Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004.

For the transition period from              to             .

Commission file number: 000-50802

RADIATION THERAPY SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)

(239) 931-7275

(Registrant’s 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 1, 2004, we had outstanding 22,448,314 shares of Common Stock, par value $0.0001 per share.

Table of Contents

Table of Contents

RADIATION THERAPY SERVICES, INC.

Form 10-Q

INDEX

2

Table of Contents

PART I

FINANCIAL INFORMATION

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)

See accompanying notes.

3

Table of Contents

RADIATION THERAPY SERVICES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes.

4

Table of Contents

RADIATION THERAPY SERVICES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Continued on next page

5

Table of Contents

RADIATION THERAPY SERVICES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

(unaudited)

See accompanying notes.

6

Table of Contents

RADIATION THERAPY SERVICES, INC.

AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. ORGANIZATION

Radiation Therapy Services, Inc. and its consolidated subsidiaries (the Company) develops and operates radiation therapy centers that provide radiation treatment to cancer patients in Alabama, Delaware, Florida, Kentucky, Maryland, Nevada, New York, North Carolina and New Jersey.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed interim 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, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

In December 2003, the Financial Accounting Standards Board revised Interpretation No. 46R (FIN No. 46R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which requires that companies consolidate variable interest entities if they are the primary beneficiaries of the activities of those entities. Companies are generally required to apply FIN No. 46R immediately for all variable interest entities created after January 31, 2003 and by the end of the first quarter 2004 for all other entities for which it is the primary beneficiary. We provide administrative services for a fee to certain radiation oncology practices in certain states with laws that prohibit business corporations from providing, or holding themselves out as providers of, medical care. Fees are based upon the estimated costs of the services performed plus a profit margin. We operate in these states providing administrative services for a fee to radiation oncology practices pursuant to long-term management agreements ranging from 20 to 25 years. Pursuant to the administrative services agreements, the radiation oncology practices are each solely responsible for all aspects of the practice of medicine and patient care as defined by their respective state. We provide administrative and other support services.

During 2003, we determined that these radiation oncology practices are variable interest entities as defined by FIN No. 46R, and that we have a variable interest in each of these practices through our administrative services agreements. We also determined that through our variable interests in these practices, we would absorb a majority of the net losses, if any occur.

Based on these determinations, we included the radiation oncology practices in our interim consolidated financial statements as of and for the nine-month period ended September 30, 2004 and restated prior periods to conform to the current period presentation. The result of the consolidation is an increase in revenue and a corresponding increase in expenses and minority interest, thereby resulting in no significant impact on net income, earnings per share or cash flows. All significant intercompany accounts and transactions within the Company have been eliminated.

These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003 and the notes thereto contained in our prospectus on Form S-1 that was declared effective by the SEC on June 21, 2004.

7

Table of Contents

For the nine months ended September 30, 2004, we had a change in estimate of approximately $2.1 million, related to a reimbursement policy change by a significant commercial payor to reimburse for services not previously covered, and the impact was an increase to our net patient service revenue for the respective period.

The cost of revenues for the three months ended September 30, 2004 and 2003 are approximately $23.7 million and $20.2 million, respectively. The cost of revenues for the nine months ended September 30, 2004 and 2003 are approximately $69.1 million and $59.1 million, respectively.

3. 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 quarter ended June 30, 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 40.0%.

4. 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 $44.1 million was used to repay outstanding indebtedness under our senior secured credit facility, and approximately $2.8 million was used to repay outstanding indebtedness to certain of our 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 Company’s common stock to 75,000,000 shares, $0.0001 par value, and 10,000,000 shares of preferred stock, $0.0001 par value. All stock related data in the condensed consolidated financial statements reflect the stock split for all periods presented.

5. Stock Based Compensation

We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure requires pro forma disclosure of net income and earnings per share for the effect of compensation had the fair value method of accounting for stock options been adopted. For purposes of this disclosure, the fair value of each option grant has been calculated using the Black-Scholes valuation model.

