Exhibit 99.1
US Oncology, Inc.
16825 Northchase Drive, Suite 1300 News Release
Houston, Texas 77060
www.usoncology.com
Contacts:
Bruce Broussard Steve Sievert
Investor Relations Public Relations
832.601.6103 832.601.6193
bruce.broussard@usoncology.com steve.sievert@usoncology.com
US Oncology Reports Financial Results for First Quarter 2003
Quarter Produces Earnings Per Share of $0.17
HOUSTON, May 9, 2003 - US Oncology, Inc. (Nasdaq: USON) today reported
results for the first quarter ended March 31, 2003.
US Oncology recorded year-over-year increases in net operating
revenue, net income and earnings per share for the first quarter of 2003. The
company did not incur unusual charges in the quarter. The following table
provides a review of first quarter results, along with applicable comparisons:
(in millions, except per share amounts)
Q1 2003 Q1 2002 % change Q4 2002 % change
------- ------- -------- ------- --------
Net Operating Revenue $ 574.1 $ 500.9 14.6% $ 554.0 3.6%
Revenue/(1)/ 447.2 391.3 14.3% 428.5 4.4%
Net income (loss) 16.3 5.3 207.7% (5.4) N/A
EPS 0.17 0.05 240.0% (0.06) N/A
Excluding unusual charges/(2)/
EBITDA $50,155 $46,168 8.6% $46,996 6.7%
Net income 16.3 14.2 14.8% 14.2 14.8%
EPS 0.17 0.14 21.4% 0.15 13.3%
"Our first quarter results represent a strong start to the year and
reflect the success of our efforts in converting affiliated practices to a more
sustainable model, as well as our emphasis on operational improvements
throughout our network," said R. Dale Ross, US Oncology chairman and chief
executive officer. "Same practice net operating revenue increased 19.3 percent
over the first quarter of 2002, demonstrating our commitment to operational
excellence and expanding the range of patient-care services at affiliated
practices."
/(1)/ See Key Operating Statistics on page 6 for calculations.
/(2)/ See Summary of Unusual Charges on page 10.
US Oncology highlights for 2003 are detailed below.
Operational Execution
. US Oncology's EBITDA/(3)/ for the first quarter was $50.2 million,
compared to $46.2 million for the first quarter of 2002 and $47.0
million for the fourth quarter of 2002. EBITDA excludes unusual
charges for prior periods.
. The company's percentage of field EBITDA/(3)/ for the first quarter
was 34 percent, which was relatively stable when compared to its
percentage of field EBITDA of 35 percent for the first quarter of 2002
and 34 percent for the fourth quarter of 2002. Field EBITDA excludes
unusual charges for prior periods.
. The company's accounts receivable days outstanding were 50 at the end
of the first quarter, compared to 53 at the end of the first quarter
of 2002 and 48 at the end of the fourth quarter of 2002.
. As of the end of the first quarter, 73 percent of US Oncology's net
operating revenue was generated by non-net revenue model practices, an
increase from 64 percent at the end of the first quarter of 2002 and
69 percent at the end of the fourth quarter of 2002.
. The company's operating cash flow for the three months ended March 31,
2003 was $(1.1) million, which reflects payments for advance purchases
of pharmaceutical products. As of May 6, 2003, US Oncology had
approximately $116.2 million in cash and cash equivalents, an increase
from $74.8 million at the end of the first quarter of 2003.
. US Oncology has recruited 55 new physicians this year into its
affiliated practices. Of these oncologists, nine have begun
practicing, with the remainder scheduled to begin throughout the year.
Business Development
US Oncology opened three cancer centers in the first quarter of 2003,
expanding affiliated practice services in Dayton, Ohio; Indianapolis; and Fort
Worth, Texas. These fully integrated, freestanding facilities provide patients
with the complete continuum of oncology care and access to the latest clinical
research trials.
Today, US Oncology operates 76 cancer centers nationwide, which
includes the addition of the three centers in the first quarter of 2003 and the
previously announced closures or sales of five centers, which also took place in
the first quarter. The company also installed one positron emission tomography
(PET) unit in its cancer-care network during the first quarter.
/(3)/ See Reconciliation of Selected Financial Data on page 10 for calculations.
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The company has an additional nine cancer centers, as well as six PET
units, which will serve 10 practice locations, in various stages of development.
In the service line segment of the business, US Oncology has
affiliated with seven new practices, representing 33 physicians, since its
introduction of the service line model. Three of the practices, with 13
physicians, initiated services agreements in the first quarter of 2003. Included
in these affiliations are US Oncology's first practice relationships in
California and New Jersey, expanding the company's network to 29 states.
