|
|
$
|
17,590,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded capital lease obligations related to the acquisition of
equipment
|
|
$
|
6,297,222
|
|
|
$
|
14,739,263
|
|
|
$
|
22,753,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded earn-out accrual related to the acquisition of
radiation center assets
|
|
$
|
|
|
|
$
|
1,317,085
|
|
|
$
|
1,069,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded non-cash contribution of capital by minority interest
holder
|
|
$
|
2,598,249
|
|
|
$
|
2,831,079
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded capital lease obligations related to the acquisition of
radiation center assets
|
|
$
|
2,225,775
|
|
|
$
|
47,514
|
|
|
$
|
816,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded obligation related to the acquisition of radiation
center assets
|
|
$
|
273,600
|
|
|
$
|
137,139
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of nonvested stock
|
|
$
|
|
|
|
$
|
250,050
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for the acquisition of Devoto
Construction, Inc.
|
|
$
|
3,528,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded related party payable relating to construction in
process and building improvement costs
|
|
$
|
310,058
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
E-82
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
Notes
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Compensation
|
|
|
Retained
|
|
|
Receivable
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
on Nonvested
|
|
|
Earnings
|
|
|
from
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
(Deficit)
|
|
|
Shareholders
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Balance, January 1, 2003
|
|
|
17,281,920
|
|
|
$
|
1,728
|
|
|
$
|
16,615,798
|
|
|
$
|
|
|
|
$
|
35,643,067
|
|
|
$
|
(2,645,161
|
)
|
|
$
|
(37,058
|
)
|
|
$
|
49,578,374
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,188,442
|
|
|
|
|
|
|
|
|
|
|
|
9,188,442
|
|
Distributions to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,441,155
|
)
|
|
|
|
|
|
|
|
|
|
|
(46,441,155
|
)
|
Issuance of common stock
|
|
|
3,303
|
|
|
|
1
|
|
|
|
37,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,905
|
|
Payment of notes receivable from shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
877,630
|
|
|
|
|
|
|
|
877,630
|
|
Unrealized gain on interest rate swap agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,748
|
|
|
|
45,748
|
|
Exercise of stock options
|
|
|
932,706
|
|
|
|
93
|
|
|
|
2,316,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,316,346
|
|
Issuance of common stock in initial public offering, net of
expenses
|
|
|
4,000,000
|
|
|
|
400
|
|
|
|
46,780,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,781,061
|
|
Compensation to outside consultants
|
|
|
|
|
|
|
|
|
|
|
407,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,918
|
|
Issuance of common stock in connection with the acquisition of
Devoto Construction, Inc.
|
|
|
271,385
|
|
|
|
27
|
|
|
|
3,527,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,528,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
22,489,314
|
|
|
$
|
2,249
|
|
|
$
|
69,686,507
|
|
|
$
|
|
|
|
$
|
(1,609,646
|
)
|
|
$
|
(1,767,531
|
)
|
|
$
|
8,690
|
|
|
$
|
66,320,269
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,969,298
|
|
|
|
|
|
|
|
|
|
|
|
24,969,298
|
|
Payment of notes receivable from shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,286,407
|
|
|
|
|
|
|
|
1,286,407
|
|
Unrealized gain on interest rate swap agreement, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,629
|
|
|
|
4,629
|
|
Exercise of stock options
|
|
|
334,667
|
|
|
|
33
|
|
|
|
2,683,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,683,418
|
|
Nonvested stock issued to key employee
|
|
|
7,500
|
|
|
|
1
|
|
|
|
250,049
|
|
|
|
(250,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of nonvested stock grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,335
|
|
Compensation to outside consultants
|
|
|
|
|
|
|
|
|
|
|
110,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
22,831,481
|
|
|
$
|
2,283
|
|
|
$
|
72,730,328
|
|
|
$
|
(241,715
|
)
|
|
$
|
23,359,652
|
|
|
$
|
(481,124
|
)
|
|
$
|
13,319
|
|
|
$
|
95,382,743
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,323,044
|
|
|
|
|
|
|
|
|
|
|
|
30,323,044
|
|
Payment of notes receivable from shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,761
|
|
|
|
|
|
|
|
94,761
|
|
Unrealized gain on interest rate swap agreement, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,362
|
|
|
|
31,362
|
|
Exercise of stock options
|
|
|
535,402
|
|
|
|
54
|
|
|
|
5,988,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,988,224
|
|
Tax benefit from stock option exercise
|
|
|
|
|
|
|
|
|
|
|
2,937,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,937,922
|
|
Adoption of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(241,715
|
)
|
|
|
241,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock issued to key employee
|
|
|
4,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of nonvested stock grants
|
|
|
|
|
|
|
|
|
|
|
61,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,631
|
|
Forfeited nonvested stock
|
|
|
(4,895
|
)
|
|
|
|
|
|
|
(11,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
23,366,883
|
|
|
$
|
2,337
|
|
|
$
|
81,464,715
|
|
|
$
|
|
|
|
$
|
53,682,696
|
|
|
$
|
(386,363
|
)
|
|
$
|
44,681
|
|
|
$
|
134,808,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated
Financial Statements.
E-83
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Radiation Therapy Services, Inc. and its consolidated
subsidiaries (the Company) develop and operate radiation therapy
centers that provide radiation treatment to cancer patients in
Alabama, Arizona, California, Delaware, Florida, Kentucky,
Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York,
North Carolina, Rhode Island and West Virginia.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and all subsidiaries and entities
controlled by the Company through the Companys direct or
indirect ownership of a majority interest and exclusive rights
granted to the Company as the general partner of such entities.
Financial Accounting Standards Board (FASB) revised
Interpretation No. 46R (FIN No. 46R),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51
, requires a company to
consolidate variable interest entities if the company is the
primary beneficiary of the activities of those entities. Certain
of the Companys radiation oncology practices are variable
interest entities as defined by FIN No. 46R, and the
Company has a variable interest in each of these practices
through its administrative services agreements. The Company,
through its variable interests in these practices, would absorb
a majority of the net losses of these practices, should they
occur. Based on these determinations, the Company has included
the radiation oncology practices in its consolidated financial
statements for all periods presented. All significant
intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to the prior year
financial statements to conform to the current year
presentation. Such reclassifications had no impact on net income
as previously reported.
Pro
forma statements of income data
Effective June 15, 2004, the Company elected, by the
consent of the shareholders, to revoke its status as an
S corporation and became subject to taxation as a C
corporation. The Company is now subject to federal and state
income taxes at prevailing corporate rates. The impact of this
change resulted in an income tax expense of approximately
$17.6 million during the year ended December 31, 2004.
Pro forma net income and pro forma net income per share are
based on the assumption that the Company was a C corporation at
the beginning of each period presented, and provides for income
taxes utilizing an effective rate of 40%.
Public
offering of common stock and recapitalization
On June 23, 2004, the Company successfully completed an
initial public offering of 5.5 million shares of common
stock at a price of $13.00 per share. Of the shares offered,
4.0 million shares were sold by the Company and
1.5 million were offered by selling shareholders. In
addition, the underwriters for the Company exercised their
over-allotment option by purchasing an additional
825,000 shares at $13.00 per share from selling
shareholders. Of the net proceeds to the Company of
approximately $46.8 million, approximately
$44.0 million was used to repay outstanding indebtedness
under the Companys senior secured credit facility, and
approximately $2.8 million was used to repay outstanding
indebtedness to certain directors, officers and related parties.
On May 28, 2004 the Board of Directors declared a 1.83 for
1 forward common stock split for shareholders of record on that
date. In addition, the Board of Directors approved an increase
in the authorized shares of the Companys common stock to
75,000,000 shares, $0.0001 par value, and
10,000,000 shares of
E-84
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
preferred stock, $0.0001 par value. All stock related data
in the consolidated financial statements reflect the stock split
for all periods presented.
Net
Patient Service Revenue and Allowances for Contractual
Discounts
The Company has agreements with third-party payers that provide
for payments to the Company at amounts different from its
established rates. Net patient service revenue is reported at
the estimated net realizable amounts due from patients,
third-party payers and others for services rendered. Net patient
service revenue is recognized as services are provided.
Medicare and other governmental programs reimburse physicians
based on fee schedules, which are determined by the related
government agency. The Company also has agreements with managed
care organizations to provide physician services based on
negotiated fee schedules. Accordingly, the revenues reported in
the Companys consolidated financial statements are
recorded at the amount that is expected to be received.
The Company derives a significant portion of its revenues from
Medicare, Medicaid, and other payers that receive discounts from
its standard charges. The Company must estimate the total amount
of these discounts to prepare its consolidated financial
statements. The Medicare and Medicaid regulations and various
managed care contracts under which these discounts must be
calculated are complex and subject to interpretation and
adjustment. The Company estimates the allowance for contractual
discounts on a payer class basis given its interpretation of the
applicable regulations or contract terms. These interpretations
sometimes result in payments that differ from the Companys
estimates. Additionally, updated regulations and contract
renegotiations occur frequently necessitating regular review and
assessment of the estimation process by management.
Adjustments to revenue related to changes in prior period
estimates decreased patient service revenue by approximately
$1,869,000, $1,149,000, and $5,800,000 for the years ended
December 31, 2004, 2005 and 2006, respectively or
approximately 1.1%, 0.5%, and 2.0% of the net patient service
revenue for the years ended December 31, 2004, 2005 and
2006, respectively.
During 2004, 2005, and 2006, approximately 53%, 50%, and 52%
respectively, of net patient service revenue related to services
rendered under the Medicare and Medicaid programs. In the
ordinary course of business, the Company is potentially subject
to a review by regulatory agencies concerning the accuracy of
billings and sufficiency of supporting documentation of
procedures performed. Laws and regulations governing the
Medicare and Medicaid programs are extremely complex and subject
to interpretation. As a result, there is at least a reasonable
possibility that estimates will change by a material amount in
the near term.
Net patient service revenue is presented net of provisions for
contractual adjustments. In the ordinary course of business, the
Company provides services to patients who are financially unable
to pay for their care. Accounts written off as charity and
indigent care are not recognized in net patient service revenue.
The Companys policy is to write off a patients
account balance upon determining that the patient qualifies
under certain charity care
and/or
indigent policy. The Companys policy includes the
completion of an application for eligibility for charity care.
The determination for charity care eligibility is based on
income relative to federal poverty guidelines, family size and
assets available to the patient. A sliding scale discount is
then applied to the balance due with discounts up to 100%.
Charity services at established charges provided by the Company
and formally approved through this process approximate
$5,142,000, $8,139,000, and $7,451,000 for the years ended
December 31, 2004, 2005, and 2006, respectively. These
amounts are excluded from net patient service revenue.
E-85
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Cost
of Revenues
The cost of revenues for each of the years ended
December 31, 2004, 2005 and 2006, are approximately
$95,032,000, $127,385,000, and $164,583,000 respectively.
Marketable
Securities
Marketable securities are classified as
available-for-sale
and are carried at fair value, with the unrealized holding gains
and losses, net of income taxes, reflected as a separate
component of shareholders equity until realized. For the
purposes of computing realized and unrealized gains and losses,
cost is determined on a specific identification basis.
Accounts
Receivable and Allowances for Doubtful Accounts
Accounts receivable in the accompanying consolidated balance
sheets are reported net of estimated allowances for doubtful
accounts and contractual adjustments. Accounts receivable are
uncollateralized and primarily consist of amounts due from
third-party payers and patients. To provide for accounts
receivable that could become uncollectible in the future, the
Company establishes an allowance for doubtful accounts to reduce
the carrying value of such receivables to their estimated net
realizable value. Approximately $13,700,000 and $20,300,000 of
accounts receivable were due from the Medicare and Medicaid
programs at December 31, 2005 and 2006, respectively. The
credit risk for other concentrations of receivables is limited
due to the large number of insurance companies and other payers
that provide payments for services. Management does not believe
that there are any other significant concentrations of revenues
from any particular payer that would subject the Company to any
significant credit risk in the collection of its accounts
receivable.
The amount of the provision for doubtful accounts is based upon
managements assessment of historical and expected net
collections, business and economic conditions, trends in Federal
and state governmental healthcare coverage and other collection
indicators. The primary tool used in managements
assessment is an annual, detailed review of historical
collections and write-offs of accounts receivable. The results
of the detailed review of historical collections and write-off
experience, adjusted for changes in trends and conditions, are
used to evaluate the allowance amount for the current period.
Accounts receivable are written off after collection efforts
have been followed in accordance with the Companys
policies.
A summary of the activity in the allowance for uncollectible
accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Balance, beginning of year
|
|
$
|
6,983,290
|
|
|
$
|
8,985,710
|
|
|
$
|
12,490,077
|
|
Additions charged to provision for bad debts
|
|
|
5,852,325
|
|
|
|
6,792,402
|
|
|
|
9,424,524
|
|
Accounts receivable written off (net of recoveries)
|
|
|
(3,849,905
|
)
|
|
|
(3,288,035
|
)
|
|
|
(4,360,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,985,710
|
|
|
$
|
12,490,077
|
|
|
$
|
17,554,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and Other Intangible Assets
Goodwill represents the excess purchase price over the estimated
fair market value of net assets acquired by the Company in
business combinations. Goodwill and indefinite lived intangible
assets are not amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. No
goodwill impairment loss was recognized for the years ended
December 31, 2004, 2005 and 2006.
E-86
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Intangible assets consist of noncompete agreements and licenses
and are amortized over the life of the agreement (which
typically ranges from 2 to 10 years) using the
straight-line method.
Interest
Rate Swap Agreements
The Company recognizes all derivatives on the consolidated
balance sheets at fair value. The accounting for changes in the
fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part
of a hedging relationship based on its effectiveness in hedging
against the exposure. Derivatives that are not hedges must be
adjusted to fair value through operating results. If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset
against the change in fair value of assets, liabilities, or firm
commitments through operating results or recognized in other
comprehensive income until the hedged item is recognized in
operating results. The ineffective portion of a
derivatives change in fair value will be immediately
recognized in earnings.
The Company enters into interest rate swap agreements to reduce
the impact of changes in interest rates on its floating rate
Senior Credit Facility (see Note 12). The interest rate
swap agreements are contracts to exchange floating rate interest
payments for fixed interest payments over the life of the
agreements without the exchange of the underlying notional
amounts. The notional amount of interest rate swap agreements
are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The
differential paid or received on interest rate swap agreements
is recognized in interest expense in the consolidated statements
of income and comprehensive income. The related accrued
receivable or payable is included in other assets or accrued
expenses.
On April 1, 2005 and August 31, 2005, the Company
entered into interest rate swap agreements to hedge the effect
of changes in interest rates on a portion of its floating rate
Senior Credit Facility. These interest rate swap agreements were
terminated on December 16, 2005, as a result of the
refinancing of the fourth amended and restated senior credit
facility.
On December 30, 2005, the Company entered into an interest
rate swap agreement for its fourth amended and restated senior
credit facility. The Company has designated this derivative
financial instrument as a cash flow hedge (i.e., the interest
rate swap agreement hedges the exposure to variability in
expected future cash flows that is attributable to a particular
risk). The notional amount of the swap agreement is
$20.0 million. The effect of this agreement is to fix the
interest rate exposure to 4.87% plus a margin on
$20.0 million of the Companys Senior Credit Facility.
The interest rate swap agreement expires on December 31,
2009. The fair value of the interest rate swap agreement is the
estimated amount that the Company would receive or pay to
terminate the agreement at the reporting date, taking into
account current interest rates and the current credit worthiness
of the counter parties. At December 31, 2005, and 2006 the
fair value of the Companys interest rate swap agreements
is an asset of $13,319 and $44,681, respectively, which is
included in the accompanying consolidated balance sheets. There
were no amounts recorded in the income statement related to the
interest rate swap agreement due to hedge ineffectiveness.
Professional
and General Liability Claims
The Company is subject to claims and legal actions in the
ordinary course of business, including claims relating to
patient treatment, employment practices and personal injuries.
To cover these types of claims, the Company maintains general
liability and professional liability insurance in excess of
self-insured retentions through commercial insurance carriers in
amounts that the Company believes to be sufficient for its
operations, although, potentially, some claims may exceed the
scope of coverage in effect. The Company expenses an estimate of
the costs it expects to incur under the self-insured retention
exposure for general and professional liability claims. The
Company maintains insurance for the majority of its physicians
up to
E-87
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
$1 million on individual malpractice claims and
$3 million on aggregate claims on a claims made basis.
Effective October 2003, the Company purchased medical
malpractice insurance from an insurance company owned by certain
of the Companys shareholders. The Companys reserves
for professional and general liability claims are based upon
independent actuarial calculations, which consider historical
claims data, demographic considerations, severity factors,
industry trends and other actuarial assumptions.
Actuarial calculations include a large number of variables that
may significantly impact the estimate of ultimate losses that
are recorded during a reporting period. Professional judgment is
used by the actuary in determining the loss estimate, by
selecting factors that are considered appropriate by the actuary
for the Companys specific circumstances. Changes in
assumptions used by the Companys actuary with respect to
demographics, industry trends and judgmental selection of
factors may impact the Companys recorded reserve levels.
The reserve for professional and general liability claims as of
the balance sheet dates reflects the current estimates of all
outstanding losses, including incurred but not reported losses,
based upon actuarial calculations. The loss estimates included
in the actuarial calculations may change in the future based
upon updated facts and circumstances. The reserve for
professional liability claims was $930,000 at December 31,
2005 and $1,690,000 at December 31, 2006.
Minority
Interest in Consolidated Entities
The Company currently maintains equity interests in six
treatment center facilities with ownership interests ranging
from 50.1% to 90.0%. Since the Company controls more than 50% of
the voting interest in these facilities, the Company
consolidates the treatment centers. The minority interest
represents the equity interests of outside investors in the
equity and results of operations of the consolidated entities.
In addition, in accordance with FIN No. 46R, the
Company consolidates certain radiation oncology practices where
the Company provides administrative services pursuant to
long-term management agreements. The minority interests in these
entities represent the interests of the physician owners of the
oncology practices in the equity and results of operations of
the consolidated entities.
Use of
Estimates
The preparation of these consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial
statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less when purchased.
Inventories
Inventories consist of parts and supplies used for repairs and
maintenance of equipment owned or leased by the Company.
Inventories are valued at the lower of cost or market. The cost
of parts and supplies is determined using the
first-in,
first-out method.
E-88
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Property
and Equipment
Property and equipment are recorded at historical cost less
accumulated depreciation and are depreciated over their
estimated useful lives utilizing the straight-line method.
Leasehold improvements are amortized over the lesser of the
estimated useful life of the improvement or the life of the
lease. Amortization of leased assets is included in depreciation
and amortization in the accompanying consolidated statements of
income and comprehensive income. Expenditures for repairs and
maintenance are charged to operating expense as incurred, while
equipment replacement and betterments are capitalized.
Major asset classifications and useful lives are as follows:
|
|
|
Buildings and leasehold improvements
|
|
10-39 years
|
Office, computer and telephone equipment
|
|
5-10 years
|
Medical and medical testing equipment
|
|
5-10 years
|
Automobiles and vans
|
|
5 years
|
The weighted average useful life of medical and medical testing
equipment is 8.3 years.
The Company evaluates its long-lived assets for possible
impairment whenever circumstances indicate that the carrying
amount of the asset, or related group of assets, may not be
recoverable from estimated future cash flows, in accordance with
SFAS No. 144,
Accounting for Impairment or Disposal
of Long-Lived Assets.
Fair value estimates are derived from
independent appraisals, established market values of comparable
assets, or internal calculations of estimated future net cash
flows. The Companys estimates of future cash flows are
based on assumptions and projections it believes to be
reasonable and supportable. The Companys assumptions take
into account revenue and expense growth rates, patient volumes,
changes in payer mix, changes in legislation and other payer
payment patterns. These assumptions vary by type of facility.
During 2004, the Company recorded a charge of $1.2 million
for the write down to fair value of certain of the
Companys analog linear accelerators and treatment
simulators. The adjustment to machine inventories was
precipitated by the decision to discontinue the installation of
this type of equipment in favor of digital machines with
migration capability and combination CT-simulators. This amount
is included in general and administrative expenses in the
statement of income and comprehensive income for the year ended
December 31, 2004.
During 2005, the Company incurred an impairment loss of
$1.2 million for the write down of leasehold improvements
in connection with the consolidation of two Yonkers, New York
based treatment centers within the Westchester/Bronx local
market.
New
Pronouncements
In June 2006 the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. This interpretation also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently
evaluating the potential impact that the adoption of this
interpretation will have on its financial position and results
of operations.
E-89
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Comprehensive
Income
Comprehensive income consists of two components, net income and
other comprehensive income (loss). Other comprehensive
income / loss refers to revenue, expenses, gains and
losses that under accounting principles generally accepted in
the United Sates are recorded as an element of
shareholders equity but are excluded from net income. The
Companys other comprehensive income / loss is
composed of unrealized gains and losses on interest rate swap
agreements accounted for as cash flow hedges. This income
increased shareholders equity on a consolidated basis by
$4,629 during the year ended December 31, 2005 and
increased shareholders equity by $31,362 during the year
ended December 31, 2006.
Income
Taxes
Effective June 15, 2004, the Company elected, by the
consent of the shareholders, to revoke its status as an
S corporation and become subject to taxation as a C
corporation. Under the S corporation provisions of the
Internal Revenue Code, the individual shareholders included
their pro rata portion of the Companys taxable income in
their personal income tax returns. Accordingly, through
June 14, 2004, the Company was not subject to federal and
certain state corporate income taxes. The Company is now subject
to federal and state income taxes at prevailing corporate rates.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment (SFAS 123R)
for the Companys 2004 Stock Incentive Plan (2004 Option
Plan). The Company previously accounted for the 2004 Option Plan
under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related
interpretations and disclosure requirements established by
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS 123), as amended by Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation Transitions and Disclosure
(SFAS 148).
Under the previous standards, no compensation expense was
recorded in the statement of income and comprehensive income for
options issued under the Companys 2004 Option Plan. The
pro forma effects on net income and earnings per share for stock
options as calculated under SFAS 123 were instead disclosed
in a footnote to the financial statements. Compensation expense
was recorded in the statement of income and comprehensive income
for non-vested stock grants under the intrinsic value method.
Under SFAS 123R, all share-based compensation cost is
measured at the grant date, based on the fair value of the
award, and is recognized as an expense in the statement of
income and comprehensive income over the requisite service
period.
On November 3, 2005, the Board of Directors of the Company,
upon the recommendation of the Compensation Committee consisting
solely of independent directors, approved the acceleration of
vesting of all nonqualified outstanding non-vested stock options
previously granted under the Companys equity compensation
plans. As a result of the acceleration, nonqualified non-vested
stock options to purchase an aggregate of 1.2 million
shares of the Companys common stock, which would otherwise
have vested over periods of two to four years, became
immediately exercisable. The affected stock options have an
exercise price of $13.00 per share.
The primary purpose of the acceleration of the nonqualified
non-vested stock options was to enable the Company to avoid
recognizing compensation expense associated with these stock
options in future periods in its statement of income and
comprehensive income, upon adoption of SFAS No. 123R.
Under SFAS No. 123R,
E-90
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
the compensation expense associated with these accelerated
options that would have been recognized in the Companys
income statement commencing with the implementation of
SFAS 123R and continuing through 2009 would have been
approximately $2.4 million. Because of the accelerated
vesting, the adoption of SFAS No. 123R had no impact
on net income.
Certain stock options granted prior to the Companys
initial public offering were valued under SFAS 123 using
the minimum value method in the pro-forma disclosures. The
minimum value method excludes volatility in the calculation of
fair value of stock based compensation. In accordance with
SFAS No. 123R, options granted that were valued using
the minimum value method must be transitioned to SFAS 123R
using the prospective method. This means that these options will
continue to be accounted for under the same accounting
principles (recognition and measurement) originally applied to
those awards in the income statement, which for the Company was
APB 25. Additionally, pro forma information previously required
under SFAS 123 and SFAS 148 will no longer be
presented for these options.
The Company adopted SFAS 123R using the modified
prospective transition method for all other stock based
compensation awards. Under this transition method, compensation
cost recognized in 2006 includes: (a) the compensation cost
for all share-based awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS 123 and (b) the compensation cost of all
share-based awards granted subsequent to December 31, 2005,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. Results for prior periods have
not been restated.
Upon adoption of SFAS 123R, the Company continued to use
the Black-Scholes valuation model for valuing all stock options.