We follow SFAS 123 and EITF Issue No. 96-18, Accounting for Equity Investments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods and Services, for our stock option grants to non-employees. As such, we measure compensation expense as the services are performed and recognize the expense ratably over the service period. Prior to vesting, we recognize expense using the fair value of the option at the end of the reporting period. Additional expense due to increases in the value of our options prior to the vesting date will be recognized in the period of the option value increase.

8

Table of Contents

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over their vesting periods. Our pro forma information is as follows (in thousands, except per share data):

6. EARNINGS PER SHARE

Diluted earnings per common and common share equivalents have been computed by dividing net income by the weighted average common and common share equivalents 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 interim condensed consolidated financial statements (in thousands, except per share data):

9

Table of Contents

7. STOCK OPTION PLAN AND DEFERRED COMPENSATION

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 our 1997 stock option plan (“the 1997 Plan”) that was terminated contemporaneously with the consummation of our initial public offering, (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:

Pursuant to the 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.

Options generally are granted at 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 three to five 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. We have recognized compensation expense of $104,000 for the nine months ended September 30, 2004. Compensation expense is measured as the services are performed and the expense is recognized ratably over the service period. Prior to vesting, we recognize expense using the fair value of the option at the end of the reporting period. Additional expense due to increases in the value of our options prior to the vesting date will be recognized in the period of the option value increase.

At September 30, 2004, we had approximately 1,397,000 options available for grant and approximately 2,537,000 options outstanding.

10

Table of Contents

8. 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 States are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income / loss is composed of unrealized gains / losses on an interest rate swap agreement accounted for as a cash flow hedge. The impact of the unrealized gain / loss was a decrease to shareholders’ equity on a cumulative basis by $37,000 as of December 31, 2003 and an increase to shareholders’ equity of $37,000 for the nine months ended September 30, 2004.

9. ACQUISITIONS

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 through 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. The purchase of Devoto Construction, Inc. was a strategic fit for us as we continue to expand our 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. The results of operations have been included in the financial statements since the date of acquisition.

On September 21, 2004 we acquired the operations and medical and office equipment of two radiation centers in New Jersey. We 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. We also completed the purchase of a third center in Willingboro, New Jersey, on October 18, 2004, completing our acquisitions of the planned three centers in that state. The acquisitions were accounted for as a purchase. The fair value of the assets acquired, including intangible assets, was approximately $10,225,000. The purchase price was allocated to tangible assets of $2,841,000; $680,000 as a non-compete amortized over eighteen to twenty four months and goodwill of $6,704,000. The consideration given for the acquisition included $7,905,000 cash, the assumption of capital lease financing of $2,220,000, and the assumption of $100,000 in liability for assuming a physician employment contract. 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.

10. 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 Company’s 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. The impact of this change resulted in an income tax expense of approximately $17.6 million for the nine months ended September 30, 2004.

11

Table of Contents

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 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 September 30, 2004 (in thousands):

Significant components of the income tax provision for the nine months ended September 30, 2004 are as follows (in thousands):

11. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003. The implementation of SFAS No. 149 had no impact on our consolidated financial statements for 2004 and we do not expect it to have a material effect on our future results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity-type instruments, must now be accounted for as liabilities. The financial instruments effected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. The provisions of SFAS No. 150 are applicable to our financial statements beginning in 2005. The implementation of SFAS No. 150 is not expected to have a material effect on our future results of operations or financial position.

12

Table of Contents

In December 2003, the Financial Accounting Standards Board issued revised Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which requires that companies consolidate variable interest entities if they are the primary beneficiaries of the activities of those entities. Companies are generally required to apply FIN No. 46R immediately for all variable interest entities created after January 31, 2003 and by the end of the first quarter 2004 for all other entities for which it is the primary beneficiary. We provide administrative services to certain professional corporations in states with laws that prohibit business corporations from providing, or holding themselves out as providers of, medical care. During 2003, we determined that the professional corporations are variable interest entities as defined by FIN No. 46R, and we have a variable interest in each of the practices through our administrative services agreements. Based on these determinations, we consolidated the radiation oncology practices in our consolidated financial statements as of and for the year ended December 31, 2003 and have restated prior periods to conform to the current period presentation. All periods presented reflect the retroactive restatement of our financial position and operations in accordance with FIN No. 46R.