Business Outlook
"While we are in the final stages of our transitional process, the
conversion of the remaining net revenue model practices to the earnings or
service line model continues to be a key priority this year," said Ross. "We
expect this initiative, coupled with increasing interest in our service line
offerings and a strong cancer center and PET development pipeline, to produce
more stable operating results for the remainder of 2003."
The company reaffirms its previous guidance of anticipated
year-over-year growth in EBITDA of approximately 10 to 15 percent and
earnings-per-share growth of approximately 15 to 20 percent, both excluding
unusual charges.
The company's growth expectations are based upon a stabilized
operating platform, an expectation that charges relating to additional
transition activities will be limited, and management's belief, as evidenced by
growth in service line business in recent months, that development activities
will increase in 2003. The company also has assumed that reimbursement levels
for cancer care will remain relatively stable.
In addition, US Oncology's expectation of earnings-per-share growth
includes the effect of the company's stock repurchases during 2002, the impact
of depreciation of the assets in the company's leasing facility (which was
brought onto the company's balance sheet as of Dec. 31, 2002) and reduced
amortization expense due to the company's impairment of intangible assets.
Additional stock repurchases could have the effect of increasing such
earnings-per-share growth. These estimates are forward-looking statements,
subject to uncertainty. Investors should refer to the company's cautionary
advice regarding forward-looking statements appearing elsewhere in this news
release and in the company's filings with the Securities and Exchange
Commission.
Financial Exhibits
Exhibits - including key operating statistics, financial statements,
reconc iliation of selected financial data and financial discussion - are
included in this news release.
3
Conference Call
US Oncology will host a conference call for investors Friday, May 9 at
9 a.m., CDT. Investors are invited to access the call at 1-877-615-1716 and
reference password "US Oncology." A replay of the call will be available through
May 23 at 1-800-642-1687. The conference call also can be accessed via Web cast.
Details of the Web cast are available at www.usoncology.com.
About US Oncology, Inc.
US Oncology, headquartered in Houston, Texas, is America's premier
cancer-care services company. The company provides comprehensive services to a
network of affiliated practices - comprised of more than 875 affiliated
physicians in over 440 sites, including 76 integrated cancer centers - in 29
states, with the mission of expanding access to and improving the quality of
cancer care in local communities. These practices care for approximately 15
percent of the country's new cancer cases each year. The services the company
offers include:
. Oncology Pharmaceutical Services. The company purchases and manages
specialty oncology pharmaceuticals for affiliated practices.
. Cancer Center Services. The company develops and manages
comprehensive, community-based cancer centers for affiliated
practices. These centers integrate a comprehensive array of outpatient
cancer care services, from chemotherapy and radiation therapy to
laboratory and diagnostic radiology.
. Cancer Research Services. The company facilitates a broad range of
cancer research and development activities through its network of
affiliated practices.
. Other Practice Management Services. Under the company's physician
practice management arrangements, it acts as the exclusive manager and
administrator of all day-to-day nonmedical business functions
connected with affiliated practices.
US Oncology operates with its affiliated practices under three
economic models. In its practice-management business, the company generally
offers all of the above services under two models: the "earnings model," in
which management fees are based on practice earnings before income taxes; and
the "net revenue model," in which the management fee consists of a fixed fee,
which is a percentage fee of the practice's net revenues and, if certain
performance criteria are met, a performance fee. In certain states, the
company's fee is a fixed fee.
The company also markets its aforementioned core services under
separate agreements through a non-physician management model, the "service line
model," in which each service is offered under a separate contract and the
company does not necessarily provide all of the practice management services
described above.
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This news release contains forward-looking statements, including statements that
include the words "believes," "expects," "anticipates," "estimates," "intends,"
"plans," "projects," or similar expressions and statements regarding our
prospects. All statements concerning expected financial results, business
development activities, the benefits of the service line model and all other
statements other than statements of historical fact included in this news
release are forward-looking statements. Although the company believes that the
expectations reflected in such statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Matters that
could further impact future results and financial condition include
reimbursement rates, including in particular, reimbursement for pharmaceutical
products, the success of the service line model, transition of existing
practices, our ability to maintain good relationships with existing practices,
expansion into new markets and development of existing markets, our ability to
complete cancer centers and PET facilities currently in development, our ability
to recover the costs of our investments in cancer centers, our ability to
complete negotiations and enter into agreements with practices currently
negotiating with us, reimbursement for health-care services, continued efforts
by payors to lower their costs, government regulation and enforcement, continued
relationships with pharmaceutical companies and other vendors, changes in cancer
therapy or the manner in which care is delivered, drug utilization, increases in
the cost of providing cancer treatment services and the operations of the
company's affiliated physician practices. Please refer to the company's filings
with the Securities and Exchange Commission, including its Annual Report on Form
10-K for 2002 and subsequent SEC filings, for a more extensive discussion of
factors that could cause actual results to differ materially from the company's
expectations.