Compensation for non-vested stock grants is measured at fair
value on the grant date based on the number of shares expected
to vest and the quoted market price of the Companys common
stock. Compensation cost for all awards will be recognized in
earnings, net of estimated forfeitures, on a straight-line basis
over the requisite service period.
E-91
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair-value
recognition provisions of SFAS 123R to all of the
Companys share-based compensation awards for periods prior
to the adoption of SFAS 123R:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Pro forma net income as reported
|
|
$
|
19,220,941
|
|
|
$
|
24,969,298
|
|
Deduct: total stock-based employee compensation expense
determined under a fair value based method for all awards, net
of related tax effects
|
|
|
(1,436,678
|
)
|
|
|
(3,653,821
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted pro forma net income
|
|
$
|
17,784,263
|
|
|
$
|
21,315,477
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income or pro forma net income per share:
|
|
|
|
|
|
|
|
|
Basic pro forma as reported
|
|
$
|
0.95
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
Basic adjusted pro forma
|
|
$
|
0.88
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma as reported
|
|
$
|
0.91
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
Diluted adjusted pro forma
|
|
$
|
0.85
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
Adjusted pro forma weighted average common shares
outstanding basic
|
|
|
20,292,117
|
|
|
|
22,725,819
|
|
|
|
|
|
|
|
|
|
|
Adjusted pro forma weighted average common and common equivalent
shares outstanding diluted
|
|
|
20,830,244
|
|
|
|
23,390,429
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of option grants
|
|
$
|
4.77
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
No options were granted in 2005 or 2006. For 2004, the fair
value of each option grant was estimated on the date of grant
using the Black Scholes Model with the following assumptions:
risk free interest rate of 4.02%, no dividend yield, expected
life of 5.0 years, and volatility of 30%.
Cash received from options exercised under all share-based
payment arrangements for the year ended December 31, 2005
and 2006 was approximately $2.7 million and
$6.0 million, respectively. The tax benefit realized for
the tax deductions from option exercises for the year ended
December 31, 2006 was approximately $2.9 million. The
Company currently expects to satisfy share-based awards with
registered shares available to be issued.
Fair
Value of Financial Instruments
The carrying values of the Companys financial instruments,
which include cash, marketable securities, accounts receivable
and accounts payable, approximate their fair values due to the
short-term maturity of these instruments.
The carrying values of the Companys long-term debt
approximates fair value due either to the length to maturity or
the existence of interest rates that approximate prevailing
market rates unless otherwise disclosed in these consolidated
financial statements.
E-92
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Segments
The Companys business of providing healthcare services to
patients comprises a single reportable operating segment under
SFAS No. 131,
Disclosures about Segments of an
Enterprise and Related Information.
Diluted earnings per common and common equivalent share have
been computed by dividing net income by the weighted average
common and common equivalent shares outstanding during the
respective periods. The weighted average common and common
equivalent shares outstanding have been adjusted to include the
number of shares that would have been outstanding if vested
in the money stock options had been exercised, at
the average market price for the period, with the proceeds being
used to buy back shares (i.e., the treasury stock method). Basic
earnings per common share was computed by dividing net income by
the weighted average number of shares of common stock
outstanding during the year. The following is a reconciliation
of the denominator of basic and diluted earnings per share (EPS)
computations shown on the face of the accompanying consolidated
financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Weighted average common shares outstanding basic
|
|
|
20,292,117
|
|
|
|
22,725,819
|
|
|
|
23,137,966
|
|
Effect of dilutive securities
|
|
|
739,851
|
|
|
|
977,834
|
|
|
|
855,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares
outstanding diluted
|
|
|
21,031,968
|
|
|
|
23,703,653
|
|
|
|
23,993,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities classified as
available-for-sale
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Auction rate securities, cost
|
|
$
|
5,450,000
|
|
|
$
|
|
|
Auction rate securities, fair value
|
|
|
5,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, all of the Companys auction
rate securities were invested in obligations of individual
states and political subdivisions.
E-93
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
|
|
5.
|
Property
and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Land
|
|
$
|
5,423,504
|
|
|
$
|
5,723,504
|
|
Buildings and leasehold improvements
|
|
|
37,487,736
|
|
|
|
47,934,760
|
|
Office, computer and telephone equipment
|
|
|
14,518,889
|
|
|
|
18,603,644
|
|
Medical and medical testing equipment
|
|
|
95,600,555
|
|
|
|
134,119,995
|
|
Automobiles and vans
|
|
|
1,715,149
|
|
|
|
2,039,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,745,833
|
|
|
|
208,421,850
|
|
Less accumulated depreciation
|
|
|
(43,152,233
|
)
|
|
|
(58,105,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
111,593,600
|
|
|
|
150,316,677
|
|
Construction in progress
|
|
|
1,803,749
|
|
|
|
2,062,341
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,397,349
|
|
|
$
|
152,379,018
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Capital
Lease Arrangements
|
The Company is the lessor of medical equipment under various
capital lease arrangements. The lease terms are for seven years,
at which time the lessee can purchase the equipment at an agreed
upon amount.
The components of the investment in sales-type leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Minimum lease receivable
|
|
$
|
1,344,623
|
|
|
$
|
616,984
|
|
Less unearned interest income
|
|
|
(116,882
|
)
|
|
|
(36,256
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in sales-type leases
|
|
|
1,227,741
|
|
|
|
580,728
|
|
Less current portion
|
|
|
(647,013
|
)
|
|
|
(427,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
580,728
|
|
|
$
|
153,424
|
|
|
|
|
|
|
|
|
|
|
The aggregate amount of scheduled receipts on lease receivables
consist of the following at December 31, 2006:
|
|
|
|
|
2007
|
|
$
|
456,894
|
|
2008
|
|
|
134,850
|
|
2009
|
|
|
15,144
|
|
2010
|
|
|
10,096
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
$
|
616,984
|
|
|
|
|
|
|
E-94
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
The Company leases certain equipment under agreements, which are
classified as capital leases. These leases have bargain purchase
options at the end of the original lease terms. Capital leased
assets included in property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Equipment
|
|
$
|
28,762,605
|
|
|
$
|
51,624,811
|
|
Less: accumulated amortization
|
|
|
(3,157,211
|
)
|
|
|
(7,704,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,605,394
|
|
|
$
|
43,920,213
|
|
|
|
|
|
|
|
|
|
|
Amortization expense relating to capital leased equipment was
approximately $925,000, $1,829,000 and $4,547,000 for the years
ended December 31, 2004, 2005 and 2006, respectively, and
is included in depreciation expense in the consolidated
statements of income and comprehensive income.
|
|
7.
|
Goodwill
and Intangible Assets
|
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Intangible assets subject to amortization (definite-lived)
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Noncompete agreements
|
|
$
|
7,974,934
|
|
|
$
|
(1,530,753
|
)
|
|
$
|
6,444,181
|
|
Other licenses
|
|
|
35,000
|
|
|
|
(7,500
|
)
|
|
|
27,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,009,934
|
|
|
|
(1,538,253
|
)
|
|
|
6,471,681
|
|
Intangible assets not subject
to amortization (indefinite-lived)
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of need licenses
|
|
|
302,229
|
|
|
|
|
|
|
|
302,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,312,163
|
|
|
$
|
(1,538,253
|
)
|
|
$
|
6,773,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Intangible assets subject to amortization (definite-lived)
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Noncompete agreements
|
|
$
|
10,418,536
|
|
|
$
|
(3,263,225
|
)
|
|
$
|
7,155,311
|
|
Other licenses
|
|
|
332,500
|
|
|
|
(191,000
|
)
|
|
|
141,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,751,036
|
|
|
|
(3,454,225
|
)
|
|
|
7,296,811
|
|
Intangible assets not subject
to amortization (indefinite-lived)
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of need licenses
|
|
|
302,229
|
|
|
|
|
|
|
|
302,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,053,265
|
|
|
$
|
(3,454,225
|
)
|
|
$
|
7,599,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense relating to intangible assets was
approximately $253,000, $960,000 and $1,916,000 for the years
ended December 31, 2004, 2005 and 2006, respectively. The
weighted-average amortization period is approximately
6.3 years.
E-95
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Estimated future amortization expense is as follows at
December 31, 2006:
|
|
|
|
|
2007
|
|
$
|
1,660,751
|
|
2008
|
|
|
1,419,320
|
|
2009
|
|
|
1,271,007
|
|
2010
|
|
|
1,224,309
|
|
2011
|
|
|
1,129,771
|
|
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Balance, beginning of year
|
|
$
|
24,915,162
|
|
|
$
|
35,442,050
|
|
|
$
|
66,537,332
|
|
Goodwill recorded during the year
|
|
|
10,526,888
|
|
|
|
29,741,834
|
|
|
|
71,332,136
|
|
Earn-out calculations
|
|
|
|
|
|
|
1,353,448
|
|
|
|
1,069,831
|
|
Adjustments to purchase price allocations
|
|
|
|
|
|
|
|
|
|
|
(153,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
35,442,050
|
|
|
$
|
66,537,332
|
|
|
$
|
138,785,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 23, 2004 the Company acquired the assets of Devoto
Construction, Inc., which was owned by certain directors and
officers for approximately $3,528,000 through the issuance of
271,385 shares of the Companys common stock. Devoto
Construction, Inc. performs remodeling and real property
improvements at the Companys medical facilities and
specializes in the construction of radiation medical facilities.
The purchase of Devoto Construction, Inc. was a strategic fit
for the Company as it continues to expand its operations into
new markets. The purchase price was allocated to net tangible
assets of $4,000, an intangible asset of $35,000 amortized over
7 years and goodwill of $3,489,000.
On September 21, 2004 the Company acquired the operations
and medical and office equipment of two radiation centers in New
Jersey. The Company determined that the purchase provided an
entry into the state of New Jersey with the potential to add
value in providing advanced treatment services to the community.
The Company also completed the purchase of a third center in
Willingboro, New Jersey, on October 18, 2004, completing
the acquisitions of the planned three centers in that state. The
fair value of the assets acquired, including intangible assets,
was approximately $10,569,000. The purchase price was allocated
to tangible assets of $2,851,000; $680,000 as a non-compete
amortized over eighteen to twenty four months and goodwill of
$7,038,000. The consideration given for the acquisition included
$7,909,000 cash, payments of direct costs relating to due
diligence of $160,000, the assumption of capital lease financing
of $2,226,000, and the assumption of $100,000 in liability for
assuming a physician employment contract and other liabilities
of $174,000. In addition, the purchase of the third center
includes a deferred purchase price contingent on maintaining a
certain level of earnings before interest, taxes, depreciation
and amortization and providing for payment of a certain
percentage over the base level annually during the following
three fiscal years. During 2005 and 2006, the amounts paid for
the deferred purchase price contingency were approximately
$36,000 and $110,000, respectively, which were recorded as
additional goodwill.
On April 1, 2005, the Company sold a 49.9% interest in a
joint venture that was formed to operate a treatment center
located in Berlin, Maryland. The interest was sold to a
healthcare enterprise operating in the area for $1,814,000. The
Company realized a gain of approximately $982,000 on the sale of
the interest.
E-96
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
In April 2005, the Company acquired a 60% interest in a single
radiation therapy treatment center located in Martinsburg, West
Virginia for approximately $662,000. The Company operates the
facility as part of its Central Maryland local market. Under the
terms of the agreement, the Company partners with a university
hospital system and manages the facility. The Company determined
that the purchase of the radiation therapy center would provide
an expansion into the Central Maryland local market and add
value in providing advanced treatment services to the community.
The allocation of the purchase price was to tangible assets of
$369,000, certificate of need license of $163,000, goodwill of
$324,000 and assumed liabilities and minority interest of
$194,000.
In May 2005, the Company acquired five radiation treatment
centers located in Clark County, Nevada from Associated
Radiation Oncologists, Inc. for approximately $25,969,000, plus
a three-year contingent earn-out. This acquisition positions the
Company as the largest operator of radiation oncology treatment
centers in the state of Nevada. The allocation of the purchase
price was to tangible assets of $5,442,000, non-compete
agreements of $3,294,000, amortized over six years, and goodwill
of $17,233,000. At December 31, 2005 and 2006, the Company
accrued approximately $1,317,000 and $959,000, respectively in
earn-out payments and recorded the amount as additional goodwill.
In June 2005, the Company acquired four radiation treatment
centers located in the markets of Scottsdale, Arizona, Holyoke,
Massachusetts, and two centers in Maryland for approximately
$16,215,000. This acquisition provides the Company its first
entrance into two new local markets in Arizona and
Massachusetts. The two centers purchased in Maryland will
further expand the Companys presence in its Central
Maryland local market. The allocation of the purchase price was
to tangible assets of $1,072,000, non-compete agreements of
$2,958,000, amortized over periods ranging from 1.5 years
to 10 years, and goodwill of $12,185,000.
In December 2005, the Company acquired the assets of a urology
practice with four office locations in southwest Florida for
approximately $348,000. The urology practices provide additional
service and treatment protocols to our patients with prostate
cancer and other urological diseases. The total purchase price
was allocated to tangible assets.
In January 2006, the Company acquired the assets of a radiation
treatment center located in Opp, Alabama for approximately
$1,800,000. The center purchased in Alabama will further expand
the Companys presence in its Southeastern Alabama local
market. The allocation of the purchase price is to tangible
assets of $304,000, non-compete agreements of $230,000,
amortized over 2 years, and goodwill of $1,266,000.
In May 2006, the Company acquired the assets of a radiation
treatment center located in Santa Monica, California for
approximately $11,972,000. The consideration given for the
acquisition included approximately $11,155,000 in cash and
$817,000 in an assumed capital lease obligation. The center
purchased in California further expands the Companys
presence into a second local market in the California area. The
allocation of the purchase price is to tangible assets of
$910,000, non-compete agreements of $870,000, amortized over
7 years, and goodwill of $10,192,000.
In August 2006, the Company acquired the assets of a radiation
treatment center located in Bel Air, Maryland for approximately
$6,812,000. The consideration given for the acquisition included
approximately $6,805,000 in cash and $7,000 in assumed
liabilities. The center purchased in Maryland will further
expand the Companys presence into its Central Maryland
local market. The allocation of the purchase price is to
tangible assets of $2,470,000, non-compete agreements of
$10,000, amortized over 3 years, and goodwill of $4,332,000.
In September 2006, the Company acquired the assets of a
radiation treatment center located in Beverly Hills, California
for approximately $19,099,000. The center purchased in
California will further expand the
E-97
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Companys presence in its Los Angeles local market
complementing the Santa Monica radiation center purchased in May
2006. The allocation of the purchase price is to tangible assets
of $738,000, non-compete agreements of $858,000, amortized over
5 years, and goodwill of $17,503,000.
In November 2006, the Company acquired a cluster network of
radiation treatment centers in Southeastern Michigan for
approximately $47,131,000. The consideration given for the
acquisition included approximately $41,512,000 in cash and
$5,619,000 in assumed liabilities. The acquisition provides the
Company an entrance into a new local market. The allocation of
the purchase price is to tangible assets of $9,140,000, and
goodwill of $37,991,000. Additionally, $3,300,000 of the
purchase price will be held in escrow pending receipt of a
consent from a hospital regarding a ground lease at one of the
centers and to satisfy any indemnification obligations of the
sellers related to warranties, representations and covenants
under the agreement. Upon receipt of the required hospital
consent, the Company is obligated to acquire all of
sellers ownership interests in a Michigan co-partnership,
relating to the leasehold assets at one of the centers, for a
purchase price of $2,950,000. In addition, in conjunction with
the acquisition of the treatment centers, the Company deducted
$5,280,000 from the purchase price to fund estimated tax
liabilities of the entities acquired, which represents the
majority of the assumed liabilities of $5,619,000. The amount
deducted is being held in an escrow account maintained by the
Companys legal counsel pending the filing of tax returns
and payments associated with this potential tax liability. Fifty
percent of any excess of amounts being held in escrow over the
tax liability of the entities will be returned to the seller.
During the fourth quarter of 2006, the Company acquired the
assets of several urology and surgery practices within southwest
Florida for approximately $619,000. The urology and surgery
practices provide additional service and treatment protocols to
our patients with prostate cancer and other urological diseases.
The allocation of the purchase price is to tangible assets of
$570,000, and goodwill of $49,000.
Allocation
of Purchase Price
The purchase prices of these transactions were allocated to the
assets acquired and liabilities assumed based upon their
respective fair values. The operations of the foregoing
acquisitions have been included in the accompanying consolidated
statements of income and comprehensive income from the
respective dates of acquisition. The following table summarizes
the allocations of the aggregate purchase price of the
acquisitions, including assumed liabilities and direct
transaction costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Fair value of net assets acquired, excluding cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
|
|
|
$
|
305,000
|
|
|
$
|
|
|
Inventories
|
|
|
|
|
|
|
82,000
|
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
1,000
|
|
|
|
487,000
|
|
Other non-current assets
|
|
|
201,000
|
|
|
|
81,000
|
|
|
|
25,000
|
|
Property and equipment
|
|
|
2,654,000
|
|
|
|
6,762,000
|
|
|
|
13,620,000
|
|
Intangible assets
|
|
|
715,000
|
|
|
|
6,415,000
|
|
|
|
1,968,000
|
|
Goodwill
|
|
|
10,527,000
|
|
|
|
31,095,000
|
|
|
|
72,402,000
|
|
Current liabilities
|
|
|
|
|
|
|
(185,000
|
)
|
|
|
(5,626,000
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
(817,000
|
)
|
Minority interest
|
|
|
|
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,097,000
|
|
|
$
|
44,547,000
|
|
|
$
|
82,059,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-98
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
During 2005, the Company incurred an impairment loss of
$1.2 million for the write down of leasehold improvements
in connection with the consolidation of two Yonkers, New York
based treatment centers within the Westchester/Bronx local
market.
Significant components of the income tax provision for the year
ended December 31, 2004, 2005 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,112,875
|
|
|
$
|
14,994,469
|
|
|
$
|
15,539,317
|
|
State
|
|
|
526,118
|
|
|
|
1,499,447
|
|
|
|
1,301,264
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
15,602,010
|
|
|
|
(784,299
|
)
|
|
|
1,976,615
|
|
State
|
|
|
1,605,457
|
|
|
|
(78,430
|
)
|
|
|
165,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
22,846,460
|
|
|
$
|
15,631,187
|
|
|
$
|
18,982,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate to the
Companys effective income tax rate on income before income
taxes for the years ended December 31, 2004, 2005 and 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
|
|
3.4
|
|
|
|
2.9
|
|
|
|
2.9
|
|
Income tax effect attributable to portion of year the Company
was recognized as an S-Corporation for federal income tax
purposes
|
|
|
(20.0
|
)
|
|
|
|
|
|
|
|
|
Income tax effect of conversion from an S-Corporation to a
C-Corporation
|
|
|
52.7
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
|
71.3
|
%
|
|
|
38.5
|
%
|
|
|
38.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provides for income taxes using the liability method
in accordance with Financial Accounting Standards Board
Statement No. 109,
Accounting for Income Taxes
.
Deferred income taxes arise
E-99
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
from the temporary differences in the recognition of income and
expenses for tax purposes. Deferred tax assets and liabilities
are comprised of the following at December 31, 2005 and
2006:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
3,009,035
|
|
|
$
|
4,206,445
|
|
State net operating loss carryforwards
|
|
|
115,510
|
|
|
|
848,534
|
|
Deferred rent liability
|
|
|
593,839
|
|
|
|
647,818
|
|
Intangible assets
|
|
|
717,840
|
|
|
|
782,100
|
|
Management fee receivable allowance
|
|
|
3,333,591
|
|
|
|
4,182,611
|
|
Other
|
|
|
1,232,216
|
|
|
|
1,992,847
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
9,002,031
|
|
|
$
|
12,660,355
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
(14,555,970
|
)
|
|
$
|
(18,579,305
|
)
|
Intangible assets
|
|
|
(3,236,382
|
)
|
|
|
(5,085,174
|
)
|
Income tax effect of conversion from an S-Corporation to a
C-Corporation
|
|
|
(3,876,611
|
)
|
|
|
(1,976,610
|
)
|
Prepaid expense
|
|
|
(787,176
|
)
|
|
|
(2,098,586
|
)
|
Partnership interests
|
|
|
(2,781,738
|
)
|
|
|
(3,084,055
|
)
|
Other
|
|
|
(108,892
|
)
|
|
|
(323,500
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(25,346,769
|
)
|
|
|
(31,147,230
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
|
$
|
(16,344,738
|
)
|
|
$
|
(18,486,875
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, and 2006, state net operating loss
carryforwards, primarily in Florida and Kentucky expiring in
years 2011 through 2025, available to offset future taxable
income approximated $2.6 million and $18.6 million,
respectively. Utilization of net operating loss carryforwards in
any one year may be limited.
E-100
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
The Company is obligated under long-term debt agreements as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
$150,000,000 Senior Credit Facility (Term B portion) with
interest rates at LIBOR or prime plus applicable margin,
collateralized by substantially all of the Companys
assets. At December 31, 2005 and 2006, interest rates were
at LIBOR and prime plus applicable margin, ranging from 6.53% to
7.75% and 7.1% to 8.5%, respectively, due at various maturity
dates through December 2012
|
|
$
|
100,000,000
|
|
|
$
|
98,550,000
|
|
$140,000,000 Senior Credit Facility (Revolving Credit portion)
with interest rates at LIBOR or prime plus applicable margin,
collateralized by substantially all of the Companys
assets. At December 31, 2006, interest rates were at LIBOR
and prime plus applicable margin, ranging from 6.87% to 8.25%
due at various maturity dates through March 2010
|
|
|
|
|
|
|
66,700,000
|
|
Capital leases payable with various monthly payments plus
interest at rates ranging from 3.9% to 11.4%, due at various
maturity dates through December 2011 and collateralized by
leasehold improvements and medical equipment with a net book
value of $25,605,394 and $43,920,213 at December 31, 2005
and 2006, respectively
|
|
|
23,463,245
|
|
|
|
39,994,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,463,245
|
|
|
|
205,244,038
|
|
Less current portion
|
|
|
(6,506,254
|
)
|
|
|
(12,284,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,956,991
|
|
|
$
|
192,959,189
|
|
|
|
|
|
|
|
|
|
|
Maturities under the obligations described above are as follows
at December 31, 2006:
|
|
|
|
|
2007
|
|
$
|
12,284,849
|
|
2008
|
|
|
10,682,599
|
|
2009
|
|
|
9,607,643
|
|
2010
|
|
|
74,927,307
|
|
2011
|
|
|
4,191,640
|
|
Thereafter
|
|
|
93,550,000
|
|
|
|
|
|
|
|
|
$
|
205,244,038
|
|
|
|
|
|
|
At December 31, 2005 and 2006, the prime interest rate was
7.25% and 8.25%, respectively.
On March 18, 2005 the Company amended its third amended and
restated senior secured credit facility principally to increase
the Term A loan to $35 million and increase its revolving
credit commitment from $80 million to $140 million.
Per the amendment, the interest rate spreads on the Term A loan
and on the revolver were reduced overall by 25 basis
points. The amendment extended the maturity date of the Term A
loan and the revolver to March 15, 2010.
On April 26, 2005 the Company amended its third amended and
restated senior secured credit facility principally to increase
the aggregate amount of permitted acquisitions from
$25 million to $45 million and to
E-101
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
obtain consent on the purchase of five radiation treatment
centers located in Clark County, Nevada. As a result of its
refinancing in March and April 2005, the Company wrote-off
approximately $579,000 of financing costs capitalized in
connection with its previous credit facility.
On December 16, 2005, the Company entered into a fourth
amended and restated senior secured credit facility principally
to provide for a $100 million Term B loan. The fourth
amended and restated senior secured credit facility provides,
subject to compliance with covenants and customary conditions,
for $290 million in borrowings consisting of: (i) a
$100 million Term B loan, (ii) a $50 million
accordion feature, which allows the Company to increase the
aggregate principal amount of the Term B loan to
$150 million, and (iii) a $140 million revolver.
The Company used the proceeds of the $100 million Term B
loan to pay off its pre-existing Term A loan as well as the
borrowings drawn on its $140 million revolver.
On November 14, 2006, the Company amended its fourth
amended and restated senior secured credit facility to exclude
the acquisition of the radiation centers in Southeastern
Michigan from the total permitted acquisition amount threshold
of $62 million in 2006, increase the amount of the 2006
permitted capital expenditures to $50 million, and increase
the amount of purchase money indebtedness outstanding at any
time from $40 million to $70 million.