12. LEGAL PROCEEDINGS

On September 21, 2004 a lawsuit was filed by the Kissel Family Trust against us and certain of our directors and officers in the United States District Court, Middle District of Florida (Civil Action No. 2:04-CV-470-FtM-29.SPC). We believe that the complaint is without merit and intend to pursue a vigorous defense. The complaint purports to be a class action on behalf of all persons who purchased our common stock between June 17, 2004 and September 8, 2004. The complaint claims that the defendants violated the Securities Exchange Act of 1934 by disseminating purportedly false and misleading information and failing to disclose material facts in our public filings. The plaintiff asserts in the complaint that it purchased 800 of our shares of common stock at a purportedly inflated price of $14.53 on July 6, 2004 and sold its shares for $12.90 on August 6, 2004. The complaint seeks certification as a class action as well as unspecified compensatory damages, counsel fees and expert fees and such other relief as the court may deem just and proper. We are obligated to provide indemnification to our directors and officers against any liability, cost or expense in this matter to the fullest extent permitted by law. The lawsuit is in a very early stage and we have not reserved or accrued any amounts on our financial statements for this lawsuit. While we do not expect the ultimate result of this lawsuit to have a material adverse effect on our results of operations, financial position or cash flows, due to the inherently unpredictable nature of complex litigation there can be no assurances as to the eventual resolution.

13. SUBSEQUENT EVENTS

On October 8, 2004 we amended our third amended and restated senior secured credit facility principally to pay off the remaining balance of the designated Term B portion and increase our revolving credit commitment from $70 million to $80 million. The transaction included paying off the $22.8 million remaining on the designated Term B portion by increasing the Term A loan to $25 million and drawing on the revolver. Per the amendment, the interest rate spreads on the Term A loan and on the revolver were reduced overall by 25 basis points. Borrowings at LIBOR plus a spread range from 175 to 300 basis points and borrowings at a specified base rate plus a spread range from 25 to 150 basis points. The amendment modified the mandatory quarterly principal payments on the Term A loan from $1.25 million to $1.75 million. The additional deferred financing costs incurred of approximately $241,000 will be expensed over the remaining period of the Term A loan maturing on April 15, 2007.

13

Table of Contents

Item 2. Management’s 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 10-Q. This section of the 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. 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 should place no undue reliance on these forward-looking statements, which apply on and as of the date of this 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 currently provide radiation therapy services in 54 treatment centers. Our treatment centers are clustered into 18 regional networks in nine states, including Alabama, Delaware, Florida, Kentucky, Maryland, Nevada, New York, North Carolina and New Jersey. Of these 54 treatment centers, 20 treatment centers were internally developed, 24 were acquired and 10 involve hospital-based treatment centers.

For the three months and nine months ended September 30, 2004, our total revenues grew by 27.0% and 21.4%, respectively while our net income and pro forma net income grew by 41.8% and 21.8%, respectively over the same periods of the prior year. For the three months and nine months ended September 30, 2004, we had total revenues of $40.7 million and $125.8 million, respectively. Pro forma net income gives effect to taxes as if we had been taxed as a C corporation for all periods presented.

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 regional networks in which we operate:

We added a new internally developed treatment center during the quarter ended June 30,2004 replacing services we had provided at a hospital based treatment center.

14

Table of Contents

In September 2004, we acquired the operations and medical and office equipment of two radiation centers in New Jersey. The treatment centers are located on, or adjacent to, the campuses of Virtua Health in Voorhees, and Underwood-Memorial Hospital in Woodbury. These centers are established practices and offer radiation therapies to patients residing in Burlington and Camden Counties. We plan to upgrade these facilities with advanced technologies and equipment, expanding available treatment options.