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US ONCOLOGY, INC.
Key Operating Statistics
($ in millions)
(unaudited)
Q1 2003 Q1 2002 % Change
-------- -------- --------
Net operating revenue $ 574.1 $ 500.9 14.6%
Physician compensation 126.9 109.6 15.8%
-------- --------
Revenue $ 447.2 $ 391.3 14.3%
======== ========
Physician Summary:
PPM physicians 817 867 -5.8%
Service Line physicians 68 0 N/A
-------- --------
Total physicians 885 867 2.1%
======== ========
Medical Oncology/Hematology:
Medical oncologists 693 671 3.3%
PPM medical oncology visits 585,686 617,213 -5.1%
Other oncologists 39 30 30.0%
Radiation Oncology:
Radiation oncologists 115 127 -9.4%
Radiation treatments per day 2,628 2,587 1.6%
Total cancer centers 76 77 -1.3%
Imaging/Diagnostics:
Diagnostic radiologists 38 39 -2.6%
PET installations 1 1 0.0%
Total PET installations 17 13 30.8%
PET scans 4,154 2,924 42.1%
Research accruals 874 848 3.1%
Days sales outstanding 50 53 -5.7%
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US ONCOLOGY, INC.
Consolidated Income Statement
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
-------- --------
Revenue (1) $447,210 $391,285
Operating expenses:
Pharmaceuticals and supplies 246,628 197,595
Field compensation and benefits 87,893 86,101
Other field costs 46,958 47,859
General and administrative 15,576 13,562
Depreciation and amortization 18,813 17,871
Restructuring charges -- 705
-------- --------
415,868 363,693
Income from operations 31,342 27,592
Other income (expense):
Interest expense, net (1) (5,132) (5,442)
Loss on early extinguishment of debt (1) -- (13,633)
-------- --------
Income before income taxes 26,210 8,517
Income taxes (9,960) (3,236)
-------- --------
Net income $ 16,250 $ 5,281
======== ========
Net income per share - basic and diluted $ 0.17 $ 0.05
======== ========
Net income per share, excluding unusual charges (2) - basic and diluted $ 0.17 $ 0.14
======== ========
Shares used in per share calculations - basic 92,972 99,848
Shares used in per share calculations - diluted 94,632 100,305
Field EBITDA, excluding unusual charges (2) $192,649 $169,327
(1) Certain previously reported financial information for 2002 has been
reclassified to conform to the current presentation. Interest income of $67
for the first three months of 2002 has been reclassified from revenue to
interest expense, net and $13,633 extraordinary loss on early
extinguishment of debt has been reclassified to other income (expense).
(2) See summary of unusual charges on page 10.
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US ONCOLOGY, INC.
Condensed Consolidated Statement of Cash Flows
($ in thousands)
(unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
-------- ---------
Net cash used in operating activities $ (1,123) $ (20,066)
Cash flows from investing activities:
Acquisition of property and equipment (16,878) (14,713)
-------- ---------
Net cash used in investing activities (16,878) (14,713)
Cash flows from financing activities:
Proceeds from Credit Facility -- 24,500
Repayment of Credit Facility -- (24,500)
Proceeds from senior subordinated notes -- 175,000
Repayment of senior secured notes -- (100,000)
Repayment of other indebtedness (9,536) (9,010)
Purchase of treasury shares (3,482) --
Deferred financing costs -- (7,449)
Premium payment upon early extinguishment of debt -- (11,731)
Proceeds from exercise of stock options 339 678
-------- ---------
Net cash provided from (used in) financing activities (12,679) 47,488
-------- ---------
Increase (decrease) in cash and equivalents (30,680) 12,709
Cash and equivalents:
Beginning of period 105,564 20,017
-------- ---------
End of period $ 74,884 $ 32,726
======== =========
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US ONCOLOGY, INC.