The Term B loan requires quarterly payments of $250,000 and
matures on December 16, 2012. The Term B loan initially
bears interest either at LIBOR plus a spread of 200 basis
points or a specified base rate plus a spread of 50 basis
points, with the opportunity to permanently reduce the spread by
25 basis points on LIBOR and base rate loans after six
months, provided the Companys leverage ratio is below 2.00
to 1.00. At June 30, 2006, the Companys leverage
ratio was below 2.00 to 1.00 and the interest rate on the Term B
loan was reduced by 25 basis points.
The revolver will mature on March 15, 2010. The revolver
bears interest either at LIBOR plus a spread ranging from 125 to
250 basis points or a specified base rate plus a spread
ranging from 0 to 100 basis points, with the exact spread
determined upon the basis of the Companys leverage ratio,
as defined. The Company is required to pay a quarterly unused
commitment fee at a rate ranging from 25 to 50 basis points
on its revolving line of credit determined upon the basis of its
leverage ratio, as defined.
The fourth amended and restated senior secured credit facility
is secured by a pledge of substantially all of the
Companys tangible and intangible assets and includes a
number of restrictive covenants including limitations on
leverage, capital and acquisitions expenditures and requirements
to maintain minimum ratios of cash flow to fixed charges and
cash flow to interest. Under the terms of the Companys
fourth amended and restated senior secured credit facility,
borrowings under its revolver are based on minimum incremental
amounts of not less than $500,000 for BASE rate loans and not
less than $1,000,000 for LIBOR rate loans. Unused amounts under
the revolver portion of the senior secured credit facility
incurs a commitment fee charge based on the Companys
leverage ratio ranging from 25 basis points to
50 basis points.
|
|
12.
|
Unconsolidated
Joint Ventures
|
The Company currently maintains equity interests in three
unconsolidated joint ventures, including a 37% interest with a
hospital for the ownership of assets used for the delivery of
radiation oncology services, a 50% interest in a joint venture
with a freestanding radiation oncology center and a 40% interest
in a joint venture with a PET imaging facility.
The Company utilizes the equity method to account for its
investments in the unconsolidated joint ventures. At
December 31, 2005 and 2006, the Companys investments
in the unconsolidated joint ventures were approximately
$0.8 million and $1.2 million, respectively.
E-102
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
The condensed financial position and results of operations of
the unconsolidated joint venture entities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Total assets
|
|
$
|
3,716,684
|
|
|
$
|
4,201,469
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
1,651,678
|
|
|
$
|
1,053,656
|
|
Shareholders equity
|
|
|
2,065,006
|
|
|
|
3,147,813
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,716,684
|
|
|
$
|
4,201,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Revenues
|
|
$
|
3,289,998
|
|
|
$
|
2,846,491
|
|
|
$
|
2,226,162
|
|
Expenses
|
|
|
2,903,971
|
|
|
|
3,999,229
|
|
|
|
2,492,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
386,027
|
|
|
$
|
(1,152,738
|
)
|
|
$
|
(266,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the changes in the equity investment in the
unconsolidated joint ventures is as follows:
|
|
|
|
|
Balance at January 1, 2004
|
|
$
|
1,228,886
|
|
Equity interest in net income of joint ventures
|
|
|
193,014
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,421,900
|
|
Capital contributions in joint venture
|
|
|
84,124
|
|
Distributions from joint venture
|
|
|
(235,000
|
)
|
Equity interest in net loss of joint ventures
|
|
|
(467,872
|
)
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
803,151
|
|
Capital contributions in joint venture
|
|
|
539,659
|
|
Equity interest in net loss of joint ventures
|
|
|
(127,740
|
)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
1,215,070
|
|
|
|
|
|
|
During 2005, one of the unconsolidated joint ventures sold a
redundant facility for approximately $0.5 million realizing
a loss of approximately $0.9 million. A cash distribution
was made from the proceeds of the sale.
|
|
13.
|
Commitments
and Contingencies
|
Letters
of Credit
The Company issued to the lessor of one of its treatment centers
an unconditional and irrevocable letter of credit in the amount
of $300,000 to serve as security for the performance of the
assignees obligations under the lease.
Lease
Commitments
The Company is obligated under various operating leases for
office space and medical equipment. Total lease expense incurred
under these leases was approximately $7,163,000, $10,115,000,
and $12,270,000 for the years ended December 31, 2004, 2005
and 2006, respectively.
E-103
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Future fixed minimum annual lease commitments are as follows at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
Sublease
|
|
|
Net Rental
|
|
|
|
Commitments
|
|
|
Rentals
|
|
|
Commitments
|
|
|
2007
|
|
$
|
11,086,099
|
|
|
$
|
328,002
|
|
|
$
|
10,758,097
|
|
2008
|
|
|
10,530,779
|
|
|
|
328,002
|
|
|
|
10,202,777
|
|
2009
|
|
|
10,557,063
|
|
|
|
328,002
|
|
|
|
10,229,061
|
|
2010
|
|
|
9,936,209
|
|
|
|
426,403
|
|
|
|
9,509,806
|
|
2011
|
|
|
9,700,459
|
|
|
|
426,403
|
|
|
|
9,274,056
|
|
Thereafter
|
|
|
76,518,310
|
|
|
|
1,279,208
|
|
|
|
75,239,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,328,919
|
|
|
$
|
3,116,020
|
|
|
$
|
125,212,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases land and space at its treatment centers under
operating lease arrangements expiring in various years through
2044. The majority of the Companys leases provide for
fixed rent escalation clauses, ranging from 2% to 5%, or
escalation clauses tied to the Consumer Price Index. The rent
expense for leases containing fixed rent escalation clauses or
rent holidays is recognized by the Company on a straight-line
basis over the lease term. Leasehold improvements made by a
lessee that are funded by landlord incentives or allowances are
recorded as leasehold improvements. Leasehold improvements are
amortized over the shorter of their estimated useful lives
(generally 39 years or less) or the related lease term plus
anticipated renewals when there is an economic penalty
associated with non-renewal. An economic penalty is deemed to
occur when the Company forgoes an economic benefit, or suffers
an economic detriment by not renewing the lease. Penalties
include, but are not limited to, impairment of existing
leasehold improvements, profitability, location, uniqueness of
the property within its particular market, relocation costs, and
risks associated with potential competitors utilizing the
vacated location. Lease incentives are recorded as deferred rent
and amortized as reductions to lease expense over the lease term.
Concentrations
of Credit Risk
Financial instruments, which subject the Company to
concentrations of credit risk, consist principally of cash and
accounts receivable. The Company maintains its cash in bank
accounts with highly rated financial institutions. These
accounts may, at times, exceed federally insured limits. The
Company has not experienced any losses in such accounts. The
Company grants credit, without collateral, to its patients, most
of whom are local residents. Concentrations of credit risk with
respect to accounts receivable relate principally to third-party
payers, including managed care contracts, whose ability to pay
for services rendered is dependent on their financial condition.
Legal
Proceedings
The Company is involved in certain legal actions and claims
arising in the ordinary course of its business. It is the
opinion of management, based on advice of legal counsel, that
such litigation and claims will be resolved without material
adverse effect on the Companys consolidated financial
position, results of operations or cash flows.
On April 13, 2005, the Company was served with a
shareholder derivative lawsuit filed by Steven Scheye,
derivatively on behalf of nominal defendant, Radiation Therapy
Services, Inc., against certain officers of the Company, all of
the members of its Board of Directors and the Company as nominal
defendant (Circuit Court for the Twentieth Judicial Circuit, Lee
County, Florida; Case
No. 05-CA-001103).
The complaint alleges breach of fiduciary duties and states that
this action is brought for the benefit of Radiation Therapy
E-104
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Services, Inc. (the Company) against the members of its Board of
Directors. The complaint contains allegations substantially the
same as those raised in the purported class action lawsuit filed
by the Kissel Family Trust in September 2004 in the United
States District Court, Middle District of Florida that was
voluntarily dismissed without prejudice. The complaint alleges
breach of fiduciary duties of loyalty and good faith as a result
of entering into related party transactions and agreements and
seeks to recover unspecified damages in favor of the Company,
appropriate equitable relief and an award to plaintiff of the
costs and disbursements of the action including reasonable
attorneys fees. Based on its review of the complaint, the
Company believes that the derivative lawsuit is without merit
and has moved for dismissal of the complaint. The court has not
yet ruled on the Companys motion to dismiss the complaint.
The Company is obligated to provide indemnification to its
officers and directors in this matter to the fullest extent
permitted by law. Since by its inherent nature a derivative suit
seeks to recover alleged damages on behalf of the company
involved, the Company does not expect the ultimate resolution of
this derivative suit to have a material adverse effect on its
results of operations, financial position or cash flows.
Acquisitions
The Company has acquired and plans to continue acquiring
businesses with prior operating histories. Acquired companies
may have unknown or contingent liabilities, including
liabilities for failure to comply with healthcare laws and
regulations, such as billing and reimbursement, fraud and abuse
and similar anti-referral laws. Although the Company institutes
policies designed to conform practices to its standards
following completion of acquisitions, there can be no assurance
that the Company will not become liable for past activities that
may later be asserted to be improper by private plaintiffs or
government agencies. Although the Company generally seeks to
obtain indemnification from prospective sellers covering such
matters, there can be no assurance that any such matter will be
covered by indemnification, or if covered, that such
indemnification will be adequate to cover potential losses and
fines.
Employment
Agreements
The Company is party to employment agreements with several of
its employees that provide for annual base salaries, targeted
bonus levels, severance pay under certain conditions and certain
other benefits.
Tax
Indemnification Agreements
Prior to the consummation of the Companys initial public
offering (the Offering), the Company entered into
S Corporation Tax Allocation and Indemnification Agreements
(the Tax Agreements) with its then current shareholders relating
to their respective income tax liabilities. Because the Company
is fully subject to corporate income taxation after the
consummation of the Offering, the reallocation of income and
deductions between the periods during which the Company was
treated as an S corporation and the periods during which
the Company is subject to corporate income taxation may increase
the taxable income of one party while decreasing that of another
party. Accordingly, the Tax Agreements are intended to include
provisions such that taxes are borne by the Company, on the one
hand, and the shareholder, on the other, only to the extent that
such parties were required to report the related income for tax
purposes.
The Company has a defined contribution retirement plan under
Section 401(a) of the Internal Revenue Code (the Retirement
Plan). The Retirement Plan allows all full-time employees after
one year of service to defer a portion of their compensation on
a pre-tax basis through contributions to the Retirement Plan.
The Company matches a portion of these contributions based upon
an employees length of service. The
E-105
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
Companys matching contribution for the years ended
December 31, 2004, 2005 and 2006 was $415,000, $530,000,
and $637,000, respectively.
15. Stock
Option Plan and Restricted Stock Grants
Stock
Option Plan
In August 1997, the Board of Directors approved and adopted the
1997 Stock Option Plan (the 1997 Plan). The 1997 Plan, as
amended in July 1998, authorized the issuance of options to
purchase up to 3,660,000 shares of the Companys
common stock. Under the 1997 Plan, options to purchase common
stock may be granted until August 2007. The Company believes
that such awards better align the interests of its key employees
with those of its shareholders. Options generally are granted at
the fair market value of the common stock at the date of grant,
are exercisable in installments beginning one year from the date
of grant, vest on average over five years and expire ten years
after the date of grant. The 1997 Plan provides for acceleration
of exercisability of the options upon the occurrence of certain
events relating to a change of control, merger, sale of assets
or liquidation of the Company. The 1997 Plan permits the
issuance of either Incentive Stock Options or Nonqualified Stock
Options.
In April 2004, our Board of Directors adopted the 2004 Stock
Incentive Plan under which the Company has authorized the
issuance of equity-based awards for up to 2,000,000 shares
of common stock to provide additional incentive to employees,
officers, directors and consultants. In addition to the shares
reserved for issuance under our 2004 stock incentive plan, such
plan also includes (i) 1,141,922 shares that were
reserved but unissued under the 1997 Plan (ii) shares
subject to grants under the 1997 Plan that may again become
available as a result of the termination of options or the
repurchase of shares issued under the 1997 Plan, and
(iii) annual increases in the number of shares available
for issuance under the 2004 stock incentive plan on the first
day of each fiscal year beginning with our fiscal year beginning
in 2005 and ending after our fiscal year beginning in 2014,
equal to the lesser of:
|
|
|
|
|
5% of the outstanding shares of common stock on the first day of
our fiscal year;
|
|
|
|
1,000,000 shares; or
|
|
|
|
an amount our board may determine.
|
Pursuant to the 2004 Option Plan, the Company can grant either
incentive or non-qualified stock options. Options to purchase
common stock under the 2004 Option Plan have been granted to
Company employees at the fair market value of the underlying
shares on the date of grant. The Company issues new shares as
option exercises are executed through the Companys
transfer agent.
Options generally are granted at the fair market value of the
common stock at the date of grant, are exercisable in
installments beginning one year from the date of grant, vest
over three to ten years and expire ten years after the date of
grant.
In June 2004, options were granted to consultants to provide
services for healthcare reimbursement efforts and to an
independent contractor to provide advice with respect to
business opportunities in the state of New York. The Company
recognized compensation expense on these options of $408,000 and
$110,000 for the years ended December 31, 2004 and 2005,
respectively. Compensation expense is measured as the services
are performed and the expense is recognized over the service
period. The Company recognizes expense on these options based on
the fair value of the option at the end of each reporting
period. Compensation accrued during the service period is
adjusted in subsequent periods up to the measurement date for
changes, either increases or decreases, in the quoted market
value of the shares covered by the grant. In February 2005, the
E-106
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
consultants became employees of the Company. As a result of the
change, compensation expense on the options is no longer
recorded.
Incentive stock options may be granted to key employees,
including officers, directors and other selected employees. The
exercise price of each option must be 100% of the fair market
value of the common stock on the date of grant (110% in the case
of shareholders that own 10% or more of the outstanding common
stock). Nonqualified stock options may be granted under the 2004
Option Plan or otherwise to officers, directors, consultants,
advisors and key employees. The exercise price of each option
must be at least 85% of the fair market value of the common
stock on the date of grant.
At December 31, 2006, the number of options outstanding
were 1,235,500 for Nonqualified Stock Options and 389,994 for
Incentive Stock Options. Under the 2004 Option Plan, there were
3,382,812 shares of common stock reserved for future grants
as of December 31, 2006.
Transactions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Outstanding at January 1, 2004
|
|
|
1,710,719
|
|
|
$
|
2.72
|
|
|
|
|
|
Granted
|
|
|
1,745,000
|
|
|
|
13.00
|
|
|
|
|
|
Exercised
|
|
|
(932,706
|
)
|
|
|
2.39
|
|
|
|
|
|
Forfeited
|
|
|
(27,450
|
)
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
2,495,563
|
|
|
$
|
10.00
|
|
|
|
|
|
Exercised
|
|
|
(334,667
|
)
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
2,160,896
|
|
|
$
|
10.80
|
|
|
|
|
|
Exercised
|
|
|
(535,402
|
)
|
|
|
11.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
1,625,494
|
|
|
$
|
10.67
|
|
|
$
|
33,890,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2004
|
|
|
430,051
|
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2005
|
|
|
1,939,557
|
|
|
$
|
11.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2006
|
|
|
1,493,690
|
|
|
$
|
11.37
|
|
|
$
|
30,105,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No options were granted during the year ended December 31,
2005 and 2006. The total intrinsic value of options exercised
during the year ended December 31, 2005 and 2006 was
approximately $4.9 million and $9.4 million,
respectively.
For future option grants, the Company elected to use the
Black-Scholes model to estimate the fair value. Future stock
option grants will use the expected volatilities based on the
historical volatility of the Companys stock. The expected
term of options granted represents the period of time the
options granted are expected to be outstanding. The risk-free
rate is based on the U.S. Treasury yield curve in effect at
the time of grant. Exercise prices for options outstanding as of
December 31, 2006 ranged from $2.80 to $13.00.
E-107
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
The following table provides certain information with respect to
stock options outstanding at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Stock
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
$1.91 $2.80
|
|
|
131,804
|
|
|
$
|
2.80
|
|
|
|
2.1
|
|
$3.01
|
|
|
226,200
|
|
|
|
3.01
|
|
|
|
3.1
|
|
$7.33 $13.00
|
|
|
1,267,490
|
|
|
|
12.86
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625,494
|
|
|
$
|
10.67
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides certain information with respect to
stock options exercisable at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Stock
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
Range of Exercise Prices
|
|
Exercisable
|
|
|
Price
|
|
|
Term
|
|
|
$3.01
|
|
|
226,200
|
|
|
$
|
3.01
|
|
|
|
3.1
|
|
$7.33 $13.00
|
|
|
1,267,490
|
|
|
|
12.86
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,493,690
|
|
|
$
|
11.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
Stock Grant
Restricted shares vest ratably over a
5-year
period.
The fair value of the non-vested stock
grants is measured on the grant date and recognized in earnings
over the requisite service period.
The following table summarizes non-vested stock activity from
December 31, 2005 through December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested balance at December 31, 2005
|
|
|
7,500
|
|
|
$
|
33.34
|
|
Shares granted
|
|
|
4,895
|
|
|
|
28.49
|
|
Shares forfeited
|
|
|
(4,895
|
)
|
|
|
28.49
|
|
Vested
|
|
|
(1,500
|
)
|
|
|
33.34
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2006
|
|
|
6,000
|
|
|
$
|
33.34
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, there was approximately $192,000
of total unrecognized compensation cost related to nonvested
stock grants under the Plan. That cost is expected to be
recognized over a weighted-average period of 3.8 years.
Pursuant to SFAS 123R, the approximate $241,000 of deferred
stock compensation recorded as a reduction to shareholders
equity at December 31, 2005 is no longer reported as a
separate component of shareholders equity and has been
reclassified to additional paid-in capital.
E-108
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
|
|
16.
|
Related
Party Transactions
|
The Company purchased nuclear medical and pharmacological
supplies from a company which was majority-owned by certain of
the Companys shareholders until June 2004. Purchases by
the Company from this company was approximately $627,000, for
the year ended December 31, 2004. In June 2004, the
Companys shareholders sold their majority interest in the
nuclear and pharmacological supply company.
The Company leases certain of its treatment centers and other
properties from partnerships which are majority-owned by certain
of the Companys shareholders. These related party leases
have expiration dates through February 28, 2020 and they
provide for annual lease payments ranging from approximately
$30,000 to $463,000. The aggregate lease payments the Company
made to the entities owned by these related parties were
approximately $2,672,000, $3,173,000, and $3,843,000 in 2004,
2005 and 2006, respectively.
In October 1999, the Company entered into a sublease arrangement
with a partnership which is owned by certain of the
Companys shareholders to lease space to the partnership
for an MRI center in Mount Kisco, New York. Sublease rentals
paid by the partnership to the landlord were approximately
$528,000, $571,000, and $658,000 during 2004, 2005 and 2006,
respectively.
The Company provides billing and collection services to an MRI
entity, which is owned by certain of the Companys
shareholders. In addition, the Company charges the MRI entity
for certain allocated cost of certain staff who perform services
on behalf of the MRI entity. The fees received by the Company
for the billing and collection services and for reimbursement of
certain allocated costs were approximately $371,000, $332,000,
and $368,000 in 2004, 2005 and 2006, respectively. The balance
due from the MRI entity was approximately $33,000 and $18,000 at
December 31, 2005 and 2006, respectively.
The Company is a participating provider in an oncology network,
which is partially owned by one of the Companys
shareholders. The Company provides oncology services to members
of the network. Annual payments received by the Company for the
services were $419,000, $384,000, and $619,000 during 2004, 2005
and 2006, respectively.
The Company provided medical equipment to radiation treatment
centers in Argentina, Costa Rica and Guatemala, which are owned
by a family member of one of the Companys shareholders.
The Company discontinued sales to these centers in June 2004.
Sales of medical equipment to these radiation centers was
approximately $93,000 in 2004. Gain on the sale of the medical
equipment was approximately $8,000 in 2004.
The Company contracted with a radiology group, which was partly
owned by a shareholder, to provide PET scans to our patients.
The shareholders interest in the group terminated in May
2004. The Company reimbursed for services, supplies, equipment
and personnel provided by the radiology group. Purchases by the
Company were approximately $240,000 for the year ended
December 31, 2004.
The Company maintains a construction company which provides
remodeling and real property improvements at its facilities. In
addition, the construction company builds and constructs
facilities on behalf of certain land partnerships which are
owned by certain of the Companys shareholders. Payments
received by the Company for building and construction fees were
approximately $1,310,000 in 2006. Amounts due to the Company for
the construction services were approximately $390,000 at
December 31, 2006. No payments were received by the Company
in 2004 and 2005.
Effective October 2003, the Company purchased medical
malpractice insurance from an insurance company owned by certain
of the Companys shareholders. The period of coverage runs
from October to September. The premium payments made by the
Company in 2004, 2005 and 2006 were approximately $3,375,000,
$4,096,000, and $7,981,000, respectively.
E-109
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
In California, Maryland, Massachusetts, Michigan, Nevada, New
York, and North Carolina, the Company maintains administrative
services agreements with professional corporations owned by
certain of the Companys shareholders, who are licensed to
practice medicine in such states. The Company entered into these
administrative services agreements in order to comply with the
laws of such states which prohibit the Company from employing
physicians. The administrative services agreements generally
obligate the Company to provide treatment center facilities,
staff, equipment, accounting services, billing and collection
services, management and administrative personnel, assistance in
managed care contracting and assistance in marketing services.
Fees paid to the Company by such professional corporations under
the administrative services agreements were approximately
$26,702,000, $24,753,000, and $35,023,000 in 2004, 2005 and 2006
respectively. These amounts have been eliminated in
consolidation.
|
|
17.
|
Pro Forma
Disclosure (Unaudited)
|
Pro forma taxes:
The Company had elected to be
taxed as an S corporation under the provisions of the
Internal Revenue Code. In connection with the closing of the
Companys initial public offering in June 2004, the
S corporation election was terminated and, accordingly, the
Company became subject to U.S. federal and state income
taxes. Upon termination of the S corporation election,
current and deferred income taxes reflecting the tax effects of
temporary differences between the Companys consolidated
financial statement and tax basis of certain assets and
liabilities became liabilities of the Company. These liabilities
are reflected on the consolidated balance sheets with a
corresponding expense in the consolidated statements of income
and comprehensive income. See note 11 Income
Taxes. The 2004 proforma net income includes pro forma
income taxes as if the Company were subject to tax during the
respective period using an effective rate of approximately 40%.
|
|
Note 18.
|
Unaudited
Quarterly Financial Information
|
The quarterly interim financial information shown below has been
prepared by the Companys management and is unaudited. It
should be read in conjunction with the audited consolidated
financial statements appearing herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total Revenues
|
|
$
|
52,419,468
|
|
|
$
|
54,443,727
|
|
|
$
|
56,014,269
|
|
|
$
|
64,372,849
|
|
Net income
|
|
|
6,297,217
|
|
|
|
7,491,788
|
|
|
|
4,527,149
|
|
|
|
6,653,144
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
|
$
|
0.20
|
|
|
$
|
0.29
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
|
$
|
0.19
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total Revenues
|
|
$
|
73,941,647
|
|
|
$
|
72,631,222
|
|
|
$
|
69,481,304
|
|
|
$
|
77,927,780
|
|
Net income
|
|
|
8,856,626
|
|
|
|
8,847,886
|
|
|
|
5,414,809
|
|
|
|
7,203,723
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
|
$
|
0.38
|
|
|
$
|
0.23
|
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
$
|
0.23
|
|
|
$
|
0.30
|
|
E-110
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2006
|
|
Note 19.
|
Subsequent
Event
|
In January 2007, the Company acquired a 67.5% interest in a
single radiation therapy treatment center located in Gettysburg
Pennsylvania for approximately $750,000. The Company also
acquired a urology group practice in southwest Florida for
approximately $688,000.
E-111
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on February 15, 2007.
RADIATION THERAPY SERVICES INC.
|
|
|
|
By:
|
/s/
Daniel
E. Dosoretz, M.D.
|
Daniel E. Dosoretz, M.D.