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

Our revenue growth is primarily driven by entering new markets, increasing the utilization of our existing centers and by benefiting from demographic and population trends in most of our regional 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, 2004, net patient service revenue comprised 94.2% 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 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. Our administrative services fees may include fees for providing facilities and equipment, management and administrative services, as well as the services of our dosimetrists, physicists, therapists and medical assistants. In 30 of our radiation treatment centers we employ the physicians, and in 24 we operate pursuant to administrative service 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. In 2003, 25% 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, 2004, other revenue comprised approximately 5.8% 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.

15

Table of Contents

We believe that our future financial performance will be impacted by:

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 thirty six months, we have acquired 15 treatment centers and internally developed seven treatment centers.

In 2003, we acquired six treatment centers for total consideration of $11.1 million, we opened two internally developed treatment centers and we signed agreements to provide services to three hospital-based treatment centers. Of these 11 treatment centers, six were located in four new regional networks and five were located in existing regions.

In 2004, we opened two internally developed treatment centers. One of these centers replaced services we had previously provided at a hospital-based center. During the third quarter of 2004, we acquired two treatment centers in the state of New Jersey and closed on a third treatment center in October 2004.

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.

The operations of the foregoing acquisitions have been included in the accompanying consolidated statements of 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 values.

Sources of Revenue By Payor

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 payor mix, the number and nature of procedures performed and

16

Table of Contents

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 payor in our last fiscal year and the nine months ended September 30, 2003 and 2004.

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 less than 1% 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 2002, the CF decreased by 5.4%; in 2003, it increased by 1.6%; in 2004, it has increased by 1.5%; and in 2005, the rate is preliminarily scheduled to increase an additional 1.5%. The net result to CF and RVUs of the changes 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. CMS recently released its preliminary RVUs for 2005 and the proposed changes are not expected to have a significant impact on our business. 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.

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 6% of our total net patient service revenue. We receive our managed care contracted revenue under two primary arrangements. Approximately 99% of our managed care business is attributable to contracts where a fee schedule is negotiated for services provided at our treatment centers. Less than 1% of our net patient service revenue is attributable to contracts where we bear utilization risk. Although the terms and conditions of our managed care contracts vary considerably, they are typically for a one-year term and provide for automatic renewals. If payments by managed care organizations and other private third-party payors decrease, then our total revenues and net income could decrease.

17

Table of Contents

Self Pay

Self pay consists of payments for treatments by patients not otherwise covered by third-party payors, such as government or commercial sources. The amount of net patient service revenue derived from self pay is not expected to significantly change in the foreseeable future.

Billing and Collections

Our billing system utilizes a fee schedule for billing patients, third-party payors 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 payors, the 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 payor in order to calculate average collection percentages by facility and payor. 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.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

We consider our critical accounting policies to be those that require us to make more significant judgments and estimates when we prepare our financial statements, including the following:

Net Patient Service Revenue and Allowances for Contractual Discounts

We have agreements with third-party payors that provide for payments to the Company at amounts different from our established rates. Net patient service revenue is reported at the estimated net realizable amounts due from patients, third-party payors 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 the interim condensed consolidated financial statements are recorded at the amount that is expected to be received.

18

Table of Contents

We derive a significant portion of our revenues from third-party payors that receive discounts from our standard charges. We must estimate the total amount of these discounts to prepare our consolidated financial statements. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and subject to interpretation and adjustment. We estimate the allowance for contractual discounts on a payor-specific basis given our interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from our estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating regular review and assessment of the estimation process by management. Changes in estimates related to the allowance for contractual discounts affect revenues reported in the interim condensed consolidated statement of income and comprehensive income.

Provision for Doubtful Accounts

Collection of receivables from third-party payors and patients is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patient accounts and to patient accounts for which the primary insurance payor has paid, but patient responsibility amounts (generally deductibles and co-payments) remain outstanding. We estimate provisions for doubtful accounts based primarily upon the age of patients’ accounts, the economic ability of patients to pay and the effectiveness of our collection efforts. We routinely review accounts receivable balances in conjunction with our historical collection rates and other economic conditions, which might ultimately affect the collectibility of patient accounts when we consider the adequacy of the amounts we record as reserves for doubtful accounts. Significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental health care coverage could affect our collection of accounts receivable, cash flows and results of operations.