Condensed Consolidated Balance Sheet
($ in thousands)
March 31, 2003 December 31, 2002
-------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and equivalents $ 74,884 $ 105,564
Accounts receivable 298,321 281,560
Other receivables 29,013 42,363
Prepaids and other current assets 29,075 20,134
Inventories 32,016 31,371
Due from affiliates 45,478 47,583
---------- ----------
Total current assets 508,787 528,575
Property and equipment, net 329,679 327,558
Service agreements, net 249,451 252,720
Due from affiliates, long-term 1,420 7,708
Deferred income taxes 41,492 43,214
Other assets 24,634 25,166
---------- ----------
Total assets $1,155,463 $1,184,941
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 13,394 $ 15,363
Accounts payable 134,006 193,544
Due to affiliates 51,812 32,877
Accrued compensation costs 20,248 25,417
Income taxes payable 28,611 20,441
Other accrued liabilities 40,390 36,379
---------- ----------
Total current liabilities 288,461 324,021
Long-term indebtedness 264,475 272,042
---------- ----------
Total liabilities 552,936 596,063
Minority interests 10,378 10,338
Stockholders' equity 592,149 578,540
---------- ----------
Total liabilities and stockholders' equity $1,155,463 $1,184,941
========== ==========
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US ONCOLOGY, INC.
Reconciliation of Selected Financial Data
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
-------- --------
Net Income / EPS before unusual charges (1)
Income before income taxes $ 26,210 $ 8,517
Unusual charges (1) -- 14,338
-------- --------
Income before income taxes and unusual charges 26,210 22,855
Tax rate 38.0% 38.0%
-------- --------
Net income before unusual charges $ 16,250 $ 14,170
======== ========
Weighted average shares outstanding - diluted 94,632 100,305
======== ========
EPS before unusual charges $ 0.17 $ 0.14
======== ========
EBITDA / Field EBITDA before unusual charges (1)
Income before income taxes and unusual charges $ 26,210 $ 22,855
Depreciation expense 14,410 12,413
Amortization expense 4,403 5,458
Interest expense 5,132 5,442
-------- --------
EBITDA before unusual charges 50,155 46,168
General & administrative expenses 15,576 13,562
Physician compensation 126,918 109,597
-------- --------
Field EBITDA before unusual charges $192,649 $169,327
======== ========
(1) Unusual charges for the three months ended March 31, 2002 include (i) $13.6
million loss on early extinguishment of debt, (ii) $0.3 million in costs
related to personnel reductions and (iii) $0.4 million in consulting costs
related to the introduction of the service line model.
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Financial Discussion
Introduction
The following discussion should be read in conjunction with the financial
statements, related notes, and other financial information appearing elsewhere
in this report. In addition, see "Forward-Looking Statements and Risk Factors"
included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC).
General
We provide comprehensive services to our network of affiliated practices, made
up of 847 oncologists and 38 radiologists in over 440 sites, with the mission of
expanding access to and improving the quality of cancer care in local
communities and advancing the delivery of care. The services we offer include:
.. Oncology Pharmaceutical Services. We purchase and manage specialty oncology
pharmaceuticals for our affiliated practices. We are responsible for
purchasing, delivering and managing nearly $1 billion of pharmaceuticals
annually through a network of 36 licensed pharmacies, 121 pharmacists and
239 pharmacy technicians.
.. Cancer Center Services. We develop and manage comprehensive,
community-based cancer centers which integrate a broad array of outpatient
cancer care services, from laboratory and diagnostic radiology capabilities
to chemotherapy and radiation therapy. We have developed and operate 76
integrated community-based cancer centers and manage over one million
square feet of medical office space. We have installed and manage 17
Positron Emission Tomography (PET) units, and 107 Linear Accelerators, as
well as 50 Computerized Axial Tomography (CT) units.
.. Cancer Research Services. We facilitate a broad range of cancer research
and development activities through our network. We contract with
pharmaceutical and biotechnology firms to provide a comprehensive range of
services relating to clinical trials. We currently manage 66 clinical
trials, supported by our network of over 500 participating physicians in
more than 170 research locations.
.. Other Practice Management Services. Under our physician practice management
arrangements, we act as the exclusive manager and administrator of all
day-to-day non-medical business functions connected with our affiliated
practices. As such, we are responsible for billing and collecting for
medical oncology services, physician recruiting, data management,
accounting, systems, and capital allocation to facilitate growth in
practice operations.
We offer these services through two business models, the Physician Practice
Management ("PPM") model, under which we provide all of the above services under
a single contract with a single fee based on overall practice performance, and
the service line model, under which practices contract with us to purchase only
certain of the above services, each under a separate contract, with a separate
fee methodology for each service.