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the date
indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
Howard
M. Sheridan, M.D
Howard
M. Sheridan, M.D.
|
|
Chairman of the Board
|
|
February 15, 2007
|
|
|
|
|
|
/s/
Daniel
E. Dosoretz, M.D.
Daniel
E. Dosoretz, M.D.
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
February 15, 2007
|
|
|
|
|
|
/s/
David
M. Koeninger
David
M. Koeninger
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
February 15, 2007
|
|
|
|
|
|
/s/
Joseph
Biscardi
Joseph
Biscardi
|
|
Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 15, 2007
|
|
|
|
|
|
/s/
James
H. Rubenstein, M.D.
James
H. Rubenstein, M.D.
|
|
Medical Director, Secretary and Director
|
|
February 15, 2007
|
|
|
|
|
|
/s/
Michael
J. Katin, M.D.
Michael
J. Katin, M.D.
|
|
Director
|
|
February 15, 2007
|
|
|
|
|
|
/s/
Herbert
F. Dorsett
Herbert
F. Dorsett
|
|
Director
|
|
February 15, 2007
|
|
|
|
|
|
/s/
Ronald
E. Inge
Ronald
E. Inge
|
|
Director
|
|
February 15, 2007
|
|
|
|
|
|
/s/
Leo
Doerr
Leo
Doerr
|
|
Director
|
|
February 15, 2007
|
|
|
|
|
|
/s/
Solomon
Agin, D.D.
Solomon
Agin, D.D.
|
|
Director
|
|
February 15, 2007
|
E-112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
2
|
.1
|
|
Purchase Agreement dated November 14, 2006, by and among
Michigan Radiation Therapy Management Services, Inc. and Farideh
R. Bagne and Alexander Bagne.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.1
|
|
11/16/06
|
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of Radiation
Therapy Services, Inc.
|
|
S-1/A
|
|
333-114603
|
|
|
3
|
.3
|
|
6/15/04
|
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Radiation Therapy Services, Inc.
|
|
S-1/A
|
|
333-114603
|
|
|
3
|
.4
|
|
6/15/04
|
|
|
|
4
|
.1
|
|
Form of Radiation Therapy Services, Inc. common stock certificate
|
|
S-1/A
|
|
333-114603
|
|
|
4
|
.1
|
|
5/21/04
|
|
|
|
4
|
.2
|
|
Fourth Amended and Restated Credit Agreement among the Company,
Bank of America, N.A., as Administrative Agent, Swing Line
Lender and Issuing Lender, Wachovia Bank, National Association,
as Syndication Agent, the other lenders party thereto, Banc of
America Securities, LLC and Wachovia Securities, Inc. as joint
lead arrangers and Joint Book Managers, dated as of
December 16, 2005
|
|
8-K
|
|
000-50802
|
|
|
10
|
.1
|
|
12/21/05
|
|
|
|
4
|
.3
|
|
Amendment No. 1 to Fourth Amended and Restated Credit
Agreement.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.8
|
|
11/16/06
|
|
|
|
10
|
.1
|
|
Lease Agreement effective July 1, 1987, between Kyle,
Sheridan & Thorn Associates and Katin, Dosoretz
Radiation Therapy Associates, P.A. for premises in
Ft. Myers, Florida. Effective July 31, 1997, Katin,
Dosoretz Radiation Therapy Associates, P.A. changed its name to
21st Century Oncology, Inc.
|
|
S-1
|
|
333-114603
|
|
|
10
|
.1
|
|
4/19/04
|
|
|
|
10
|
.2
|
|
Lease Agreement dated May 1, 1999 between Colonial
Radiation Associates and Radiation Therapy Services, Inc. for
premises in Ft. Myers, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.2
|
|
4/19/04
|
|
|
|
10
|
.3
|
|
Lease dated December 3, 1999 between Henderson Radiation
Associates and Nevada Radiation Therapy Management Services,
Inc. for premises in Henderson, Nevada
|
|
S-1
|
|
333-114603
|
|
|
10
|
.3
|
|
4/19/04
|
|
|
|
10
|
.4
|
|
Lease dated December 31, 1999 between Tamarac Radiation
Associates and 21st Century Oncology, Inc. for premises in
Tamarac, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.4
|
|
4/19/04
|
|
|
|
10
|
.5
|
|
Lease dated January 1, 2001 between Bonita Radiation
Associates and 21st Century Oncology, Inc. for premises in
Bonita Springs, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.5
|
|
4/19/04
|
|
|
|
10
|
.6
|
|
Lease dated October 25, 2000 between North Naples Extension
and 21st Century Oncology, Inc. for premises in Naples, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.6
|
|
4/19/04
|
|
|
E-113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
10
|
.7
|
|
Lease Agreement dated May 21, 2001 between Fort Walton
Radiation Associates, LLP and 21st Century Oncology, Inc. for
premises in Fort Walton Beach, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.7
|
|
4/19/04
|
|
|
|
10
|
.8
|
|
Lease Agreement dated November 13, 2000 between West Palm
Radiation Associates, LLC and Palms West Radiation Associates,
LLC for premises in Palm Beach County, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.8
|
|
4/19/04
|
|
|
|
10
|
.9
|
|
Lease dated May 1, 2002 between Bradenton Radiation
Associates and 21st Century Oncology, Inc. for premises in
Bradenton, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.9
|
|
4/19/04
|
|
|
|
10
|
.10
|
|
Lease Agreement dated October 1, 2002 between 21st Century
Oncology, Inc. and Plantation Radiation Associates for premises
in Plantation, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.10
|
|
4/19/04
|
|
|
|
10
|
.11
|
|
Lease Agreement dated January 21, 2003 between Yonkers
Radiation Enterprises, LLC and New York Radiation Therapy
Management Services, Incorporated for premises in Yonkers, New
York
|
|
S-1
|
|
333-114603
|
|
|
10
|
.11
|
|
4/19/04
|
|
|
|
10
|
.12
|
|
Lease dated February 1, 2003 between Lehigh Radiation
Associates and 21st Century Oncology, Inc. for premises in
Lehigh Acres, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.12
|
|
4/19/04
|
|
|
|
10
|
.13
|
|
Lease dated November 19, 2003 between Destin Radiation
Enterprises, LLC and 21st Century Oncology, Inc. for premises in
Santa Rosa Beach, Florida
|
|
S-1
|
|
333-114603
|
|
|
10
|
.13
|
|
4/19/04
|
|
|
|
10
|
.14
|
|
Sublease agreement dated October 21, 1999 between Radiation
Therapy Services, Inc. and Westchester MRI Specialists, P.C.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.14
|
|
5/21/04
|
|
|
|
10
|
.15
|
|
Lease dated June 1, 2005 between Arizona Radiation
Enterprises, LLC and Arizona Radiation Therapy Management
Services, Inc.
|
|
10-Q
|
|
000-50802
|
|
|
10
|
.2
|
|
8/5/05
|
|
|
|
10
|
.16
|
|
Administrative Services Agreement dated January 1, 1999
between New York Radiation Therapy Management Services,
Incorporated and Yonkers Radiation Medical Practice, P.A.;
Addendum dated January 1, 2000 for Yonkers; Addendum dated
January 1, 2001; Addendum dated January 1, 2002;
Addendum dated January 1, 2003; Addendum dated
January 1, 2004.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.15
|
|
5/21/04
|
|
|
|
10
|
.17
|
|
Addendum dated January 1, 2005.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.16
|
|
2/18/05
|
|
|
|
10
|
.18
|
|
Addendum dated January 1, 2006.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.18
|
|
2/17/06
|
|
|
|
10
|
.19
|
|
Addendum dated January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
E-114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
10
|
.20
|
|
Administrative Services Agreement dated January 1, 2002
between North Carolina Radiation Therapy Management Services,
Inc. and Radiation Therapy Associates of Western North Carolina,
P.A.; Addendum dated January 1, 2002; Addendum dated
January 1, 2003; Addendum dated January 1, 2004
|
|
S-1
|
|
333-114603
|
|
|
10
|
.16
|
|
4/19/04
|
|
|
|
10
|
.21
|
|
Addendum dated January 1, 2005.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.18
|
|
2/18/05
|
|
|
|
10
|
.22
|
|
Addendum dated January 1, 2006.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.21
|
|
2/17/06
|
|
|
|
10
|
.23
|
|
First Amendment dated August 1, 2006
|
|
8-K
|
|
000-50802
|
|
|
10
|
.4
|
|
8/4/06
|
|
|
|
10
|
.24
|
|
Addendum dated October 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.25
|
|
Addendum dated January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
Administrative Services Agreement dated January 9, 1998
between Nevada Radiation Therapy Management Services,
Incorporated and Michael J. Katin, M.D., Prof. Corp.;
Addendum dated January 1, 1999; Addendum dated
January 1, 2000; Addendum dated January 1, 2001;
Addendum dated January 1, 2002; Addendum dated
January 1, 2003; Addendum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.26
|
|
dated January 1, 2004.
|
|
S-1
|
|
333-114603
|
|
|
10
|
.17
|
|
4/19/04
|
|
|
|
10
|
.27
|
|
Addendum dated January 1, 2005.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.20
|
|
2/18/05
|
|
|
|
10
|
.28
|
|
Addendum dated January 1, 2006.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.24
|
|
2/17/06
|
|
|
|
10
|
.29
|
|
First Amendment dated August 1, 2006
|
|
8-K
|
|
000-50802
|
|
|
10
|
.5
|
|
8/4/06
|
|
|
|
10
|
.30
|
|
Administrative Services Agreement dated October 31, 1998
between Maryland Radiation Therapy Management Services, Inc. and
Katin Radiation Therapy, P.A.; Addendum dated January 1,
2000; Addendum dated January 1, 2001; Addendum dated
January 1, 2002; Addendum dated January 1, 2003;
Addendum dated January 1, 2004.
|
|
S-1
|
|
333-114603
|
|
|
10
|
.18
|
|
4/19/04
|
|
|
|
|
|
|
Addendum dated January 1, 2005.
|
|
10-Q
|
|
000-50802
|
|
|
10
|
.22
|
|
2/18/05
|
|
|
|
10
|
.31
|
|
Amendment effective April 1, 2005.
|
|
10-Q
|
|
000-50802
|
|
|
10
|
.1
|
|
8/5/05
|
|
|
|
10
|
.32
|
|
Addendum dated January 1, 2006.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.27
|
|
2/17/06
|
|
|
|
10
|
.33
|
|
Addendum dated January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.34
|
|
Independent Contractor Agreement between Katin Radiation
Therapy, P.A. and Ambergers, LLC dated October 18, 2005.
|
|
10-Q
|
|
000-50802
|
|
|
10
|
.2
|
|
11/7/05
|
|
|
|
|
|
|
Administrative Services Agreement between California Radiation
Therapy Management Services, Inc. and 21st Century Oncology of
California, a Medical Corporation dated August 1, 2003.
Addendum dated January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.35
|
|
Addendum dated January 1, 2005.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.23
|
|
2/18/05
|
|
|
|
10
|
.36
|
|
Addendum dated January 1, 2006.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.30
|
|
2/17/06
|
|
|
E-115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
10
|
.37
|
|
Termination of Administrative Services Agreement
|
|
8-K
|
|
000-50802
|
|
|
10
|
.3
|
|
8/4/06
|
|
|
|
10
|
.38
|
|
Administrative Services Agreement between New England
Radiation Therapy Management Services, Inc. and Massachusetts
Oncology Services PC
|
|
10-Q
|
|
000-50802
|
|
|
10
|
.3
|
|
8/5/05
|
|
|
|
10
|
.39
|
|
Addendum dated January 1, 2006.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.32
|
|
2/17/06
|
|
|
|
10
|
.40
|
|
Addendum dated January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.41+
|
|
Second Amended and Restated 1997 Stock Option Plan
|
|
S-1
|
|
333-114603
|
|
|
10
|
.19
|
|
4/19/04
|
|
|
|
10
|
.42+
|
|
Radiation Therapy Services, Inc. 2004 Stock Incentive Plan
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.20
|
|
6/2/04
|
|
|
|
10
|
.43+
|
|
Performance Based Bonus Plan as of April 2004
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.21
|
|
5/21/04
|
|
|
|
10
|
.44+
|
|
Executive Employment Agreement of Daniel E. Dosoretz, M.D.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.22
|
|
5/21/04
|
|
|
|
10
|
.45+
|
|
Physician Employment Agreement between Daniel E.
Dosoretz, M.D. and 21st Century Oncology, Inc.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.23
|
|
5/21/04
|
|
|
|
10
|
.46+
|
|
Physician Employment Agreement between Michael J.
Katin, M.D. and 21st Century Oncology, Inc.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.25
|
|
6/2/04
|
|
|
|
10
|
.47+
|
|
Executive Employment Agreement of James H. Rubenstein, M.D.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.26
|
|
5/21/04
|
|
|
|
10
|
.48+
|
|
Physician Employment Agreement between James H.
Rubenstein, M.D. and 21st Century Oncology, Inc.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.27
|
|
5/21/04
|
|
|
|
10
|
.49+
|
|
Executive Employment Agreement of David M. Koeninger
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.28
|
|
5/21/04
|
|
|
|
10
|
.50+
|
|
Executive Employment Agreement of Joseph Biscardi
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.29
|
|
5/21/04
|
|
|
|
10
|
.51
|
|
Form of Transition Agreement and Stock Pledge
|
|
S-1
|
|
333-114603
|
|
|
10
|
.30
|
|
4/19/04
|
|
|
|
10
|
.52
|
|
Fourth Amended and Restated Credit Agreement among the Company,
Bank of America, N.A., as Administrative Agent, Swing Line
Lender and Issuing Lender, Wachovia Bank, National Association,
as Syndication Agent, the other lenders party thereto, Banc of
America Securities, LLC and Wachovia Securities, Inc. as joint
lead arrangers and Joint Book Managers, dated as of
December 16, 2005 (contained in Exhibit 4.2)
|
|
8-K
|
|
000-50802
|
|
|
10
|
.1
|
|
12/21/05
|
|
|
|
10
|
.53
|
|
Amendment No. 1 to Fourth Amended and Restated Credit
Agreement (contained in Exhibit 4.3)
|
|
8-K
|
|
000-50802
|
|
|
10
|
.8
|
|
11/16/06
|
|
|
|
10
|
.54
|
|
Insurance Policy issued by Batan Insurance Company SPC, LTD to
Radiation Therapy Services, Inc.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.42
|
|
5/21/04
|
|
|
E-116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
10
|
.55
|
|
Asset Purchase Agreement dated April 15, 2004 for
acquisition of Devoto Construction, Inc.
|
|
S-1
|
|
333-114603
|
|
|
10
|
.43
|
|
4/19/04
|
|
|
|
10
|
.56
|
|
S Corporation Tax Allocation and Indemnification Agreements
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.44
|
|
6/2/04
|
|
|
|
10
|
.57+
|
|
Employment Agreement of Howard M. Sheridan, M.D.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.49
|
|
5/21/04
|
|
|
|
10
|
.58+
|
|
Form of Indemnification Agreement (Directors and/or Officers)
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.50
|
|
5/21/04
|
|
|
|
10
|
.59
|
|
Management Services Agreement dated May 1, 2001 between
Riverhill MRI Specialists, P.C. d/b/a Rivermed Imaging and
Financial Services of Southwest Florida, Inc.
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.53
|
|
6/2/04
|
|
|
|
10
|
.60
|
|
Positron Emission Tomography (PET) Services Office, Equipment
and Personnel Lease Agreement dated June 1, 2002 between
Radiation Regional Center, P.A. and 21st Century Oncology, Inc.;
Amendment 1 dated September 2003
|
|
S-1/A
|
|
333-114603
|
|
|
10
|
.54
|
|
6/2/04
|
|
|
|
10
|
.61
|
|
Positron Emission Tomography (PET) Services Office, Equipment
and Personnel Lease Agreement dated October 1, 2001 between
Radiology Regional Center, P.A. and 21st Century Oncology, Inc.;
Amendment 2 dated September 2003
|
|
S-1
|
|
333-114603
|
|
|
10
|
.55
|
|
6/2/04
|
|
|
|
10
|
.62
|
|
Development Agreement between Palm Springs Radiation
Enterprises, LLC and California Radiation Therapy Management
Services, Inc. dated effective as of December 16, 2004.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.46
|
|
2/18/05
|
|
|
|
10
|
.63
|
|
Purchasing Agreement between Palm Springs Radiation Enterprises,
LLC and DeVoto Construction of Southwest Florida, Inc. dated
effective as of December 16, 2004.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.47
|
|
2/18/05
|
|
|
|
10
|
.64
|
|
Lease dated January 30, 2003 between Crestview Radiation
Enterprises, LLC and 21st Century Oncology, Inc. for premises in
Crestview, Florida lease effective February 20, 2004.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.48
|
|
2/18/05
|
|
|
|
10
|
.65
|
|
Physician Sharing Agreement between 21st Century Oncology, Inc.
and Radiation Therapy Associates of Western North Carolina, P.A.
effective August 1, 2003
|
|
10-K
|
|
000-50802
|
|
|
10
|
.49
|
|
2/18/05
|
|
|
|
10
|
.66
|
|
Personal and Services Agreement between Imaging Initiatives, Inc
and 21st Century Oncology, Inc. effective December 1, 2004
|
|
10-K
|
|
000-50802
|
|
|
10
|
.50
|
|
2/18/05
|
|
|
|
10
|
.67
|
|
Lease dated October 2005 between Palm Springs Radiation
Enterprises, LLC and California Radiation Therapy Management
Services, Inc.
|
|
10-K
|
|
000-50802
|
|
|
10
|
.59
|
|
2/17/06
|
|
|
E-117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
10
|
.68+
|
|
Executive Employment Agreement effective March 1, 2006 by
and between the Company and Patricia Gondolfo.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.1
|
|
3/3/06
|
|
|
|
10
|
.69+
|
|
Letter agreement dated July 22, 206 between Patricia
Gondolfo and the Company.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.1
|
|
7/25/06
|
|
|
|
10
|
.70
|
|
Management Services Agreement dated May 1, 2006 between
LHA, Inc. and 21st Century Oncology of California, a Medical
Corporation.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.1
|
|
8/4/06
|
|
|
|
10
|
.71
|
|
Amendment to Management Services Agreement dated August 1,
2006.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.2
|
|
8/4/06
|
|
|
|
10
|
.72
|
|
Transfer of Project and First Amendment to Lease Agreement dated
September 25, 2006 by and between Colonial Radiation
Associates and 21st Century Oncology, Inc.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.1
|
|
11/4/06
|
|
|
|
10
|
.73
|
|
Management Services Agreement dated September 8, 2006
between Beverly Hills Radiation Oncology and 21st Century
Oncology of California, a Medical Corporation.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.2
|
|
11/4/06
|
|
|
|
10
|
.74
|
|
Second Amendment to Management Services Agreement dated
November 1, 2006 between California Radiation Therapy
Management Services, Inc. and 21st Century Oncology of
California, a Medical Corporation.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.3
|
|
11/4/06
|
|
|
|
10
|
.75
|
|
Termination of Management Services Agreement dated
November 1, 2006 between California Radiation Therapy
Management Services, Inc. and 21st Century Oncology of
California, a Medical Corporation.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.4
|
|
11/4/06
|
|
|
|
10
|
.76
|
|
Business Operations and Support Agreement dated July 20,
1999 by and between Phoenix Management Company, LLC and X-Ray
Treatment Center, P.C.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.2
|
|
11/16/06
|
|
|
|
10
|
.77
|
|
Business Operations and Support Agreement dated August 19,
2000 by and between American Consolidated Technologies and
RADS, P.C. Oncology Professionals.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.3
|
|
11/16/06
|
|
|
|
10
|
.78
|
|
Business Operations and Support Agreement dated August 19,
2000 by and between Pontiac Investment Associates and American
Oncologic Associates of Michigan, P.C.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.4
|
|
11/16/06
|
|
|
|
10
|
.79
|
|
Amendment to Business Operations and Support Agreement dated
November 15, 2006 by and between Phoenix Management
Company, LLC and X-Ray Treatment Center, P.C.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.5
|
|
11/16/06
|
|
|
|
10
|
.80
|
|
Amendment to Business Operations and Support Agreement dated
November 15, 2006 by and between American Consolidated
Technologies and RADS, P.C. Oncology Professionals.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.6
|
|
11/16/06
|
|
|
E-118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
10
|
.81
|
|
Amendment to Business Operations and Support Agreement dated
November 15, 2006 by and between Phoenix Management
Company, LLC and American Oncologic Associates of
Michigan, P.C.
|
|
8-K
|
|
000-50802
|
|
|
10
|
.7
|
|
11/16/06
|
|
|
|
10
|
.82
|
|
Professional Services Agreement dated January 3, 2007
between Gettysburg Radiation, LLC and Katin Radiation Therapy,
P.A.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.83+
|
|
Second Amendment to Physician Employment Agreement dated and
effective October 1, 2006 between 21st Century Oncology,
Inc. and Michael J. Katin, M.D.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.84
|
|
Physician Sharing Agreement dated as of October 1, 2006
between Katin Radiation Therapy, P.A. and 21st Century Oncology
of Harford County, Maryland, LLC
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.85
|
|
Pre Construction Management Services Agreement dated
February 1, 2007 between Theriac Ent. Of Jacksonville, LLC
and Devoto Construction of Southwest Florida, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.86
|
|
Construction Management Services Agreement dated
February 1, 2007 between Theriac of Littlestown, LLC and
Devoto Construction of Southwest Florida, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.87
|
|
Pre Construction Management Services Agreement dated
February 1, 2007 between Theriac of Colonial, LLC and
Devoto Construction of Southwest Florida, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.88
|
|
AIA contract agreement dated June 5, 2006 between Devoto
Construction of Southwest Florida, Inc. and 3680 Broadway
Building Associates, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.89
|
|
AIA contract agreement dated June 5, 2006 between Devoto
Construction of Southwest Florida, Inc. and Marco Island
Radiation Enterprise, LLC.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.90
|
|
AIA contract agreement dated June 5, 2006 between Devoto
Construction of Southwest Florida, Inc. and 21st Century
Oncology.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.91
|
|
Purchasing Agreement dated October 1, 2006 between Nevada
Radiation Enterprises, LLC and Devoto Construction of Southwest
Florida, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
10
|
.92
|
|
Purchasing Agreement dated October 1, 2006 between Theriac
Enterprises of Scottsdale, LLC and Devoto Construction of
Southwest Florida, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
21
|
.1
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
|
|
|
|
|
|
|
|
|
|
X
|
E-119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filing
|
|
Herewith
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No
|
|
Exhibit
|
|
Date
|
|
|
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer of Radiation
Therapy Services, Inc. pursuant to
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer of Radiation
Therapy Services, Inc. pursuant to
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer of Radiation
Therapy Services, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer of Radiation
Therapy Services, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
+
|
|
Denotes management contracts and compensatory plans and
arrangements required to be filed as exhibits to this report.
|
E-120
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
Form 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|
|
|
For the quarterly period ended
September 30, 2007.
|
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
|
|
|
For the transition period from
to
|
Commission file number:
000-50802
RADIATION THERAPY SERVICES,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
|
|
|
Florida
|
|
65-0768951
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer Identification
No.)
|
|
|
|
2234 Colonial Boulevard, Fort Myers, Florida
|
|
33907
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(239) 931-7275
(Registrants Telephone
Number, Including Area Code)
N/A
(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Sections 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer (or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act). Large accelerated
filer
o
Accelerated
filer
þ
Non-accelerated
filer
o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
o
Yes
þ
No
As of November 1, 2007, we had outstanding
23,694,919 shares of Common Stock, par value $0.0001 per
share.