Impairment of Long-Lived Assets

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 asset’s carrying value exceeds its estimated fair value. During the third quarter of 2004, we recorded a charge of $1.2 million for the write down to fair value of certain of our analog Linac and simulator inventory. 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.

Goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), we do not amortize goodwill. We review goodwill for impairment at the reporting unit level, as defined by SFAS No. 142, on an annual basis or sooner if indicators of impairment arise. We periodically evaluate each reporting unit for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on market conditions and the operating performance of each reporting unit. During the last quarter of our fiscal year ended December 31, 2003, we completed our most recent annual impairment review of our goodwill. This impairment review indicated an impairment loss of $285,000 due to increased competition in a specific practice within a regional market. Future changes in the estimates we use to conduct the impairment review, including revenue and profitability projections or market values, could cause our analysis to indicate that our goodwill is impaired in subsequent periods, and could result in the write-off of a portion or all of our goodwill.

Stock Based Compensation

We grant stock options for a fixed number of shares to employees in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and accordingly, recognize no compensation expense for the stock option grants to employees provided that the exercise price is not less than the

19

Table of Contents

fair market value of the underlying stock on the date of grant. The value of options issued to non-employees have been determined in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods and Services, and are periodically remeasured as the services are performed and recognize the expense ratably over the service period.

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.

20

Table of Contents

Results of Operations

The following table presents, for the periods indicated, information expressed as a percentage of total revenues.

Comparison of the Three Months Ended September 30, 2004 and 2003

Total revenues. Total revenues increased by $8.7 million, or 27.0%, from $32.0 million for the three months ended September 30, 2003 to $40.7 million for the three months ended September 30, 2004. Approximately $4.3 million of this increase resulted from our expansion into new regional networks during the latter part of 2003. We acquired new treatment centers in Key West, Florida in August 2003, Kentucky in September 2003 and Alabama in December 2003. Approximately $4.4 million of this increase was driven by volume growth, service mix improvements and pricing in our existing regional networks.

21

Table of Contents

Salaries and benefits. Salaries and benefits increased by $3.0 million, or 16.2%, from $18.7 million for the three months ended September 30, 2003 to $21.7 million for the three months ended September 30, 2004. Salaries and benefits as a percentage of total revenues decreased from 58.4% for the three months ended September 30, 2003 to 53.5% for the three months ended September 30, 2004. Salaries and benefits consist of 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. The decrease as a percentage of revenue is due to the 27% growth in our revenue from the prior quarter, resulting in further leveraging of our staff. Additional staffing of personnel and physicians due to our expansion into new regional networks during the third and fourth quarters of 2003 contributed to a $2.3 million increase in salaries and benefits. Within our existing regional networks, salaries and benefits increased $0.7 million due to replacement of contract labor with employed staff and increases in the cost of our health insurance benefits.

Medical supplies. Medical supplies increased by $0.3 million, or 65.6%, from $0.5 million for the three months ended September 30, 2003 to $0.8 million for the three months ended September 30, 2004. Medical supplies as a percentage of total revenues increased from 1.5% for the three months ended September 30, 2003 to 2.0% for the three months ended September 30, 2004. 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. The increase in medical supplies as a percentage of total revenues was primarily due to the increased utilization of pharmaceuticals used in connection with the delivery of radiation therapy treatments. These pharmaceuticals are principally reimbursable by third-party payors.

Facility rent expenses. Facility rent expenses increased by $0.2 million, or 17.9%, from $1.1 million for the three months ended September 30, 2003 to $1.3 million for the three months ended September 30, 2004. Facility rent expenses as a percentage of total revenues decreased from 3.4% for the three months ended September 30, 2003 to 3.1% for the three months ended September 30, 2004. Facility rent expenses consist of rent expense associated with our treatment center locations. Approximately $0.1 million of the increase in facility rent expenses was due to the development of new centers in the Florida West Coast market and $0.1 million related to the expansion into new regional markets in Key West, Florida, Kentucky and Alabama.