F-1
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
Form 10-Q
INDEX
F-2
|
|
Item 1.
|
Financial
Statements
|
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net patient service revenue
|
|
$
|
89,422
|
|
|
$
|
67,359
|
|
|
$
|
282,571
|
|
|
$
|
208,242
|
|
Other revenue
|
|
|
2,115
|
|
|
|
2,123
|
|
|
|
6,922
|
|
|
|
7,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
91,537
|
|
|
|
69,482
|
|
|
|
289,493
|
|
|
|
216,054
|
|
Salaries and benefits
|
|
|
48,017
|
|
|
|
36,125
|
|
|
|
148,780
|
|
|
|
107,505
|
|
Medical supplies
|
|
|
3,198
|
|
|
|
1,838
|
|
|
|
9,036
|
|
|
|
5,736
|
|
Facility rent expenses
|
|
|
3,604
|
|
|
|
2,332
|
|
|
|
9,814
|
|
|
|
6,824
|
|
Other operating expenses
|
|
|
4,553
|
|
|
|
3,616
|
|
|
|
13,164
|
|
|
|
9,227
|
|
General and administrative expenses
|
|
|
10,952
|
|
|
|
7,548
|
|
|
|
30,548
|
|
|
|
22,341
|
|
Depreciation and amortization
|
|
|
6,361
|
|
|
|
4,407
|
|
|
|
17,576
|
|
|
|
12,136
|
|
Provision for doubtful accounts
|
|
|
2,499
|
|
|
|
1,871
|
|
|
|
8,215
|
|
|
|
7,198
|
|
Interest expense, net
|
|
|
4,489
|
|
|
|
2,309
|
|
|
|
12,085
|
|
|
|
6,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
83,673
|
|
|
|
60,046
|
|
|
|
249,218
|
|
|
|
177,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
7,864
|
|
|
|
9,436
|
|
|
|
40,275
|
|
|
|
38,336
|
|
Minority interests in net earnings of consolidated entities
|
|
|
(406
|
)
|
|
|
(632
|
)
|
|
|
(1,005
|
)
|
|
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,458
|
|
|
|
8,804
|
|
|
|
39,270
|
|
|
|
37,592
|
|
Income tax expense
|
|
|
2,871
|
|
|
|
3,390
|
|
|
|
15,119
|
|
|
|
14,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,587
|
|
|
|
5,414
|
|
|
|
24,151
|
|
|
|
23,119
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivative interest rate swap
agreements, net of tax
|
|
|
(198
|
)
|
|
|
(221
|
)
|
|
|
(128
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,389
|
|
|
$
|
5,193
|
|
|
$
|
24,023
|
|
|
$
|
23,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share outstanding basic
|
|
$
|
0.19
|
|
|
$
|
0.23
|
|
|
$
|
1.03
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share outstanding diluted
|
|
$
|
0.19
|
|
|
$
|
0.23
|
|
|
$
|
1.00
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,576
|
|
|
|
23,173
|
|
|
|
23,489
|
|
|
|
23,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
24,159
|
|
|
|
24,008
|
|
|
|
24,172
|
|
|
|
23,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,409
|
|
|
$
|
15,413
|
|
Accounts receivable, net
|
|
|
68,112
|
|
|
|
52,764
|
|
Income taxes receivable
|
|
|
7,575
|
|
|
|
938
|
|
Prepaid expenses
|
|
|
4,754
|
|
|
|
8,273
|
|
Current portion of lease receivable
|
|
|
186
|
|
|
|
427
|
|
Inventories
|
|
|
1,691
|
|
|
|
1,613
|
|
Deferred income taxes
|
|
|
7,094
|
|
|
|
5,583
|
|
Other
|
|
|
1,157
|
|
|
|
2,527
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
102,978
|
|
|
|
87,538
|
|
Lease receivable, less current portion
|
|
|
27
|
|
|
|
154
|
|
Equity investments in joint ventures
|
|
|
1,240
|
|
|
|
1,215
|
|
Property and equipment, net
|
|
|
202,790
|
|
|
|
152,379
|
|
Goodwill
|
|
|
201,846
|
|
|
|
138,785
|
|
Intangible assets, net
|
|
|
8,893
|
|
|
|
7,599
|
|
Other assets
|
|
|
15,680
|
|
|
|
11,424
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
533,454
|
|
|
$
|
399,094
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,787
|
|
|
$
|
10,604
|
|
Accrued expenses
|
|
|
18,143
|
|
|
|
14,679
|
|
Current portion of long-term debt
|
|
|
16,220
|
|
|
|
12,285
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
43,150
|
|
|
|
37,568
|
|
Long-term debt, less current portion
|
|
|
283,547
|
|
|
|
192,959
|
|
Other long-term liabilities
|
|
|
3,517
|
|
|
|
2,584
|
|
Deferred income taxes
|
|
|
28,538
|
|
|
|
24,070
|
|
Minority interest in consolidated entities
|
|
|
11,303
|
|
|
|
7,104
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
370,055
|
|
|
|
264,285
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 10,000 shares
authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 75,000 shares
authorized, 23,695 and 23,367 shares issued and outstanding
at September 30, 2007 and December 31, 2006,
respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
85,975
|
|
|
|
81,465
|
|
Retained earnings
|
|
|
77,722
|
|
|
|
53,683
|
|
Note receivable from shareholder
|
|
|
(216
|
)
|
|
|
(386
|
)
|
Accumulated other comprehensive (loss) income, net of tax
|
|
|
(84
|
)
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
163,399
|
|
|
|
134,809
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
533,454
|
|
|
$
|
399,094
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,151
|
|
|
$
|
23,119
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
16,064
|
|
|
|
10,694
|
|
Amortization
|
|
|
1,512
|
|
|
|
1,442
|
|
Deferred rent expense
|
|
|
538
|
|
|
|
264
|
|
Deferred income tax provision
|
|
|
3,037
|
|
|
|
1,108
|
|
Stock-based compensation
|
|
|
213
|
|
|
|
37
|
|
Tax benefit from stock option exercise
|
|
|
(1,246
|
)
|
|
|
(1,366
|
)
|
Provision for doubtful accounts
|
|
|
8,215
|
|
|
|
7,198
|
|
Loss on the sale of property and equipment
|
|
|
2
|
|
|
|
35
|
|
Minority interest in net earnings of consolidated entities
|
|
|
1,005
|
|
|
|
744
|
|
Equity interest in net (income) loss of joint ventures
|
|
|
(25
|
)
|
|
|
40
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
|
(23,635
|
)
|
|
|
(15,818
|
)
|
Income taxes receivable
|
|
|
(353
|
)
|
|
|
127
|
|
Inventories
|
|
|
(78
|
)
|
|
|
(262
|
)
|
Prepaid expenses
|
|
|
3,856
|
|
|
|
(474
|
)
|
Accounts payable
|
|
|
(771
|
)
|
|
|
883
|
|
Accrued expenses
|
|
|
3,521
|
|
|
|
3,734
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
36,006
|
|
|
|
31,505
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(26,516
|
)
|
|
|
(13,412
|
)
|
Acquisition of radiation centers
|
|
|
(69,749
|
)
|
|
|
(38,750
|
)
|
Payment of assumed acquisition liability
|
|
|
(5,200
|
)
|
|
|
|
|
Purchase of interest from joint venture partner
|
|
|
(2,141
|
)
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
6
|
|
|
|
7
|
|
Sales of marketable securities, net
|
|
|
|
|
|
|
5,450
|
|
Loans to employees
|
|
|
(505
|
)
|
|
|
(219
|
)
|
Contribution of capital to joint venture entities
|
|
|
(4,365
|
)
|
|
|
(540
|
)
|
Change in lease receivable
|
|
|
368
|
|
|
|
506
|
|
Change in other assets
|
|
|
745
|
|
|
|
(1,393
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(107,357
|
)
|
|
|
(48,351
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
76,400
|
|
|
|
22,900
|
|
Principal repayments of debt
|
|
|
(11,958
|
)
|
|
|
(7,530
|
)
|
Proceeds from exercise of stock options
|
|
|
3,051
|
|
|
|
3,883
|
|
Tax benefit from stock option exercise
|
|
|
1,246
|
|
|
|
1,366
|
|
Payments of notes receivable from shareholders
|
|
|
170
|
|
|
|
71
|
|
Minority interest in partnership distribution
|
|
|
(341
|
)
|
|
|
(92
|
)
|
Payments of loan costs
|
|
|
(221
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
68,347
|
|
|
|
20,538
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,004
|
)
|
|
|
3,692
|
|
Cash and cash equivalents, beginning of period
|
|
|
15,413
|
|
|
|
8,980
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
12,409
|
|
|
$
|
12,672
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions
|
|
|
|
|
|
|
|
|
Recorded capital lease obligations related to the acquisition of
equipment
|
|
$
|
24,371
|
|
|
$
|
10,777
|
|
|
|
|
|
|
|
|
|
|
Recorded non-cash contribution of capital by minority interest
holder
|
|
$
|
4,786
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Recorded non-cash contribution of capital to joint venture
entities
|
|
$
|
1,039
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Recorded earn-out accrual related to acquisition of radiation
center assets
|
|
$
|
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
Recorded capital lease obligations related to the acquisition of
radiation center assets
|
|
$
|
5,675
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Term B loan borrowing used to pay down the revolver
|
|
$
|
50,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Radiation Therapy Services, Inc. and its consolidated
subsidiaries (the Company) develop and operate radiation therapy
centers that provide radiation treatment to cancer patients in
Alabama, Arizona, California, Delaware, Florida, Kentucky,
Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York,
North Carolina, Pennsylvania, Rhode Island and West Virginia.
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments necessary for a fair presentation have been
included. All such adjustments are considered to be of a normal
recurring nature. Interim results for the nine months ended
September 30, 2007 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2007.
Financial Accounting Standards Board (FASB) revised
Interpretation No. 46R (FIN No. 46R),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51
, requires a company to
consolidate variable interest entities if the company is the
primary beneficiary of the activities of those entities. Certain
of the Companys radiation oncology practices are variable
interest entities as defined by FIN No. 46R, and the
Company has a variable interest in each of these practices
through its administrative services agreements. The Company,
through its variable interests in these practices, would absorb
a majority of the net losses of these practices, should they
occur. Based on these determinations, the Company has included
the radiation oncology practices in its consolidated financial
statements for all periods presented. All significant
intercompany accounts and transactions have been eliminated.
These unaudited interim consolidated financial statements should
be read in conjunction with the consolidated audited financial
statements and the notes thereto included in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2006.
During the preparation of our June 30, 2007 financial
statements, we discovered in the consolidation of one existing
local market, that the accounts receivable and net patient
service revenue were understated by approximately $2,269,000 for
the year ended December 31, 2006 and approximately $738,000
for the three months ended March 31, 2007. We reviewed the
impact on the 2006 annual financial statements and the first
quarter 2007 financial statements and concluded that it was not
material to the previously reported 2006 annual financial
statements or the expected results for the 2007 year. As a
result, we have recorded the cumulative amount of the
understatement as an increase to accounts receivable and net
patient service revenue in the second quarter of 2007.
The cost of revenues for the three months ended
September 30, 2007 and 2006 are approximately
$57.2 million and $40.5 million, respectively. The
cost of revenues for the nine months ended September 30,
2007 and 2006 are approximately $171.0 million and
$119.5 million, respectively.
Effective July 1, 2007, the Company granted a discount on
gross charges to self pay payers not covered under other third
party payer arrangements. The discount amounts are excluded from
patient service revenue. To the extent that the Company realizes
additional losses resulting from nonpayment of the discounted
charges, such additional losses are included in the provision
for bad debt.
F-6
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
New
Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in U.S. GAAP, and
expands disclosures about fair value measurements. This
statement is effective for the Company beginning January 1,
2008. The Company is currently evaluating the impact of
SFAS No. 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115
(SFAS No. 159). This statement
permits companies to choose to measure many financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. This statement
also established presentation and disclosure requirements
designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and
liabilities. This statement is effective for the Company
beginning January 1, 2008. The Company is currently
evaluating the impact of SFAS No. 159 on its
consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Instruments.
SFAS No. 155 amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging
and
SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125
(SFAS No. 155). SFAS No. 155
(i) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation; (ii) clarifies which
interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133;
(iii) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation; (iv) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives;
and (v) amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
SFAS No. 155 was effective for the Company beginning
January 1, 2007. The adoption of SFAS No. 155 did
not have an impact on the Companys consolidated financial
statements.
|
|
3.
|
STOCK-BASED
COMPENSATION
|
Effective January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 123R,
Share-Based Payment
(SFAS 123R) for
the Companys 2004 Stock Incentive Plan (2004 Option Plan).
The Company previously accounted for the 2004 Option Plan under
the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25,
Accounting for Stock
Issued to Employees
(APB 25) and related
interpretations and disclosure requirements established by
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS 123),
as amended by Statement of Financial Accounting Standards
No. 148,
Accounting for Stock-Based
Compensation Transitions and Disclosure
(SFAS 148).
Certain stock options granted prior to the Companys
initial public offering were valued under SFAS 123 using
the minimum value method in the pro-forma disclosures. The
minimum value method excludes volatility in the calculation of
fair value of stock based compensation. In accordance with
SFAS No. 123R, options granted that were valued using
the minimum value method must be transitioned to SFAS 123R
using the prospective method. This means that these options will
continue to be accounted for under the same accounting
principles (recognition and measurement) originally applied to
those awards in the income
F-7
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
statement, which for the Company was APB 25. Additionally, pro
forma information previously required under SFAS 123 and
SFAS 148 will no longer be presented for these options.
Upon adoption of SFAS 123R, the Company continued to use
the Black-Scholes valuation model for valuing all stock options.
Compensation for non-vested stock grants is measured at fair
value on the grant date based on the number of shares expected
to vest and the quoted market price of the Companys common
stock. Compensation cost for all awards is recognized in
earnings, net of estimated forfeitures, on a straight-line basis
over the requisite service period.
Cash received from options exercised under all share-based
payment arrangements for the nine months ended
September 30, 2007 and 2006 was approximately
$3.1 million and $3.9 million, respectively. The
excess tax benefit realized for the tax deductions from option
exercises for the nine months ended September 30, 2007 and
2006 was approximately $1.2 million and $1.4 million,
respectively. The Company currently expects to satisfy
share-based awards with registered shares available to be issued.
Diluted earnings per common and common equivalent share have
been computed by dividing net income by the weighted average
common and common equivalent shares outstanding during the
respective periods. The weighted average common and common
equivalent shares outstanding have been adjusted to include
non-vested stock and the number of shares that would have been
outstanding if in the money stock options had been
exercised, at the average market price for the period, with the
proceeds being used to buy back shares (i.e., the treasury stock
method). Basic earnings per common share was computed by
dividing net income by the weighted average number of shares of
common stock outstanding during the period. The following is a
reconciliation of the denominator of basic and diluted earnings
per share (EPS) computations shown on the face of the
accompanying consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average common shares outstanding basic
|
|
|
23,576
|
|
|
|
23,173
|
|
|
|
23,489
|
|
|
|
23,100
|
|
Effect of dilutive securities
|
|
|
583
|
|
|
|
835
|
|
|
|
683
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares
outstanding diluted
|
|
|
24,159
|
|
|
|
24,008
|
|
|
|
24,172
|
|
|
|
23,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income consists of two components, net income and
other comprehensive income (loss). Other comprehensive income
(loss) refers to revenue, expenses, gains and losses that, under
United States generally accepted accounting principles, are
recorded as an element of shareholders equity but are
excluded from net income. The Companys other comprehensive
income (loss) is composed of unrealized gain (loss) on
derivative interest rate swap agreements accounted for as cash
flow hedges. The impact of the unrealized gain (loss) was a
decrease of approximately $128,000 to shareholders equity
for the nine months ended September 30, 2007 and an
increase of approximately $17,000 to shareholders equity
for the nine months ended September 30, 2006.
F-8
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
|
|
6.
|
FIN 48
INCOME TAX ACCOUNTING
|
On July 13, 2006, the FASB issued Interpretation
No. 48,
Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with FASB
Statement No. 109,
Accounting for Income Taxes,
and
prescribes a recognition threshold and measurement attributes
for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under FIN 48, the
impact of an uncertain tax position on the income tax return
must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of
FIN 48, the Company recognized an increase of $111,898 in
the liability for unrecognized tax positions, which was recorded
as a reduction in retained earnings, which, if recognized in tax
expense, would impact the effective tax rate.
The Company recognizes interest accrued related to unrecognized
tax exposure in interest expense and penalties in operating
expenses. The Company did not make any payments of interest and
penalties accrued at December 31, 2006 and during the nine
month period ended September 30, 2007. Upon adoption of
FIN 48 on January 1, 2007, the Company increased its
accrual for interest and penalties to $25,443, which is included
in accrued expenses in the condensed consolidated balance sheets.
The Company is subject to taxation in the U.S. and various
states jurisdictions. In addition, the Company has state net
operating loss carryforwards available from 2004 forward. In
accordance with the statute of limitations for federal tax
returns, the Companys federal tax returns for the years
2003 through 2006 are subject to examination.
In January 2007, the Company acquired a 67.5% interest in a
start-up
radiation treatment center located in Gettysburg, Pennsylvania
for approximately $826,000. The center purchased in Gettysburg
expands the Companys presence into a new local market. The
allocation of the purchase price is to tangible assets of
$3,137,000, goodwill of $1,024,000, current liabilities of
$7,000, long-term debt of $3,420,000 and minority interest
assets of approximately $92,000.
In March 2007, the Company acquired the assets of a radiation
treatment center located in Casa Grande, Arizona for
approximately $8,022,000. The center purchased in Arizona
further expands the Companys presence into the central
Arizona local market. The allocation of the purchase price is to
tangible assets of $951,000, non-compete agreements of $531,000,
amortized over 3 years, and goodwill of $6,540,000.
In July 2007, the Company acquired the assets of a radiation
treatment center located in Salisbury, Maryland for
approximately $16,582,000 plus the assumption of debt of
approximately $2,255,000. The center purchased in Maryland
further expands the Companys presence into the central
Maryland local market. The allocation of the purchase price is
to tangible assets of $1,699,000, non-compete agreements of
$1,200,000, amortized over 6 years, and goodwill of
$15,938,000.
In July 2007, the Company purchased the remaining 49.9% interest
in a radiation treatment center located in Berlin, Maryland from
its former joint venture partner for approximately $2,141,000.
F-9
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
In August 2007, the Company acquired the assets of a radiation
treatment center located in Redding, California for
approximately $9,850,000. The center purchased in California
expands the Companys presence into a new local market. The
allocation of the purchase price is to tangible assets of
$658,000, non-compete agreements of $596,000, amortized over
7 years, and goodwill of $8,596,000.
In September 2007, the Company acquired the assets of a
radiation treatment center located in Greenville, North Carolina
and a professional services arrangement at a hospital-based
facility in nearby Kinston, North Carolina for approximately
$28,071,000. The center purchased in North Carolina expands the
Companys presence into a new local market. The allocation
of the purchase price is to tangible assets of $1,421,000, and
goodwill of $26,650,000. In addition to the $28,071,000, the
purchase price arrangement included a $1,200,000 deferred
purchase price contingent on reaching a certain level of
business volume, payable one year from the date of closing.
During the first nine months of 2007, the Company acquired the
assets of several urology and surgery practices within southwest
Florida for approximately $1,672,000. The urology and surgery
practices provide additional service and treatment protocols to
our patients with prostate cancer and other urological diseases.
The allocation of the purchase price is to tangible assets of
$1,515,000 and goodwill of $157,000.
The operations of the foregoing acquisitions have been included
in the accompanying condensed consolidated statements of income
and comprehensive income from the respective dates of each
acquisition. No pro forma information is provided as the
acquisitions, individually and in the aggregate are immaterial
to the condensed consolidated financial statements.
A shareholder complaint has been filed against the Company, each
of the Companys directors and Vestar Capital Partners
(Vestar) as a purported class action on behalf of
the public shareholders of the Company. The complaint was filed
on October 24, 2007 in the Circuit Court of Lee County,
Florida (Case
No. 07-CA-013398)
under the caption J
effrey Schwartz, individually and on
behalf of all other similarly situated, Plaintiff against Howard
M. Sheridan, Daniel E. Dosoretz, Solomon Agin, Michael J. Katin,
Ronald E. Inge, James H. Rubenstein, Herbert F. Dorsett, Leo R.
Doerr, Janet Watermeier, Radiation Therapy Services, Inc. and
Vestar Capital Partners, Defendants.
The complaint alleges,
among other things, that the directors of the Company breached
their fiduciary duties in connection with the proposed
transaction by failing to maximize stockholder value and by
approving a transaction that purportedly benefits the defendants
at the expense of the Companys public shareholders. Among
other things, the complaint seeks to enjoin the Company, its
directors and Vestar from proceeding with or consummating the
merger. Vestar is alleged to have aided and abetted the
individual defendants in breaching their fiduciary duties. Based
on the facts known to date, the Company believes that the claims
asserted in this complaint are without merit and the Company
intends to vigorously defend against this complaint.
The Company is involved in certain legal actions and claims
arising in the ordinary course of its business. The Company does
not believe that an adverse decision in any of these matters
would have a material adverse effect on its consolidated
financial position, results of operations or cash flow.
On October 19, 2007, the Company, entered into an Agreement
and Plan of Merger (the Merger Agreement) with
Radiation Therapy Services Holdings, Inc., a Delaware
corporation (Parent), RTS MergerCo, Inc., a Florida
corporation and a wholly owned subsidiary of Parent
(Merger Sub). Parent is owned and controlled by
Radiation Therapy Investments, LLC, a Delaware limited liability
company (RT
F-10
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
Investments) and is a party to the Merger Agreement for
purposes of the termination fee section of the Merger Agreement.
RT Investments is owned by Vestar Capital Partners.
Pursuant to the terms of the Merger Agreement, Merger Sub will
merge with and into the Company, with the Company as the
surviving corporation of the merger (the Merger). In
the Merger, each share of common stock of the Company, other
than those held by the Company, any subsidiary of the Company,
Parent or Merger Sub, and other than those shares with respect
to which dissenters rights are properly exercised, will be
converted into the right to receive $32.50 per share in cash
(the Merger Consideration). In addition, each share
of restricted stock will be converted into the right to receive
cash in an amount equal to the Merger Consideration and all
outstanding options to acquire shares of Company common stock
will vest at the effective time of the Merger and holders of
such options will receive an amount in cash equal to the excess,
if any, of the Merger Consideration over the exercise price per
share subject to the option for each share subject to the option.
The founders of the Company and certain members of the
Companys senior management have agreed to enter into
arrangements with Vestar Capital Partners to invest in RT
Investments.
Completion of the Merger is subject to customary closing
conditions including (i) approval by the Companys
shareholders, (ii) regulatory approval and
(iii) obtaining third party consents. The transaction is
not subject to a financing condition. The parties currently
expect that the Merger will be completed in March 2008.
The Merger Agreement contains certain termination rights for
both Parent and the Company. If the Company terminates the
Merger Agreement prior to obtaining shareholder approval as a
result of the Special Committee or the Board of Directors
concluding that in light of a superior proposal, it would be
inconsistent with the directors exercise of their
fiduciary obligations to the Companys shareholders under
applicable law to not withdraw or change its recommendation that
the Companys shareholders approve the Merger Agreement and
concurrently with such termination the Company enters into a
definitive agreement with respect to such superior proposal, the
Company is required to pay to Parent a termination fee of
$25.0 million and reimburse Parent for its
out-of-pocket
fees and expenses incurred with respect to the transactions
contemplated by the Merger Agreement, up to a maximum of
$3.0 million (the Termination Fees).
If Parent terminates the Merger Agreement because the
Companys board of directors shall have effected a change
of recommendation with respect to the Merger Agreement or the
Company fails to include the board of directors recommendation
to approve the merger in its proxy statement, the Company must
pay the Termination Fees to Parent.
If (i) prior to the termination of the Merger Agreement,
any alternative proposal which could or could reasonably be
expected to result in a transaction as favorable or more
favorable to shareholders than the transaction provided in the
Merger Agreement at such time as the bona fide intention of any
person to make an alternative proposals is publicly proposed or
publicly disclosed or otherwise made known to us prior to the
time of such termination; (ii) the Merger Agreement is
terminated by Parent or the Company by April 21, 2008, or
because after a special meeting shareholder approval was not
obtained or the Merger Agreement is terminated by Parent because
the Company has breached or failed to perform any material
agreements that would result in the failure of a closing
condition and could not be cured by April 21, 2008; and
(iii) concurrently with or within nine months after such
termination, any definitive agreement providing for a qualifying
transaction has been entered into and consummated, the Company
must pay the Termination Fees to Parent.
If the Company terminates the Merger Agreement because
(i) the mutual conditions to closing of the merger and
Parents conditions to closing would have been satisfied
had the closing been scheduled on
F-11
RADIATION
THERAPY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
April 21, 2008 (as such date may be extended by the
marketing period) and the merger has not occurred on or before
such date, (ii) Parent breaches or fails to perform in any
material respect any of its representations, warranties or
agreements contained in the Merger Agreement, which breach or
failure to perform would result in a failure of a condition to
closing of the merger which cannot be cured by April 21,
2008; provided the Company is not then in material breach of the
Merger Agreement; or (iii) Parent has has not deposited the
merger consideration with the paying agent pursuant to the
Merger Agreement and proceeded to close the merger within five
business days after notice by the Company to Parent that the
mutual conditions to closing and Parents conditions to
closing are satisfied, then Parent or its affiliates must pay
the Termination Fees to the Company.
Parent has obtained commitments for the equity portion of the
financing for the Merger, and Merger Sub has obtained
commitments for the debt portion of the financing for the
Merger, each of which is subject to customary conditions.
As a result of the Merger Agreement, on November 1, 2007,
the Company obtained a waiver from its lenders under the fourth
amended and restated senior secured credit facility principally
to waive any default or event of default arising from a change
in control solely as a result of the execution, delivery and
performance of the Merger Agreement.
The foregoing description of the Merger Agreement and the Merger
is qualified in its entirety by reference to the Merger
Agreement which was attached as Exhibit 2.1 to the
Form 8-K
filed by the Company with the SEC on October 22, 2007.
F-12
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with the unaudited interim financial statements and
related notes included elsewhere in this
Form 10-Q,
and the Managements Discussion and Analysis of the
financial condition and results of operations included in our
2006 Annual Report on
Form 10-K
filed with the SEC on February 15, 2007. This section of
the
Form 10-Q
contains forward-looking statements that involve substantial
risks and uncertainties, such as statements about our plans,
objectives, expectations and intentions. We use words such as
expect, anticipate, plan,
believe, seek, estimate,
intend, future and similar expressions
to identify forward-looking statements. Our actual results could
differ materially from those anticipated in these
forward-looking statements for many reasons, including as a
result of some of the factors described below and in the section
titled Risk Factors herein and in our 2006 Annual
Report on
Form 10-K
filed with the SEC on February 15, 2007. You are cautioned
not to place undue reliance on these forward-looking statements,
which apply on and as of the date of this
Form 10-Q.
Overview
We own, operate and manage treatment centers focused principally
on providing radiation treatment alternatives ranging from
conventional external beam radiation to newer,
technologically-advanced options. We believe we are the largest
company in the United States focused principally on providing
radiation therapy. We opened our first radiation treatment
center in 1983 and, as of September 30, 2007, we provided
radiation therapy services in 83 treatment centers. Our
treatment centers are clustered into 27 local markets in
16 states, including Alabama, Arizona, California,
Delaware, Florida, Kentucky, Maryland, Massachusetts, Michigan,
Nevada, New Jersey, New York, North Carolina, Pennsylvania,
Rhode Island, and West Virginia. Of these 83 treatment centers,
25 treatment centers were internally developed, 48 were acquired
and 10 involve hospital-based treatment centers. We have
continued to expand our affiliation with physician specialties
in other areas including gynecological and surgical oncology and
urology in a limited number of our local markets to strengthen
our clinical working relationships.
On October 19, 2007, we entered into a definitive merger
agreement with affiliates of Vestar Capital Partners to be
purchased for $32.50 per share. Closing of the merger is subject
to customary closing conditions including (i) approval by
our shareholders, (ii) regulatory approval and
(iii) obtaining third party consents. Due to the signing of
the merger agreement, we are withdrawing our previously
announced financial guidance and also discontinuing financial
guidance. Furthermore, we do not intend to hold earnings
conference calls nor issue earnings releases.
We use a number of metrics to assist management in evaluating
financial condition and operating performance, and the most
important follow:
|
|
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|
|
The number of treatments delivered per day in our freestanding
centers
|
|
|
|
The average revenue per treatment in our freestanding centers
|
|
|
|
The ratio of funded debt to earnings before interest, taxes,
depreciation and amortization (leverage ratio)
|
The principal costs of operating a treatment center are
(1) the salary and benefits of the physician and technical
staff, and (2) equipment and facility costs. The capacity
of each physician and technical position is limited to a number
of delivered treatments while equipment and facility costs for a
treatment center are generally fixed. These capacity factors
cause profitability to be very sensitive to treatment volume.
Profitability will tend to increase as the available staff and
equipment capacities are utilized.
The average revenue per treatment is sensitive to the mix of
services used in treating a patients tumor. The
reimbursement rates set by Medicare and commercial payers tend
to be higher for the more advanced treatment technologies,
reflecting their higher complexity. A key part of our business
strategy is to implement advanced technologies once supporting
economics are available. For example, we implemented a pilot
stereotactic radiosurgery program using kV x-rays in one of our
centers in 2004 and, with expanded
F-13
reimbursement for the technology available January 1, 2007,
we have accelerated the implementation of this new technology to
several of our local markets.
The reimbursement for radiation therapy services includes a
professional component for the physicians service and a
technical component to cover the costs of the machine, facility
and services provided by the technical staff. In our
freestanding centers we provide both services; while in a
hospital-based center the hospital, rather than us, provides the
technical services. Fees that we receive from the hospital for
services they purchase from us are included in other revenue in
our consolidated statements of income and comprehensive income.
Net patient service revenue in our condensed consolidated
statements of income and comprehensive income is derived from
our freestanding centers and from the professional services
provided by our doctors in hospital-based centers and by our
physicians in other specialties in their practice offices.
For the nine months ended September 30, 2007, our total
revenues grew by 34.0% while our net income grew by 4.5% from
the same period of the prior year. For the nine months ended
September 30, 2007, we had total revenues of
$289.5 million.
Our results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to fluctuate.
Many of the patients of our Florida treatment centers are
part-time residents in Florida during the winter months. Hence,
these treatment centers have historically experienced higher
utilization rates during the winter months than during the
remainder of the year. In addition, referrals are typically
lower in the summer months due to traditional vacation periods.
The following table summarizes our growth in treatment centers
and the local markets in which we operate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Treatment centers at beginning of period
|
|
|
56
|
|
|
|
68
|
|
|
|
76
|
|
Internally developed
|
|
|
2
|
|
|
|
|
|
|
|
3
|
|
Internally (consolidated)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
10
|
|
|
|
10
|
*
|
|
|
4
|
|
Hospital-based
|
|
|
2
|
|
|
|
|
|
|
|
3
|
|
Hospital-based (ended / transitioned)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Treatment centers at period end
|
|
|
68
|
|
|
|
76
|
|
|
|
83
|
|
Local markets at period end
|
|
|
22
|
|
|
|
24
|
|
|
|
27
|
|
|
|
|
*
|
|
Excludes the acquisition of the Bel Air, Maryland radiation
treatment center, as we combined the external beam treatments
done at our Belcamp, Maryland radiation treatment center.
|
F-14
The following table summarizes key operating statistics of our
results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
Number of treatment days
|
|
|
63
|
|
|
|
63
|
|
|
|
|
|
|
|
191
|
|
|
|
191
|
|
|
|
|
|
Total treatments freestanding centers
|
|
|
103,134
|
|
|
|
88,798
|
|
|
|
16.2
|
%
|
|
|
323,107
|
|
|
|
276,323
|
|
|
|
16.9
|
%
|
Treatments per day freestanding centers
|
|
|
1,637
|
|
|
|
1,409
|
|
|
|
16.2
|
%
|
|
|
1,692
|
|
|
|
1,447
|
|
|
|
16.9
|
%
|
Percentage change in revenue per treatment
freestanding centers same practice basis
|
|
|
5.6
|
%
|
|
|
14.7
|
%
|
|
|
|
|
|
|
7.3
|
%
|
|
|
17.2
|
%
|
|
|
|
|
Percentage change in treatments per day freestanding
centers same practice basis
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
2.5
|
%
|
|
|
2.2
|
%
|
|
|
|
|
Local markets at period end
|
|
|
27
|
|
|
|
23
|
|
|
|
17.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment centers freestanding
|
|
|
73
|
|
|
|
59
|
|
|
|
23.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Treatment centers hospital
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
69
|
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted days sales outstanding for the quarter*
|
|
|
55
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in total revenues same practice
basis
|
|
|
7.0
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
10.2
|
%
|
|
|
17.4
|
%
|
|
|
|
|
Net patient service revenue professional services
only (in thousands)
|
|
$
|
14,774
|
|
|
$
|
6,640
|
|
|
|
|
|
|
$
|
46,503
|
|
|
$
|
19,389
|
|
|
|
|
|
|
|
|
*
|
|
Excludes office locations operating for less than one year
|
Our revenue growth is primarily driven by entering new markets,
increasing the utilization at our existing centers and by
benefiting from demographic and population trends in most of our
local markets. New centers are added to existing markets based
on capacity, convenience, and competitive considerations. Our
net income growth is primarily driven by revenue growth and the
leveraging of our technical and administrative infrastructures.
For the nine months ended September 30, 2007, net patient
service revenue comprised 97.6% of our total revenues. In a
state where we can employ radiation oncologists, we derive our
net patient service revenue through fees earned for the
provision of the professional and technical component fees of
radiation therapy services. In states where we do not employ
radiation oncologists, we derive our administrative services
fees principally from administrative services agreements with
professional corporations. In 39 of our radiation treatment
centers we employ the physicians, and in 34 we operate pursuant
to administrative services agreements. In accordance with
Financial Accounting Standards Board revised Interpretation
No. 46R (FIN No. 46R), we consolidate the
operating results of the professional corporations for which we
provide administrative services into our own operating results.
For the nine months ended September 30, 2007, approximately
33.0% of our net patient service revenue was generated by
professional corporations with which we have administrative
services agreements.
For the nine months ended September 30, 2007, other revenue
comprised approximately 2.4% of our total revenues. Other
revenue is primarily derived from management services provided
to hospital radiation therapy departments, technical services
provided to hospital radiation therapy departments, billing
services provided to non-affiliated physicians and income for
equipment leased by joint venture entities.
F-15
Medicare is a major funding source for the services we provide
and government reimbursement developments can have a material
effect on operating performance. These developments include the
reimbursement amount for each CPT service (current procedural
terminology) that we provide and the specific CPT services
covered by Medicare. The Centers for Medicare and Medicaid
Services (CMS), the government agency responsible for
administering the Medicare program, administers an annual
process for considering changes in reimbursement rates and
covered services. We have played, and will continue to play, a
role in that process both directly and through the radiation
oncology professional societies.
Other material factors that we believe will also impact our
future financial performance include:
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|
|
|
|
Continued advances in technology and the related capital
requirements;
|
|
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|
Continued affiliation with physician specialties other than
radiation oncology;
|
|
|
|
Increased costs associated with changes in the accounting for
stock compensation;
|
|
|
|
Proposed changes in accounting for business combinations
requiring that all acquisition-related costs be expensed as
incurred;
|
|
|
|
Increased costs associated with being a public company including
compliance with Sarbanes-Oxley Section 404 reporting on
internal control;
|
|
|
|
Increased costs associated with development and expansion of
internal infrastructure;
|
|
|
|
Increased costs associated with planned development of
internally developed (de novo) treatment centers in the
future; and
|
|
|
|
Increased costs associated with the Vestar Capital Partners
merger transaction.
|
Acquisitions
and Developments
In 2005, we acquired 10 treatment centers and opened two
internally developed treatment centers.
In 2006, we acquired 10 new radiation treatment centers and we
acquired the assets of several urology and surgery practices as
follows:
In January 2006, we acquired the assets of a radiation treatment
center located in Opp, Alabama for approximately
$1.8 million. The center purchased in Alabama further
expands our presence in its Southeastern Alabama local market.
We have expanded the availability of advanced radiation therapy
treatment modalities in this service area.
In May 2006, we acquired the assets of a radiation treatment
center located in Santa Monica, California for approximately
$12.0 million. The center purchased in California expands
our presence into a second local market in the California area.
In August 2006, we acquired the assets of a radiation treatment
center located in Bel Air, Maryland for approximately
$6.8 million. The center purchased in Maryland expands our
presence in our central Maryland local market.
In September 2006, we acquired the assets of a radiation
treatment center located in Beverly Hills, California for
approximately $19.1 million. The center purchased in
California expands our presence into our Los Angeles local
market complementing the Santa Monica radiation center we
purchased in May 2006.
In November 2006, we acquired a network of radiation treatment
centers in southeastern Michigan for approximately
$47.1 million, including real estate of approximately
$6.2 million. The acquisition provides us an entrance into
a new local market. The seven-facility network consists of two
full service facilities, five satellite facilities and
Certificates of Need to operate a total of eight linear
accelerators.
During the fourth quarter of 2006, we acquired the assets of
several urology and surgery practices within southwest Florida
for approximately $0.6 million, to expand our affiliations
with other physicians and to strengthen our clinical working
relationships.
F-16
In the first nine months of 2007, we acquired 4 new radiation
treatment centers, internally developed 3 new radiation
centers (from which 2 were converted from a hospital-based
arrangement), added 3 hospital-based arrangements, ended one
hospital-based arrangement in conjunction with an acquisition of
a new radiation treatment center, and acquired the assets of
several urology and surgery practices as follows:
In January 2007, we acquired a 67.5% interest in a
start-up
radiation treatment center located in Gettysburg, Pennsylvania
for approximately $0.8 million. The center purchased in
Gettysburg expands our presence into a new local market.
In February 2007, we received a license to operate a
freestanding radiation facility at Roger Williams Medical Center
in Providence, Rhode Island, completing the transition of that
facility from hospital-based to freestanding. The freestanding
facility is a joint venture between Roger Williams and us in
which we have a majority interest in the facility. The facility
offers IMRT and IGRT programs.
In March 2007, we began providing professional services to the
Kennedy Health System in New Jersey.
In March 2007, we acquired the assets of a radiation treatment
center located in Casa Grande, Arizona for approximately
$8.0 million. The center purchased in Arizona expands our
presence into the central Arizona local market.
In May 2007, we began providing professional services to the
North Oakland Medical Center in Michigan.
In July 2007, we acquired the assets of a radiation treatment
center located in Salisbury, Maryland for approximately
$16.6 million plus the assumption of debt of approximately
$2.3 million and ended a hospital-based arrangement with a
hospital in this local market. The center purchased in Maryland
further expands the Companys presence into the central
Maryland local market.
In July 2007, we purchased the remaining 49.9% interest in a
radiation treatment center located in Berlin, Maryland from our
former joint venture partner for approximately $2.1 million.
In August 2007, we paid a three-year contingent earn-out of
approximately $4.4 million to Associated Radiation
Oncologists, Inc. relating to our acquisition of five radiation
treatment centers located in Clark County, Nevada acquired in
May 2005.
In August 2007, we acquired the assets of a radiation treatment
center located in Redding, California for approximately
$9.9 million. The center purchased in California expands
our presence into a new local market.
In September 2007, we acquired the assets of a radiation
treatment center located in Greenville, North Carolina and a
professional services arrangement at a hospital-based facility
in nearby Kinston, North Carolina for approximately
$28.1 million. The center purchased in North Carolina
expands the Companys presence into a new local market.
In September 2007, we internally developed a freestanding
facility in Aventura, Florida, completing the transition of that
facility from a hospital-based arrangement to a freestanding
center.
During the first nine months of 2007, we acquired the assets of
several urology and surgery practices within southwest Florida
for approximately $1.7 million, to expand our affiliations
with other physicians and to strengthen our clinical working
relationships.
The operations of the foregoing acquisitions have been included
in the accompanying condensed consolidated statements of income
and comprehensive income from the respective dates of each
acquisition. When we acquire a treatment center, the purchase
price is allocated to the assets acquired and liabilities
assumed based upon their respective fair values.
Since September 30, 2007, we have acquired
and / or developed the following radiation treatment
centers:
In October 2007, we opened a new internally developed
freestanding facility in our Las Vegas local market and began
the transition of an existing freestanding facility in our Las
Vegas market from radiation treatment services to the
performance of PET CT scan services.
F-17
We currently have internally developed projects (de novo
projects) in process, which would increase our number of
internally developed radiation therapy treatment centers
compared to 2006, during which we did not open any internally
developed radiation treatment centers. Our current goal is to
add up to 2 new internally developed centers in the remainder of
2007 and add up to 10 in 2008. The internal development of
radiation treatment centers is subject to a number of risks
including but not limited to risks related to negotiating and
finalizing agreements, construction delays, unexpected costs,
obtaining required regulatory permits, licenses and approvals
and the availability of qualified health care and administrative
professionals and personnel. As such, we cannot assure you that
we will be able to successfully develop radiation treatment
centers in accordance with our current plans and any failure or
material delay in successfully completing planned new internally
developed treatment centers could harm our business and impair
our future growth.
Sources
of Revenue By Payer
We receive payments for our services rendered to patients from
the government Medicare and Medicaid programs, commercial
insurers, managed care organizations and our patients directly.
Generally, our revenue is determined by a number of factors,
including the payer mix, the number and nature of procedures
performed and the rate of payment for the procedures. The
following table sets forth the percentage of our net patient
service revenue we earned based upon the patients primary
insurance by category of payer in our last fiscal year and the
nine months ended September 30, 2006 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
Payer
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Medicare
|
|
|
50.1
|
%
|
|
|
50.7
|
%
|
|
|
49.7
|
%
|
Commercial
|
|
|
46.4
|
|
|
|
45.8
|
|
|
|
47.0
|
|
Medicaid
|
|
|
1.8
|
|
|
|
1.7
|
|
|
|
1.5
|
|
Self pay
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net patient service revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
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Medicare
and Medicaid
Since cancer disproportionately affects elderly people, a
significant portion of our net patient service revenue is
derived from the Medicare program, as well as related
co-payments. Medicare reimbursement rates are determined by the
Centers for Medicare and Medicaid Services (CMS) and are lower
than our normal charges. Medicaid reimbursement rates are
typically lower than Medicare rates; Medicaid payments represent
approximately 1.5% of our net patient service revenue.
Medicare reimbursement rates are determined by a formula which
takes into account an industry wide conversion factor (CF)
multiplied by relative value units (RVUs) determined on a per
procedure basis. The CF and RVUs may change on an annual basis.
In 2005, the CF increased by 1.5%; and in 2006 and 2007, the CF
remained unchanged at the 2005 level. The net result of changes
to the CF and RVUs over the last several years has not had a
significant impact on our business, but it is difficult to
forecast the future impact of any changes. We depend on payments
from government sources and any changes in Medicare or Medicaid
programs could result in a decrease in our total revenues and
net income.
On November 1, 2006, CMS released its final rule for the
2007 Medicare physician fee schedule. The final rule included
specific reimbursement codes for stereotactic procedures and
provides for a four-year transition to a new practice expense
methodology for establishing practice expense values for
services paid under the Medicare physician fee schedule. Based
on our review of the 2007 fee schedule, we do not expect the fee
schedule to have a material impact in 2007 on the total
reimbursement of services we provide to Medicare beneficiaries.
On November 1, 2007, CMS released its final rule for the
2008 Medicare physician fee schedule. Based on our preliminary
review of the 2008 fee schedule, we do not expect the fee
schedule to have a material impact in 2008 on the total
reimbursement of services we provide to Medicare beneficiaries.
F-18
Commercial
Commercial sources include private health insurance as well as
related payments for co-insurance and co-payments. We enter into
contracts with private health insurance and other health benefit
groups by granting discounts to such organizations in return for
the patient volume they provide.
Most of our commercial revenue is from managed care business and
is attributable to contracts where a set fee is negotiated
relative to services provided by our treatment centers. We do
not have any contracts that individually represent over 10% of
our total net patient service revenue. We receive our managed
care contracted revenue under two primary arrangements.
Approximately 98% of our managed care business is attributable
to contracts where a fee schedule is negotiated for services
provided at our treatment centers. Approximately 2% of our net
patient service revenue is attributable to contracts where we
bear utilization risk. Although the terms and conditions of our
managed care contracts vary considerably, they are typically for
a one-year term and provide for automatic renewals. If payments
by managed care organizations and other private third-party
payers decrease, then our total revenues and net income could
decrease.
Self
Pay
Self pay consists of payments for treatments by patients not
otherwise covered by third-party payers, such as government or
commercial sources. Because the incidence of cancer is much
higher in those over the age of 65, most of our patients have
access to Medicare or other insurance and therefore the self-pay
portion of our business is less than it would be in other
circumstances.
Effective July 1, 2007, we granted a discount on gross
charges to self pay payers not covered under other third party
payer arrangements. The discount amounts are excluded from
patient service revenue. To the extent that we realize
additional losses resulting from nonpayment of the discounted
charges, such additional losses are included in the provision
for bad debt.
Billing
and Collections
Our billing system utilizes a fee schedule for billing patients,
third-party payers and government sponsored programs, including
Medicare and Medicaid. Fees billed to government sponsored
programs, including Medicare and Medicaid, and fees billed to
self pay patients (not covered under other third party payer
arrangements) are automatically adjusted to the allowable
payment amount at time of billing. For all other payers, the
actual contractual adjustment is recorded upon the receipt of
payment. As a result, an estimate of contractual allowances is
made on a monthly basis to reflect the estimated realizable
value of net patient service revenue. The development of the
estimate of contractual allowances is based on historical cash
collections related to gross charges developed by facility and
payer in order to calculate average collection percentages by
facility and payer. The development of the collection
percentages are applied to gross accounts receivable in
determining an estimate of contractual allowances at the end of
a reporting period.
Insurance information is requested from all patients either at
the time the first appointment is scheduled or at the time of
service. A copy of the insurance card is scanned into our system
at the time of service so that it is readily available to staff
during the collection process. Patient demographic information
is collected for both our clinical and billing systems.
It is our policy to collect co-payments from the patient at the
time of service. Insurance information is obtained and the
patient is informed of their co-payment responsibility prior to
the commencement of treatment.
Charges are posted to the billing system by our office financial
managers. After charges are posted, edits are performed, any
necessary corrections are made and billing forms are generated,
then sent electronically to our clearinghouse. Any bills not
able to be processed through the clearinghouse are printed and
mailed from our central billing office. Statements are
automatically generated from our billing system and mailed to
the patient on a monthly basis for any amounts still
outstanding. Daily, weekly and monthly accounts receivable
analysis reports are utilized by staff and management to
prioritize accounts for collection purposes, as well as to
identify trends and issues. Strategies to respond proactively to
these issues are developed at weekly and
F-19
monthly team meetings. Our write-off process is manual and our
process for collecting accounts receivable is dependent on the
type of payer as set forth below.
Self-Pay Balances.
We administer self-pay
account balances through our central billing office and our
policy is to send outstanding self-pay patient claims to
collection agencies at designated points in the collection
process. In some cases monthly payment arrangements are made
with patients for the account balance remaining after insurance
payments have been applied. These accounts are reviewed monthly
to ensure payments continue to be made in a timely manner. Once
it has been determined by our staff that the patient is not
responding to our collection attempts, a final notice is mailed.
This generally occurs more than 120 days after the date of
the original bill. If there is no response to our final notice,
after 30 days the account is assigned to a collection
agency and, as appropriate, recorded as a bad debt and written
off. Balances under $50 are written off but not sent to the
collection agency. All accounts are specifically identified for
write-offs and accounts are written off prior to being submitted
to the collection agency.
Medicare, Medicaid and Commercial Payer
Balances.
Our central billing office staff
expedites the payment process from insurance companies and other
payers via electronic inquiries, phone calls and automated
letters to ensure timely payment. Our billing system generates
standard aging reports by date of billing in increments of
30 day intervals. The collection team utilizes these
reports to assess and determine the payers requiring additional
focus and collection efforts. Our accounts receivable exposure
on Medicare, Medicaid and commercial payer balances are largely
limited to contractual adjustments. Our exposure to bad debts on
balances relating to these types of payers over the years has
been
de minimus
.
In the event of denial of payment, we follow the payers
standard appeals process, both to secure payment and to lobby
the payers, as appropriate, to modify their medical policies to
expand coverage for the newer and more advanced treatment
services that we provide which, in many cases, is the
payers reason for denial of payment. If all reasonable
collection efforts with these payers have been exhausted by our
central billing office staff, the account receivable is
written-off to the contractual allowance.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. We
continuously evaluate our critical accounting policies and
estimates. We base our estimates on historical experience and on
various assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ materially from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies are
important to the portrayal of our financial condition and
results of operations and require our managements
subjective or complex judgment because of the sensitivity of the
methods, assumptions and estimates used in the preparation of
our consolidated financial statements.
Principles of Consolidation.
Financial
Accounting Standards Board revised Interpretation No. 46R
(FIN No. 46R),
Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51
, requires a
company to consolidate variable interest entities if the company
is the primary beneficiary of the activities of those entities.
Certain of our radiation oncology practices are variable
interest entities as defined by FIN No. 46R, and we
have a variable interest in each of these practices through our
administrative services agreements. Through our variable
interests in these practices, we would absorb a majority of the
net losses of these practices, should they occur. Based on these
determinations, we have included the radiation oncology
practices in our consolidated financial statements for all
periods presented. All of our significant intercompany accounts
and transactions have been eliminated.
F-20
Net Patient Service Revenue and Allowances for Contractual
Discounts.
We have agreements with third-party
payers that provide us payments at amounts different from our
established rates. Net patient service revenue is reported at
the estimated net realizable amounts due from patients,
third-party payers and others for services rendered. Net patient
service revenue is recognized as services are provided. Medicare
and other governmental programs reimburse physicians based on
fee schedules, which are determined by the related government
agency. We also have agreements with managed care organizations
to provide physician services based on negotiated fee schedules.
Accordingly, the revenues reported in our interim condensed
consolidated financial statements are recorded at the amount
that is expected to be received.