Other operating expenses. Other operating expenses decreased by $0.2 million or 9.6%, from $2.0 million for the three months ended September 30, 2003 to $1.8 million for the three months ended September 30, 2004. Other operating expenses as a percentage of total revenues decreased from 6.3% for the three months ended September 30, 2003 to 4.5% for the three months ended September 30, 2004. Other operating expenses consist of repairs and maintenance of equipment, equipment rental and contract labor. The decrease was primarily attributable to a decrease in contract labor of approximately $0.4 million, offset by an increase in the cost of repairs and maintenance of equipment of approximately $0.2 million.

General and administrative expenses. General and administrative expenses increased by $2.5 million, or 66.3%, from $3.8 million for the three months ended September 30, 2003 to $6.3 million for the three months ended September 30, 2004. 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 11.8% to 15.5%. The third quarter 2004 included approximately $0.3 million for increases to the self insured portion of our medical malpractice exposure. The increase reflects the growth of our business and related exposure. During the third quarter of 2004, we recorded a charge of $1.2 million for the write down to fair value of certain of our analog Linac and simulator inventory. 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. Additional increase in general and administrative expenses included approximately $0.3 million in consulting/compensation fees for legislative efforts in healthcare reimbursement, $0.2 million in general and administrative expenses relating to the growth in the number of our regional networks, and $0.5 million in our existing regional networks, inclusive of costs relating to our public offering for directors and officers insurance and board expenses.

Depreciation and amortization. Depreciation and amortization increased by $0.4 million, or 34.8%, from $1.2 million for the three months ended September 30, 2003 to $1.6 million for the three months ended September 30, 2004. Depreciation and amortization expenses as a percentage of total revenues increased from

22

Table of Contents

3.9% for the three months ended September 30, 2003 to 4.1% for the three months ended September 30, 2004. An increase in capital expenditures related to our investment in advanced radiation treatment technologies in certain regional networks increased our depreciation and amortization by approximately $0.2 million. The remaining portion of the increase was attributable to the acquisition of radiation center assets during the third and fourth quarters of 2003 in expanded regional markets in Key West, Florida, Kentucky and Alabama.

Provision for doubtful accounts. Provision for doubtful accounts increased by $0.6 million, or 76.0%, from $0.8 million for the three months ended September 30, 2003 to $1.4 million for the three months ended September 30, 2004. Provision for doubtful accounts as a percentage of total revenues increased from 2.5% in 2003 to 3.5% in 2004, consistent with the increase in the three months ended June 30, 2004. Approximately $0.1 million of the increase was primarily due to an increase in service to uninsured patients within one of our existing regional markets, $0.2 million due to the expanded regional markets in Key West, Florida, Kentucky and Alabama, and $0.3 million within our remaining existing regional networks.

Interest expense, net. Interest expense, net increased by $0.3 million, or 68.5%, from $0.5 million for the three months ended September 30, 2003 to $0.8 million for the three months ended September 30, 2004. Interest expense as a percentage of total revenues increased from 1.5% in 2003 to 1.9% in 2004. Included in interest expense, net is an insignificant amount of interest income. Approximately $0.1 million of the increase is as a result of the borrowing relating to the acquisitions made in Kentucky and Alabama during the third and fourth quarters of 2003 and the acquisition of the New Jersey treatment centers during the third quarter of 2004. The remainder of the increase is due to interest on capital leases entered into during 2004.

Net income and pro forma net income Net income increased by $0.8 million, or 41.8%, from $2.1 million in pro forma net income for the three months ended September 30, 2003 to $2.9 million for the three months ended September 30, 2004. Net income and pro forma net income represents 7.1% and 6.4% of total revenues for the three months ended September 30, 2004 and 2003, 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 each period presented, and provides for income taxes utilizing an effective rate of 40.0%.

Comparison of the Nine Months Ended September 30, 2004 and 2003