We derive a significant portion of our revenues from Medicare,
Medicaid and other payers that receive discounts from our
standard charges. We must estimate the total amount of these
discounts to prepare our consolidated financial statements. The
Medicare and Medicaid regulations and various managed care
contracts under which these discounts must be calculated are
complex and subject to interpretation and adjustment. The
development of the estimate of contractual allowances is based
on historical cash collections related to gross charges
developed by facility and payer in order to calculate average
collection percentages by facility and payer. The development of
the collection percentages are applied to gross accounts
receivable in determining an estimate of contractual allowances
at the end of a reporting period.
The estimate for contractual allowances is also based on our
interpretation of the applicable regulations or contract terms.
These interpretations sometimes result in payments that differ
from our original estimates. Additionally, updated regulations
and contract renegotiations occur frequently, necessitating
regular review and reassessment of the estimation process.
Changes in estimates related to the allowance for contractual
discounts affect revenues reported in our consolidated
statements of income and comprehensive income.
During the nine months ended September 30, 2007 and 2006,
approximately 51.2% and 52.4%, respectively, of net patient
service revenue related to services rendered under the Medicare
and Medicaid programs. In the ordinary course of business, we
are potentially subject to a review by regulatory agencies
concerning the accuracy of billings and sufficiency of
supporting documentation of procedures performed. Laws and
regulations governing the Medicare and Medicaid programs are
extremely complex and subject to interpretation. As a result,
there is at least a reasonable possibility that estimates will
change by a material amount in the near term.
Accounts Receivable and Allowances for Doubtful
Accounts.
Accounts receivable are reported net of
estimated allowances for doubtful accounts and contractual
adjustments. Accounts receivable are uncollateralized and
primarily consist of amounts due from third-party payers and
patients. To provide for accounts receivable that could become
uncollectible in the future, we establish an allowance for
doubtful accounts to reduce the carrying amount of such
receivables to their estimated net realizable value. The credit
risk for other concentrations (other than Medicare) of
receivables is limited due to the large number of insurance
companies and other payers that provide payments for our
services. We do not believe that there are any other significant
concentrations of receivables from any particular payer that
would subject us to any significant credit risk in the
collection of our accounts receivable.
The amount of the provision for doubtful accounts is based upon
our assessment of historical and expected net collections,
business and economic conditions, trends in Federal and state
governmental healthcare coverage and other collection
indicators. The primary tool used in our assessment is an
annual, detailed review of historical collections and write-offs
of accounts receivable. The results of our detailed review of
historical collections and write-offs, adjusted for changes in
trends and conditions, are used to evaluate the allowance amount
for the current period. Accounts receivable are written-off
after collection efforts have been followed in accordance with
our policies.
Goodwill and Other Intangible Assets.
Goodwill
represents the excess of purchase price over the estimated fair
market value of net assets we have acquired in business
combinations. On June 29, 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 142,
Goodwill and Other Intangible
Assets,
which changed the accounting for goodwill and
intangible assets. Under SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized but
are reviewed annually, or more frequently if impairment
indicators arise, for impairment.
F-21
Intangible assets consist of noncompete agreements and licenses
and are amortized over the life of the agreements (which
typically range from 1.5 to 10 years) using the
straight-line method.
Impairment of Long-Lived Assets.
In accordance
with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, we review our long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets
may not be fully recoverable. Assessment of possible impairment
of a particular asset is based on our ability to recover the
carrying value of such asset based on our estimate of its
undiscounted future cash flows. If these estimated future cash
flows are less than the carrying value of such asset, an
impairment charge is recognized for the amount by which the
assets carrying value exceeds its estimated fair value.
Stock-Based Compensation.
Effective
January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123R,
Share-Based Payment
(SFAS 123R) for the
Companys 2004 Stock Incentive Plan (2004 Option Plan). The
Company previously accounted for the 2004 Option Plan under the
recognition and measurement provisions of Accounting Principles
Board Opinion No. 25,
Accounting for Stock Issued to
Employees
(APB 25) and related interpretations and
disclosure requirements established by Statement of Financial
Accounting Standards No. 123,
Accounting for Stock-Based
Compensation
(SFAS 123), as amended by Statement of
Financial Accounting Standards No. 148,
Accounting for
Stock-Based Compensation Transitions and Disclosure
(SFAS 148).
On November 3, 2005, the Board of Directors of the Company,
upon the recommendation of the Compensation Committee consisting
solely of independent directors, approved the acceleration of
vesting of all nonqualified outstanding non-vested stock options
previously granted under the Companys equity compensation
plans. As a result of the acceleration, nonqualified non-vested
stock options to purchase an aggregate of 1.2 million
shares of the Companys common stock, which would otherwise
have vested over periods of two to four years, became
immediately exercisable. The affected stock options have an
exercise price of $13.00 per share.
The primary purpose of the acceleration of the nonqualified
non-vested stock options was to enable the Company to avoid
recognizing compensation expense associated with these stock
options in future periods in its statement of income and
comprehensive income, upon adoption of SFAS No. 123R.
Under SFAS No. 123R, the compensation expense
associated with these accelerated options that would have been
recognized in the Companys income statement commencing
with the implementation of SFAS 123R and continuing through
2009 would have been approximately $2.4 million. Because of
the accelerated vesting, the adoption of SFAS No. 123R
had no impact on net income. The adoption of
SFAS No. 123R increased cash flows from financing
activities and decreased cash flow from operating activities by
approximately $1.3 million.
Certain stock options granted prior to the Companys
initial public offering were valued under SFAS 123 using
the minimum value method in the pro-forma disclosures. The
minimum value method excludes volatility in the calculation of
fair value of stock based compensation. In accordance with
SFAS No. 123R, options granted that were valued using
the minimum value method must be transitioned to SFAS 123R
using the prospective method. This means that these options will
continue to be accounted for under the same accounting
principles (recognition and measurement) originally applied to
those awards in the income statement, which for the Company was
APB 25. Additionally, pro forma information previously required
under SFAS 123 and SFAS 148 will no longer be
presented for these options.
The Company adopted SFAS 123R using the modified
prospective transition method for all other stock based
compensation awards. Under this transition method, compensation
cost recognized in 2006 includes: (a) the compensation cost
for all share-based awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of
SFAS 123 and (b) the compensation cost of all
share-based awards granted subsequent to December 31, 2005,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. Results for prior periods have
not been restated.
Income Taxes.
We make estimates in recording
our provision for income taxes, including determination of
deferred tax assets and deferred tax liabilities and any
valuation allowances that might be required against
F-22
the deferred tax assets. We believe that future income will
enable us to realize these benefits; therefore, we have not
recorded any valuation allowance against our deferred tax asset.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
, which
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109,
Accounting for Income
Taxes
. The interpretation prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. This interpretation also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition.
The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of
FIN 48, the Company recognized an increase of $111,898 in
the liability for unrecognized tax positions, which was recorded
as a reduction in retained earnings, which, if recognized in tax
expense, would impact the effective tax rate.
New
Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
U.S. GAAP, and expands disclosures about fair value
measurements. This statement is effective beginning
January 1, 2008. The Company is currently evaluating the
impact of SFAS No. 157 on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115
. This statement permits companies to choose to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. This statement also established presentation and
disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes
for similar types of assets and liabilities. This statement is
effective beginning January 1, 2008. The Company is
currently evaluating the impact of SFAS No. 159 on its
consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Instruments
.
SFAS No. 155 amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging
and
SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125
.
SFAS No. 155 (i) permits fair value remeasurement
for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation;
(ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of
SFAS No. 133; (iii) establishes a requirement to
evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative
requiring bifurcation; (iv) clarifies that concentrations
of credit risk in the form of subordination are not embedded
derivatives; and (v) amends SFAS No. 140 to
eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to
a beneficial interest other than another derivative financial
instrument. SFAS No. 155 was effective for the Company
beginning January 1, 2007. The adoption of
SFAS No. 155 did not have an impact on the
Companys consolidated financial statements.
F-23
Results
of Operations
The following table presents, for the periods indicated,
information expressed as a percentage of total revenues.
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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Revenues:
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Net patient service revenue
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97.7
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%
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96.9
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%
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97.6
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%
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96.4
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%
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Other revenue
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2.3
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3.1
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2.4
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3.6
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Total revenues
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100.0
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100.0
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100.0
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100.0
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Expenses:
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Salaries and benefits
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52.5
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52.0
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51.4
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49.8
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Medical supplies
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3.5
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2.6
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3.1
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2.7
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Facility rent expenses
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3.9
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3.4
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3.4
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3.2
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Other operating expenses
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5.0
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5.2
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4.5
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4.3
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General and administrative expenses
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12.0
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10.9
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10.6
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10.3
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Depreciation and amortization
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6.9
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6.3
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6.1
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5.6
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Provision for doubtful accounts
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2.7
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2.7
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2.8
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3.3
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Interest expense, net
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4.9
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3.3
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4.2
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3.1
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Total expenses
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91.4
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86.4
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86.1
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82.3
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Income before minority interests
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8.6
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13.6
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13.9
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17.7
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Minority interests in net earnings of consolidated entities
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(0.4
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)
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(0.9
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)
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(0.3
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)
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(0.3
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)
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Income before income taxes
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8.2
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12.7
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13.6
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17.4
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Income tax expense
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3.1
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4.9
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5.2
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6.7
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Net income
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5.1
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%
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7.8
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%
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8.4
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%
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10.7
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%
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Comparison
of the Three Months Ended September 30, 2007 and
2006
Total revenues.
Total revenues increased by
$22.0 million, or 31.7%, from $69.5 million for the
three months ended September 30, 2006 to $91.5 million
for the three months ended September 30, 2007.
Approximately $17.2 million of this increase resulted from
our expansion into new practices in existing local markets and
new local markets during 2006 and 2007 through the acquisition
of several urology and surgery
F-24
practices in southwest Florida, 13 new radiation treatment
centers, the opening of 3 new internally developed (de novo)
centers, and the addition of 3 hospital-based arrangements as
follows:
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Date
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Sites
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Location
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Market
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Type
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August 2006
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1
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Bel Air, Maryland
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Central Maryland
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Acquisition
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September 2006
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1
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Beverly Hills, California
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Los Angeles, California
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Acquisition
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November 2006
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7
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Southeastern Michigan
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Southeastern Michigan
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Acquisition
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January 2007
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1
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Gettysburg, Pennsylvania
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Pennsylvania
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De novo
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February 2007
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1
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Providence, Rhode Island
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Rhode Island
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De novo
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March 2007
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1
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|
|
Kennedy Health System, New Jersey
|
|
South New Jersey
|
|
Hospital-Based
|
March 2007
|
|
|
1
|
|
|
Casa Grande, Arizona
|
|
Central Arizona
|
|
Acquisition
|
May 2007
|
|
|
1
|
|
|
North Oakland Medical Center, Michigan
|
|
Southeastern Michigan
|
|
Hospital-Based
|
July 2007
|
|
|
1
|
|
|
Salisbury, Maryland
|
|
Central Maryland
|
|
Acquisition
|
August 2007
|
|
|
1
|
|
|
Redding, California
|
|
Northern California
|
|
Acquisition
|
September 2007
|
|
|
1
|
|
|
Greenville, North Carolina
|
|
Eastern North Carolina
|
|
Acquisition
|
September 2007
|
|
|
1
|
|
|
Kinston, North Carolina
|
|
Eastern North Carolina
|
|
Hospital-Based
|
September 2007
|
|
|
1
|
|
|
Aventura, Florida
|
|
Dade County, Florida
|
|
De novo
|
Approximately $4.8 million of the total revenue increase
was driven by service mix improvements, volume growth and
pricing in our existing local markets.
Salaries and benefits.
Salaries and benefits
increased by $11.9 million, or 32.9%, from
$36.1 million for the three months ended September 30,
2006 to $48.0 million for the three months ended
September 30, 2007. Salaries and benefits as a percentage
of total revenues increased from 52.0% for the three months
ended September 30, 2006 to 52.5% for the three months
ended September 30, 2007. Salaries and benefits consist of
all compensation and benefits paid, including the costs of
employing our physicians, medical physicists, dosimetrists,
radiation therapists, nurses, engineers, corporate
administration and other treatment center support staff.
Additional staffing of personnel and physicians due to our
expansion in urology and surgery practices in southwest Florida
and acquisitions of treatment centers in new local markets
during the latter part of 2006 and in 2007 contributed to a
$10.0 million increase in salaries and benefits. Within our
existing local markets, salaries and benefits increased
$1.2 million due to increases in our physician bonus
programs, additional staffing and increases in the cost of our
health insurance benefits. In addition, increased compensation
related to headcount and infrastructure development to support
our growing facility network including the addition of positions
in regional operations, management, finance, business
development, human resources and research contributed to
approximately $0.7 million in additional costs.
Medical supplies.
Medical supplies increased
by $1.4 million, or 74.0%, from $1.8 million for the
three months ended September 30, 2006 to $3.2 million
for the three months ended September 30, 2007. Medical
supplies as a percentage of total revenues increased from 2.6%
for the three months ended September 30, 2006 to 3.5% for
the three months ended September 30, 2007. Medical supplies
consist of patient positioning devices, radioactive seed
supplies, supplies used for other brachytherapy services and
pharmaceuticals used in the delivery of radiation therapy
treatments and chemotherapy medical supplies. The increase in
medical supplies was primarily due to the increased utilization
of pharmaceuticals used in connection with the delivery of
radiation therapy treatments, pharmaceuticals used in urology
services, and chemotherapy medical supplies from new markets and
services entered into in 2006 and 2007. These pharmaceuticals
and chemotherapy medical supplies are principally reimbursable
by third-party payers.
F-25
Facility rent expenses.
Facility rent expenses
increased by $1.3 million, or 54.5%, from $2.3 million
for the three months ended September 30, 2006 to
$3.6 million for the three months ended September 30,
2007. Facility rent expenses as a percentage of total revenues
increased from 3.4% for the three months ended
September 30, 2006 to 3.9% for the three months ended
September 30, 2007. Facility rent expenses consist of rent
expense associated with our treatment center locations. The
majority of the increase related to our expansion in urology and
surgery practices in southwest Florida and the expansion into
new local markets in California, Michigan, North Carolina, and
Pennsylvania and the acquisition of new treatment centers in
existing local markets in central Maryland, and central Arizona
and the de novo centers in Florida, Pennsylvania, and Rhode
Island.
Other operating expenses.
Other operating
expenses increased by $1.0 million or 25.9%, from
$3.6 million for the three months ended September 30,
2006 to $4.6 million for the three months ended
September 30, 2007. Other operating expenses consist of
repairs and maintenance of equipment, equipment rental and
contract labor. The majority of the increase was related to the
expansion into new local markets.
General and administrative expenses.
General
and administrative expenses increased by $3.5 million or
45.1%, from $7.5 million for the three months ended
September 30, 2006 to $11.0 million for the three
months ended September 30, 2007. General and administrative
expenses principally consist of professional service fees,
office supplies and expenses, insurance and travel costs.
General and administrative expenses as a percentage of total
revenues increased from 10.9% for the three months ended
September 30, 2006 to 12.0% for the three months ended
September 30, 2007. The increase of $3.5 million in
general and administrative expenses was due to an increase of
approximately $1.5 million relating to the growth in the
number of our local markets, and approximately $0.3 million
in our existing local markets. In addition, we incurred
professional expenses of approximately $1.1 million
relating to the planned private equity transaction,
$0.4 million in costs relating to the relocation of an
executive and $0.2 million relating to a legal settlement.
Depreciation and amortization.
Depreciation
and amortization increased by $2.0 million, or 44.3%, from
$4.4 million for the three months ended September 30,
2006 to $6.4 million for the three months ended
September 30, 2007. Depreciation and amortization expense
as a percentage of total revenues increased from 6.3% for the
three months ended September 30, 2006 to 6.9% for the three
months ended September 30, 2007. An increase in capital
expenditures related to our investment in advanced radiation
treatment technologies in certain local markets increased our
depreciation and amortization by approximately
$1.0 million. Approximately $0.9 million of the
remaining increase was attributable to the expansion into new
local markets in California, Michigan, North Carolina and
Pennsylvania and the acquisition of new treatment centers in
existing local markets in central Maryland, and central Arizona
and the de novo centers in Florida, Pennsylvania, and Rhode
Island.
Provision for doubtful accounts.
Provision for
doubtful accounts increased by $0.6 million, or 33.6%, from
$1.9 million for the three months ended September 30,
2006 to $2.5 million for the three months ended
September 30, 2007. Provision for doubtful accounts as a
percentage of total revenues remained at 2.7% for the three
months ended September 30, 2006 and 2007.
Interest expense, net.
Interest expense, net
of an insignificant amount of interest income, increased by
$2.2 million, or 94.4%, from $2.3 million for the
three months ended September 30, 2006 to $4.5 million
for the three months ended September 30, 2007. The increase
is primarily attributable to increased borrowings under our
senior credit facility for our expansion into new markets during
2006 and 2007 and borrowings under capital lease financing
arrangements during 2006 and 2007 of approximately
$48.0 million for our investment in advanced radiation
treatment technologies in certain local markets.
Net income.
Net income decreased by
$0.8 million, or 15.3%, from $5.4 million in net
income for the three months ended September 30, 2006 to
$4.6 million for the three months ended September 30,
2007. Net income represents 5.1% and 7.8% of total revenues for
the three months September 30, 2007 and 2006, respectively.
F-26
Comparison
of the Nine Months Ended September 30, 2007 and
2006
Total revenues.
Total revenues increased by
$73.4 million, or 34.0%, from $216.1 million for the
nine months ended September 30, 2006 to $289.5 million
for the nine months ended September 30, 2007. Approximately
$48.7 million of this increase resulted from our expansion
into new practices in existing local markets and new local
markets during 2006 and 2007 through the acquisition of several
urology and surgery practices in southwest Florida, 14 new
radiation treatment centers, the opening of 3 new internally
developed (de novo) centers, and the addition of 3
hospital-based arrangements as follows:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Sites
|
|
|
Location
|
|
Market
|
|
Type
|
|
May 2006
|
|
|
1
|
|
|
Santa Monica, California
|
|
Los Angeles, California
|
|
Acquisition
|
August 2006
|
|
|
1
|
|
|
Bel Air, Maryland
|
|
Central Maryland
|
|
Acquisition
|
September 2006
|
|
|
1
|
|
|
Beverly Hills, California
|
|
Los Angeles, California
|
|
Acquisition
|
November 2006
|
|
|
7
|
|
|
Southeastern Michigan
|
|
Southeastern Michigan
|
|
Acquisition
|
January 2007
|
|
|
1
|
|
|
Gettysburg, Pennsylvania
|
|
Pennsylvania
|
|
De novo
|
February 2007
|
|
|
1
|
|
|
Providence, Rhode Island
|
|
Rhode Island
|
|
De novo
|
March 2007
|
|
|
1
|
|
|
Kennedy Health System, New Jersey
|
|
South New Jersey
|
|
Hospital-Based
|
March 2007
|
|
|
1
|
|
|
Casa Grande, Arizona
|
|
Central Arizona
|
|
Acquisition
|
May 2007
|
|
|
1
|
|
|
North Oakland Medical Center, Michigan
|
|
Southeastern Michigan
|
|
Hospital-Based
|
July 2007
|
|
|
1
|
|
|
Salisbury, Maryland
|
|
Central Maryland
|
|
Acquisition
|
August 2007
|
|
|
1
|
|
|
Redding, California
|
|
Northern California
|
|
Acquisition
|
September 2007
|
|
|
1
|
|
|
Greenville, North Carolina
|
|
Eastern North Carolina
|
|
Acquisition
|
September 2007
|
|
|
1
|
|
|
Kinston, North Carolina
|
|
Eastern North Carolina
|
|
Hospital-Based
|
September 2007
|
|
|
1
|
|
|
Aventura, Florida
|
|
Dade County, Florida
|
|
De novo
|
Approximately $21.7 million of the total revenue increase
was driven by service mix improvements, volume growth and
pricing in our existing local markets. The remaining
$3.0 million increase was do to the recording of additional
revenue due to the understatement of net patient service revenue
in one of our existing local markets, as discussed in
note 2 to our condensed consolidated financial statements.
Salaries and benefits.
Salaries and benefits
increased by $41.3 million, or 38.4%, from
$107.5 million for the nine months ended September 30,
2006 to $148.8 million for the nine months ended
September 30, 2007. Salaries and benefits as a percentage
of total revenues increased from 49.8% for the nine months ended
September 30, 2006 to 51.4% for the nine months ended
September 30, 2007. Additional staffing of personnel and
physicians due to our expansion in urology and surgery practices
in southwest Florida and acquisitions of treatment centers in
new local markets during the latter part of 2006 and in 2007
contributed to a $30.6 million increase in salaries and
benefits. Within our existing local markets, salaries and
benefits increased $8.7 million due to increases in our
physician bonus programs, additional staffing and increases in
the cost of our health insurance benefits. In addition,
increased compensation related to headcount and infrastructure
development to support our growing facility network including
the addition of positions in regional operations, management,
finance, business development, human resources and research
contributed to approximately $2.0 million in additional
costs.
Medical supplies.
Medical supplies increased
by $3.3 million, or 57.5%, from $5.7 million for the
nine months ended September 30, 2006 to $9.0 million
for the nine months ended September 30, 2007. Medical
F-27
supplies as a percentage of total revenues increased from 2.7%
for the nine months ended September 30, 2006 to 3.1% for
the nine months ended September 30, 2007. The increase in
medical supplies was primarily due to the increased utilization
of pharmaceuticals used in connection with the delivery of
radiation therapy treatments, pharmaceuticals used in urology
services, and chemotherapy medical supplies from new markets and
services entered into in 2006 and 2007. These pharmaceuticals
and chemotherapy medical supplies are principally reimbursable
by third-party payers.
Facility rent expenses.
Facility rent expenses
increased by $3.0 million, or 43.8%, from $6.8 million
for the nine months ended September 30, 2006 to
$9.8 million for the nine months ended September 30,
2007. Facility rent expenses as a percentage of total revenues
increased from 3.2% for the nine months ended September 30,
2006 to 3.4% for the nine months ended September 30, 2007.
Facility rent expenses consist of rent expense associated with
our treatment center locations. The majority of the increase
related to our expansion in urology and surgery practices in
southwest Florida and the expansion into new local markets in
California, Michigan, North Carolina, and Pennsylvania and the
acquisition of new treatment centers in existing local markets
in central Maryland, and central Arizona and the de novo centers
in Florida, Pennsylvania, and Rhode Island.
Other operating expenses.
Other operating
expenses increased by $4.0 million or 42.7%, from
$9.2 million for the nine months ended September 30,
2006 to $13.2 million for the nine months ended
September 30, 2007. Other operating expenses as a
percentage of total revenue increased from 4.3% for the nine
months ended September 30, 2006 to 4.5% for the nine months
ended September 30, 2007. Other operating expenses consist
of repairs and maintenance of equipment, equipment rental and
contract labor. Approximately $2.9 million of the increase
was related to the expansion into new local markets and
$1.1 million increase in our remaining existing local
markets due to increased costs in our service contracts relating
to our advanced radiation therapy equipment and increased costs
in our contract labor.
General and administrative expenses.
General
and administrative expenses increased by $8.2 million or
36.7%, from $22.3 million for the nine months ended
September 30, 2006 to $30.5 million for the nine
months ended September 30, 2007. General and administrative
expenses principally consist of professional service fees,
office supplies and expenses, insurance and travel costs.
General and administrative expenses as a percentage of total
revenues increased from 10.3% for the nine months ended
September 30, 2006 to 10.6% for the nine months ended
September 30, 2007. The increase of $8.2 million in
general and administrative expenses was due to an increase of
approximately $4.3 million relating to the growth in the
number of our local markets, and approximately $2.2 million
in our existing local markets. In addition, we incurred
professional expenses of approximately $1.1 million
relating to the planned private equity transaction,
$0.4 million in costs relating to the relocation of an
executive and $0.2 million relating to a legal settlement.
Depreciation and amortization.
Depreciation
and amortization increased by $5.5 million, or 44.8%, from
$12.1 million for the nine months ended September 30,
2006 to $17.6 million for the nine months ended
September 30, 2007. Depreciation and amortization expense
as a percentage of total revenues increased from 5.6% for the
nine months ended September 30, 2006 to 6.1% for the nine
months ended September 30, 2007. An increase in capital
expenditures related to our investment in advanced radiation
treatment technologies in certain local markets increased our
depreciation and amortization by approximately
$2.4 million. Approximately $2.2 million of the
increase was attributable to the expansion into new local
markets in California, Michigan, North Carolina, and
Pennsylvania and the acquisition of new treatment centers in
existing local markets in central Maryland, and central Arizona
and the de novo centers in Florida, Pennsylvania, and
Providence, Rhode Island.
Provision for doubtful accounts.
Provision for
doubtful accounts increased by $1.0 million, or 14.1%, from
$7.2 million for the nine months ended September 30,
2006 to $8.2 million for the nine months ended
September 30, 2007. Provision for doubtful accounts as a
percentage of total revenues decreased from 3.3% for the nine
months ended September 30, 2006 to 2.8% for the nine months
ended September 30, 2007. The decrease as a percentage of
revenue in the provision for doubtful accounts is due to the
change in policy related to self pay discounts implemented in
the third quarter of 2007. A contractual adjustment is now
recorded at the time of billing to reduce gross self-pay charges
and related accounts receivable. Consequently,
F-28
subsequent write-offs, as well as our estimate of future
write-offs of existing accounts, are based on balances net of
the discount.
Interest expense, net.
Interest expense, net
of an insignificant amount of interest income, increased by
$5.3 million, or 79.0%, from $6.8 million for the nine
months ended September 30, 2006 to $12.1 million for
the nine months ended September 30, 2007. The increase is
primarily attributable to increased borrowings under our senior
credit facility for our expansion into new markets during 2006
and 2007 and borrowings under capital lease financing
arrangements during 2006 and 2007 of approximately
$48.0 million for our investment in advanced radiation
treatment technologies in certain local markets.
Net income.
Net income increased by
$1.1 million, or 4.5%, from $23.1 million in net
income for the nine months ended September 30, 2006 to
$24.2 million for the nine months ended September 30,
2007. Net income represents 8.4% and 10.7% of total revenues for
the nine months September 30, 2007 and 2006, respectively.
Seasonality
and Quarterly Fluctuations
Our results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to fluctuate.
Many of the patients of our Florida treatment centers are
part-time residents in Florida during the winter months. Hence,
these treatment centers have historically experienced higher
utilization rates during the winter months than during the
remainder of the year. In addition, referrals are typically
lower in the summer months due to traditional vacation periods.
Liquidity
and Capital Resources
Our principal capital requirements are for working capital,
acquisitions, medical equipment replacement and expansion and de
novo treatment center development. We fund acquisitions through
draws on our revolving credit facility. Working capital and
medical equipment are funded through cash from operations,
supplemented, as needed, by five-year fixed rate lease lines of
credit. Borrowings under these lease lines of credit are
recorded on the consolidated balance sheets. The construction of
de novo treatment centers is generally funded directly by third
parties and then leased by us. We finance our operations,
capital expenditures and acquisitions through a combination of
borrowings, cash generated from operations and seller financing.
Cash
Flows From Operating Activities
Net cash provided by operating activities for the nine-month
periods ended September 30, 2007 and 2006, was
$36.0 million, and $31.5 million, respectively.
Net cash provided by operating activities increased by
$4.5 million from $31.5 million for the nine month
period ended September 30, 2006 to $36.0 million for
the nine month period ended September 30, 2007. Net cash
provided by operating activities was affected by income tax
payments made in 2007 of approximately $17.6 million, as
compared to tax payments of approximately $13.2 million
made in 2006. Accounts receivable, net increased by
$15.3 million from the prior year due primarily to our
expansion in urology and surgery practices in southwest Florida
and the expansion into new local markets in California,
Michigan, North Carolina, and Pennsylvania and the acquisition
of new treatment centers in existing local markets in central
Maryland, and central Arizona and the de novo centers in
Florida, Pennsylvania, and Rhode Island.
Cash
Flows From Investing Activities
Net cash used in investing activities for the nine-month periods
ended September 30, 2007 and 2006, was $107.4 million,
and $48.4 million, respectively.
Net cash used in investing activities increased by
$59.0 million from $48.4 million for the nine month
period ended September 30, 2006 to $107.4 million for
the nine month period ended September 30, 2007. Net cash
used in investing activities was impacted by approximately
$69.7 million from the acquisitions of radiation center
assets during 2007 as compared to approximately
$38.8 million of acquisitions in 2006.
F-29
Payments of approximately $5.2 million in assumed
acquisition liability relating to our November 2006 purchase of
the treatment centers in southeastern Michigan impacted cash
used in investing activities. Approximately $13.1 million
in additional purchases of property and equipment related to new
equipment and equipment upgrades impacted the change in our
investing activities. Cash flows from investing activities was
also impacted by approximately $4.4 million in contribution
of capital related to the Roger Williams joint venture, which
began operations in February 2007 and the purchase of the
remaining interest in a radiation treatment center located in
Berlin, Maryland from our former joint venture partner for
approximately $2.1 million in July 2007.
Cash
Flows From Financing Activities
Net cash provided by financing activities for the nine-month
period ended September 30, 2007 and 2006, was
$68.3 million, and $20.5 million, respectively.
The increase in cash provided by financing activities was
primarily attributable to the borrowing of approximately
$76.4 million for the acquisition of certain urology and
surgery practices in southwest Florida and certain radiation
therapy treatment centers in 2007 compared to $22.9 million
in borrowings in 2006. Repayments of debt of approximately
$12.0 million in 2007 primarily for capital lease
obligations and payments under our senior secured credit
facility impacted cash flow from financing activities during
2007. The receipt of $3.1 million from the exercise of
stock options and the tax benefit of $1.2 million from
stock option exercise also impacted cash flow from financing
activities during 2007.
Credit
Facility and Available Lease Lines
On December 16, 2005, we entered into a fourth amended and
restated senior secured credit facility principally to provide
for a $100 million Term B loan. Our fourth amended and
restated senior secured credit facility provides, subject to our
compliance with covenants and customary conditions, for
$290 million in borrowings consisting of: (i) a
$100 million Term B loan, (ii) a $50 million
accordion feature, which allows us to increase the aggregate
principal amount of the Term B loan to $150 million, and
(iii) a $140 million revolver. We used the proceeds of
the $100 million Term B loan to pay off our pre-existing
Term A loan as well as the borrowings drawn on our
$140 million revolver.
On June 29, 2007, we executed the $50 million
accordion feature, which allowed us to increase the aggregate
principal amount of the Term B loan. We used the proceeds of the
$50 million Term B loan to pay down our revolver, resulting
in an additional $50 million of availability in the
revolver. We incurred approximately $221,000 in deferred
financing costs, which are being amortized over the term of the
Term B loan.
The Term B loan requires quarterly payments of $375,000 and
matures on December 16, 2012. The Term B loan initially
bears interest either at LIBOR plus a spread of 200 basis
points or a specified base rate plus a spread of 50 basis
points, with the opportunity to permanently reduce the spread by
25 basis points on LIBOR and base rate loans after six
months, provided our leverage ratio is below 2.00 to 1.00. At
June 30, 2006, our leverage ratio was below 2.00 to 1.00
and we reduced our interest rate on the Term B loan by
25 basis points.
Our revolver portion of our senior secured credit facility
matures on March 15, 2010 and is secured by a pledge of
substantially all of our tangible and intangible assets, and
requires us to make mandatory prepayments of outstanding
borrowings. Mandatory prepayments include prepayments to the
Term B portion of the senior secured credit facility from
proceeds from asset dispositions and debt and equity issuances,
limited to a percentage of the proceeds
and/or
an
excess amount above a dollar threshold. Beginning with the year
ended December 31, 2006, we are required to prepay the Term
B portion of the senior secured credit facility of up to 50% of
excess cash flow if our leverage is equal to or greater than
2.75 to 1.00. To date we have not been required to make such
prepayments. The revolving credit facility also requires that we
comply with various other covenants, including, but not limited
to, limitations on our leverage, restrictions on new
indebtedness, the ability to merge or consolidate, asset sales,
capital expenditures, acquisitions and dividends. Borrowings
under the senior secured credit facility bear interest at LIBOR
plus a spread ranging from 125 to 250 basis points or a
specified base rate plus a spread ranging from 0 to
100 basis points. At September 30,
F-30
2007, due to additional borrowings associated with acquisitions
and capital expenditures in the third quarter of 2007, our
leverage ratio increased to more than 3.00 to 1.00, and
therefore, the spread on LIBOR and base rate loans will increase
by 75 basis points on October 1, 2007.
In April 2007, our existing senior credit facility was amended
effective as of January 8, 2007 to provide the following
minor modifications: (i) provide for an increase in the
amount of Permitted Excluded Subsidiary Loans from
$0.5 million to $1.0 million and the aggregate amount
of Permitted Excluded Subsidiary Loans to all Excluded
Subsidiaries from $3.0 million to $10.0 million and
(ii) to amend certain administrative provisions contained
therein.
In September 2007, our existing senior credit facility was
amended to expand the capital expenditure limit for the fiscal
year 2007 to $77.0 million.
As of September 30, 2007, we had $299.8 million of
outstanding debt, $16.2 million of which was classified as
current. Of the $299.8 million of outstanding debt,
$240.8 million was outstanding to lenders under our senior
secured credit facility, and $59.0 million was outstanding
under capital leases and other miscellaneous indebtedness. As of
September 30, 2007, of the outstanding borrowings under our
senior secured credit facility, $1.5 million was classified
as short-term. We are in compliance with the covenants of the
senior secured credit facility as of September 30, 2007. As
of September 30, 2007, we had approximately
$46.6 million available under the revolving credit facility
component of our senior secured credit facility.
As result of the Merger Agreement (see subsequent events note
No. 9), on November 1, 2007, the Company obtained a
waiver from its lenders under the fourth amended and restated
senior secured credit facility principally to waive any default
or event of default arising from a change in control solely as a
result of the execution, delivery and performance of the Merger
Agreement.
We currently maintain two lease lines of credit with financial
institutions for the purpose of leasing medical equipment in the
total commitment amount of $30.0 million. As of
September 30, 2007, we had $8.9 million available
under the lease line of credit. In October 2007, we obtained an
additional lease line of credit with a financial institution for
the purpose of leasing equipment in the total commitment amount
of $20.0 million.
We believe available borrowings under our current credit
facility and lease lines, together with our cash flows from
operations, will be sufficient to fund our currently anticipated
operating requirements for at least the next twelve months but
will be insufficient to fully implement our growth plans. If our
proposed merger with affiliates of Vestar Capital Partners does
not close we will need to raise additional capital to implement
our growth plans. To the extent available borrowings and cash
flows from operations are insufficient to fund future
requirements, we may be required to seek additional financing
through additional increases in our credit facility, negotiate
credit facilities with other lenders or institutions or seek
additional capital through private placements or public
offerings of equity or debt securities. No assurances can be
given that we will be able to extend or increase the existing
credit facility, secure additional bank borrowings or complete
additional debt or equity financings on terms favorable to us or
at all. Any such financing may be dilutive in ownership,
preferences, rights, or privileges to our shareholders. If we
are unable to obtain funds when needed or on acceptable terms,
we will be required to curtail our acquisition and development
program. Our ability to meet our funding needs could be
adversely affected if we suffer adverse results of operations,
or if we violate the covenants and restrictions to which we are
subject under our current credit facility.
Off-Balance
Sheet Arrangements
We do not currently have any off-balance sheet arrangements with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
F-31
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Because our borrowings under our senior secured credit facility
bear interest at variable rates, we are sensitive to changes in
prevailing interest rates. We currently manage part of our
interest rate risk under an interest rate swap agreement. We are
not exposed to any market risks related to foreign currencies.
On December 30, 2005, we entered into an interest rate swap
agreement with a notional amount of $20 million. This
interest rate swap transaction involves the exchange of floating
for fixed rate interest payments over the life of the agreement
without the exchange of the underlying principal amounts. The
differential to be paid or received is accrued and is recognized
as an adjustment to interest expense. These agreements are
indexed to 90 day LIBOR. The following table summarizes the
terms of the swap:
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Notional Amount
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Fixed Rate
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Term in Months
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Maturity
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$20.0 million
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4.87% (plus a margin)
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48
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December 31, 2009
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The fixed rate does not include the margin, which is currently
175 basis points. In addition, further changes in interest
rates by the Federal Reserve may increase or decrease our
interest cost on the outstanding balance of the credit facility
not subject to interest rate protection. Our swap transaction
involves the exchange of floating for fixed rate interest
payments over the life of the agreement without the exchange of
the underlying principal amounts. The differential to be paid or
received is accrued and is recognized as an adjustment to
interest expense. We use derivative financial instruments to
reduce interest rate volatility and associated risks arising
from the floating rate structure of our senior credit facility
and do not hold or issue them for trading purposes.
As of September 30, 2007, we have interest rate exposure on
$220.8 million of our senior secured credit facility at an
approximate average interest rate of 7.3%. A 100 basis
point change in interest rates on our variable rate debt would
have resulted in interest expense fluctuating approximately
$2.2 million on a calendar year basis.
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Item 4.
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Controls
and Procedures
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We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report pursuant to
Exchange Act
Rule 13a-15.
Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of such date to ensure that
information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported in a
timely basis.
There has been no change in our internal control over financial
reporting that occurred during the fiscal quarter covered by
this quarterly report that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting. As disclosed in our report on
Form 8-K
filed on March 22, 2007, we appointed a new Chief Financial
Officer to assume the role of Chief Financial Officer effective
July 1, 2007 upon the June 30, 2007 retirement of our
former Chief Financial Officer.
F-32
OTHER INFORMATION
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Item 1.
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Legal
Proceedings.
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A shareholder complaint has been filed against us, each of our
directors and Vestar Capital Partners (Vestar) as a
purported class action on behalf of the public shareholders of
the Company. The complaint was filed on October 24, 2007 in
the Circuit Court of Lee County, Florida (Case
No. 07-CA-013398)
under the caption J
effrey Schwartz, individually and on
behalf of all other similarly situated, Plaintiff against Howard
M. Sheridan, Daniel E. Dosoretz, Solomon Agin, Michael J. Katin,
Ronald E. Inge, James H. Rubenstein, Herbert F. Dorsett, Leo R.
Doerr, Janet Watermeier, Radiation Therapy Services, Inc. and
Vestar Capital Partners, Defendants.
The complaint alleges,
among other things, that our directors of the Company breached
their fiduciary duties in connection with the proposed
transaction by failing to maximize stockholder value and by
approving a transaction that purportedly benefits us at the
expense of the Companys public shareholders. Among other
things, the complaint seeks to enjoin us, our directors and
Vestar from proceeding with or consummating the merger. Vestar
is alleged to have aided and abetted the individual defendants
in breaching their fiduciary duties. Based on the facts known to
date, we believe that the claims asserted in this complaint are
without merit and we intend to vigorously defend against this
complaint.
We are involved in certain legal actions and claims arising in
the ordinary course of our business. We do not believe that an
adverse decision in any of these matters would have a material
adverse effect on our consolidated financial position, results
of operations or cash flow.
You should carefully consider the Risk Factors
section of our 2006 Annual Report on
Form 10-K
filed with the SEC on February 15, 2007 in evaluating us
and our business before making an investment decision. The
specific risk factor set forth below was included in our
Form 10-K
risk factors and has been updated to provide information as of
September 30, 2007. There have been no other material
changes from the risk factors previously disclosed in our
Form 10-K
in response to Item 1A. to Part I of
Form 10-K.
If any of the risks identified herein or in our
Form 10-K,
or any other risks and uncertainties that we have not yet
identified or that we currently believe are not material,
actually occur and are material it could harm our business,
financial condition and results of operations. In such event,
the trading price of our common stock could decline and you may
lose all or part of your investment.
We
maintain a significant amount of debt to further our business or
growth strategies.
As of September 30, 2007, we had outstanding debt of
$299.8 million. Approximately $46.6 million is
available for borrowing in the future under our fourth amended
and restated senior secured credit facility. Our outstanding
debt was $205.2 million as of December 31, 2006. Our
significant indebtedness could have adverse consequences and
could limit our business as follows:
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a substantial portion of 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;
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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;
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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
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competitors with greater access to capital could have a
significant advantage over us.
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F-33
We
currently plan to internally develop an increasing number of
radiation therapy treatment centers in the future and the
internal development of treatment centers is subject to certain
risks which could impair our future growth and adversely impact
our financial results.
We did not internally develop any radiation therapy treatment
centers in 2006. However, we have internally developed three new
radiation treatment centers in the first nine months of 2007 and
our current goal is to add up to 2 new internally developed
centers in the remainder of 2007 and add up to 10 in 2008. The
internal development of radiation treatment centers is subject
to a number of risks including but not limited to risks related
to negotiating and finalizing agreements, construction delays,
unexpected costs, obtaining required regulatory permits,
licenses and approvals and the availability of qualified health
care and administrative professionals and personnel. We cannot
assure you that we will be able to successfully develop
radiation treatment centers in accordance our current plans and
any failure or material delay in successfully completing planned
new internally developed treatment centers could harm our
business and impair our future growth. Historically, our new
internally developed treatment centers have initially experience
lower total revenues and operating margins than our established
treatment centers. We cannot assure you that new internally
developed centers will generate sufficient revenue or be
sufficiently profitable to justify our related investment and if
such centers fail to generate significant revenue, costs and
expenses are significantly more than anticipated or there are
significant operating losses, it could adversely impact our
financial results.
If we
fail to complete our proposed merger transaction with Vestar, it
could adversely affect us.
On October 19, 2007, we entered into a definitive merger
agreement with affiliates of Vestar Capital Partners to be
purchased for $32.50 per share in cash. We are subject to
certain risks as a result of this merger agreement, including
the following:
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There can be no assurance that our shareholders will approve the
merger agreement or that all of the other closing conditions
will be satisfied;
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If the proposed merger is not completed, the share price of our
common stock may decline to the extent that the current market
price of our common stock reflects an assumption that the
proposed merger will be completed;
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We must pay certain costs related to the proposed merger,
including the fees
and/or
expenses of our legal, accounting and financial advisors, even
if the proposed merger is not completed;
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We may be required to pay a termination fee of $25,000,000 and
reimburse
out-of-pocket
fees and expenses incurred with respect to the transactions
contemplated by the merger agreement, up to a maximum of
$3,000,000, if the merger agreement is terminated under certain
circumstances set forth in the merger agreement;
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Shareholder lawsuits have been filed against us and may be filed
against us in connection with the merger agreement;
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Our management and employees attention may be diverted
from
day-to-day
operations which may disrupt our business;
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Our shareholders will receive $32.50 per share of our common
stock in cash despite any changes in the market value of our
common stock;
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Vestar or its affiliates may be unable to obtain the necessary
debt financing arrangements set forth in the commitment letter
it received in connection with the merger agreement;
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If we are unable to complete the merger the investment community
could have a negative perception of us and our business; and
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Increased costs associated with the Vestar Capital Partners
merger transaction.
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F-34
If our
proposed merger with affiliates of Vestar Capital Partners does
not close we will need to raise additional capital to implement
our growth plans.
We currently have approximately $46.6 million under our
credit facility available for future borrowing. We will need
capital for growth, acquisitions, development, integration of
operations and technology and equipment in the future and we do
not currently have sufficient borrowing capacity under our
current credit facility to fully implement our growth plans. If
our proposed merger with affiliates of Vestar Capital Partners
does not close we will need to raise additional capital. 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. While we currently
believe that additional capital would be available to us, it 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.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds.
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(a) None.
(b) None.
(c) None.
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Item 3.
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Defaults
Upon Senior Securities.
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None.
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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There were no matters submitted to a vote of security holders in
the third quarter of 2007.
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Item 5.
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Other
Information.
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None.
(a) Exhibits.
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Exhibit
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Number
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Description
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4
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.1
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Amendment Agreement No. 3 To Fourth Amended and Restated
Credit Agreement as of September 28, 2007
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4
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.2
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Limited Waiver To Fourth Amended and Restated Credit Agreement
as of November 1, 2007
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10
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.2
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Lease agreement between Marco Island Radiation Enterprises, LLC
(Landlord) and 21st Century Oncology, Inc. dated
August 17, 2007
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31
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.1
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Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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31
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.2
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Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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32
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.1
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Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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32
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.2
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Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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F-35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
RADIATION THERAPY SERVICES, INC.
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By:
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/s/ DAVID
N.T. WATSON
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David N.T. Watson
Chief Financial Officer
Date: November 9, 2007
F-36
Exhibit 31.1
CERTIFICATION
I, Daniel E. Dosoretz, certify that:
1. I have reviewed this quarterly report on
Form 10-Q
of Radiation Therapy Services, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e)
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and we have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officers and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
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By:
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/s/ DANIEL
E. DOSORETZ, M.D.
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Daniel E. Dosoretz, M.D.
President and Chief Executive Officer
(principal executive officer)
Dated: November 9, 2007
F-37
Exhibit 31.2
CERTIFICATION
I, David N.T. Watson, certify that:
1. I have reviewed this quarterly report on
Form 10-Q
of Radiation Therapy Services, Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e)
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and we have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officers and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
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By:
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/s/ DAVID
N.T. WATSON
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David N.T. Watson
Chief Financial Officer
(principal financial officer)
Dated: November 9, 2007
F-38
Exhibit 32.1
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Radiation Therapy
Services, Inc. (the Company) on
Form 10-Q
for the period ended September 30, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Daniel E. Dosoretz, M.D.,
Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
A signed original of this written certification required by
Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
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By:
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/s/ DANIEL
E. DOSORETZ, M.D.
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Daniel E. Dosoretz, M.D.
President and Chief Executive Officer
(principal executive officer)
November 9, 2007
F-39
Exhibit 32.2
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Radiation Therapy
Services, Inc. (the Company) on
Form 10-Q
for the period ended September 30, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, David N.T. Watson, Principal
Financial Officer of the Company, certify, pursuant to
18 U.S.C. § 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
A signed original of this written certification required by
Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
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By:
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/s/ DAVID
N.T. WATSON
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David N.T. Watson
Chief Financial Officer
(principal financial officer)
November 9, 2007
F-40
RADIATION THERAPY SERVICES, INC.
PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned hereby appoints Daniel E. Dosoretz, James H. Rubenstein , and David N. T.
Watson, and each of them, attorneys and proxies of the undersigned, with full power of
substitution, to attend the special meeting of the shareholders of Radiation Therapy Services, Inc.
to be held at the Hyatt Regency Coconut Point Resort & Spa, 5001
Coconut Road, Bonita Springs, Florida, 34134 on
Wednesday, February 6, 2008, at 10:00 a.m., Eastern Time, or any adjournment or postponement thereof, and to
vote the number of shares of common stock of Radiation Therapy Services, Inc. which the undersigned
would be entitled to vote, and with all the power the undersigned would possess if personally
present, as instructed on the reverse.
Receipt of the
Notice of Special Meeting of Shareholders to be held on
February 6, 2008 and the
Proxy Statement dated
January 11, 2008, is hereby acknowledged.
THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1 AND A VOTE FOR PROPOSAL 2. The Proxies
will vote as specified on the reverse, or, if a choice is not specified, they will vote FOR
Proposal 1 and FOR Proposal 2 and with discretionary authority on all other matters unknown by
Radiation Therapy Services, Inc. a reasonable time prior to the solicitation of proxies that may
come before the special meeting or any adjournments or postponements thereof.
YOUR VOTE IS IMPORTANT
Please sign and date this proxy card and return it promptly in the
enclosed postage-paid envelope so your shares
may be represented at the special meeting of shareholders.
(Continued and to be signed on reverse side.)
RADIATION THERAPY SERVICES, INC.
2234 COLONIAL
BOULEVARD FORT MYERS,
FLORIDA 32907
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY. THANK YOU.
Please Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
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The Board of Directors recommends a vote "FOR" proposals 1 and 2.
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FOR
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AGAINST
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ABSTAIN
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1. Approval of the Agreement and Plan of Merger, dated as of October 19, 2007 among Radiation
Therapy Services, Inc., Radiation Therapy Services Holdings, Inc., RTS MergerCo, Inc. and
Radiation Therapy Investments, LLC (as to Section 7.2 only)(the Merger Agreement).
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2. Adjournment and postponement of the special meeting, if necessary or appropriate, to solicit
additional proxies if there are insufficient votes properly cast at the time of the meeting to approve the
Merger Agreement.
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3. In their discretion, the named proxies are authorized to vote upon such other business
unknown by Radiation Therapy Services, Inc. a reasonable time prior to the solicitation of
proxies as may properly come before the special meeting or any adjournments or postponements
thereof.
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Signed (Share Owner):
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Signed (Co-Owner):
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(Please sign exactly as your name
or names appear hereon,
indicating, where proper, official
position or representative
capacity.)
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Date:
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To change your address, please mark this box.
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To include comments, please mark this box.
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ADDRESS CHANGE/COMMENTS
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