Under the PPM model, we are reimbursed for all expenses and receive a fee
generally based on one of two models. Under some agreements, the fees are based
on practice earnings before taxes - known as the "earnings model." In others,
the fee consists of a fixed fee, a percentage of the practice's revenues (in
most states) and, if certain performance criteria are met, a performance fee -
known as the "net revenue model." Under the net revenue model, the practice is
entitled to retain a fixed portion of its net revenue before any service fee is
paid, provided that all operating expenses have been reimbursed. In certain
states our fee is a fixed fee.
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We believe that the earnings model properly aligns ours and our affiliated
practices' priorities with respect to appropriate business operations, cost
control and patient care, since practice profitability is shared
proportionately, while the net revenue model results in us disproportionately
bearing the impact of increases or declines in operating margins. For this
reason, we have, since 2001, been negotiating with practices under the net
revenue model to convert to the earnings model. Since the beginning of 2001 and
through March 31, 2003, eighteen practices accounting for 27.0% of our net
operating revenue in 2002 have converted to the earnings model. 67.9% of net
operating revenue in the first quarter of 2003 is attributable to practices on
the earnings model as of March 31, 2003. Excluding disaffiliated practices,
73.0% of the net operating revenue in the first quarter of 2003 is attributable
to practices that are either on the earnings model or the service line model as
of March 31, 2003.
In certain net revenue model markets where we have not been successful in
transitioning the practice away from a net revenue model agreement, we have
recognized charges for impairments of the service agreement as a result of our
projection of future results under those agreements, given declining performance
trends. We may in the future be required to recognize additional such
impairments in such under performing markets.
In September 2001, we announced an initiative to offer our core cancer-related
services nationwide to oncology practices that are outside of our current
network under what we call the "service line structure," which allows oncology
practices to obtain our services without entering into comprehensive service
agreements that would call for our involvement in all business aspects of their
day-to-day operations. Under the service line structure, we do not pay
consideration to physicians in new markets to acquire the nonmedical assets of
their practices. We believe that the service line structure, when compared to
the PPM model, allows us to expand more rapidly into new markets without
incurring capital investments in intangible assets, with a higher return on
assets and lower compliance and reimbursement risks. During 2002, we refined the
service line structure significantly and believe it will appeal to large numbers
of oncologists outside our network, since new physicians may affiliate with us
and utilize our core services while maintaining complete ownership and control
of their oncology practices' assets.
To implement this service line strategy, we have organized the company in three
divisions, and manage and operate our business under distinct service lines.
This report includes segment financial information, which reflects a division of
our existing PPM operations into the various service line offerings in the PPM
relationship. As we enter into new service line model agreements, we will report
revenue from those agreements in the appropriate segment.
Under the service line model, we are offering physician groups three service
lines, each with a separate agreement. Those agreements are structured as
follows:
Oncology Pharmaceutical Services. The oncology pharmaceutical services service
line combines all of our core competencies and service offerings related to
oncology drugs into a single, coordinated business division. The division
provides a comprehensive, integrated solution to all of the drug needs of an
oncology practice, from purchasing drugs and supplies to mixing and managing
drugs for infusion, to post-use evaluation and data aggregation. We offer a
variety of contract options under which practices may contract to purchase only
selected services under this service line, with an option to upgrade to a fully
integrated pharmacy solution. We also act as a group purchasing organization and
will receive a fee from pharmaceutical manufacturers for this service, as well
as for providing data and informational services to pharmaceutical companies.
Cancer Center Services. We agree to develop outpatient cancer centers under
development agreements and leases with physician practices. Under the leases, we
expect to receive our economic costs of the property plus an amount sufficient
to give us a predetermined rate of
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return on invested capital. In addition, we provide management services and
expect to receive an additional fee of 30% of net earnings from radiation and
diagnostic operations, subject to adjustments.
Cancer Research Services. We contract with pharmaceutical companies and others
needing research services on a per trial basis. Our contracts with physician
groups outline the terms of access to clinical trials and provide for research
related services. We will pay physicians for each trial based on economic
considerations relating to that trial.
We are continuing to operate under the PPM model, but in connection with our
introduction of the service line model we offered our PPM practices the
opportunity to terminate their existing service agreements, repurchase certain
of their operating assets, and enter into new service line model agreements. For
those practices that remain on the PPM model, we will continue to negotiate with
"net revenue model" practices to move to the "earnings model," and otherwise to
manage those practices pursuant to existing agreements.
During 2002, three of our PPM practices, comprising 34 physicians, converted to
the service line model, and during the first quarter of 2003, one additional PPM
practice, comprising eleven physicians, converted to the service line model. As
practices transition to this service line model or otherwise terminate PPM
agreements, we would expect the financial impact to be receipt of cash payments,
recognition of restructuring and reorganization costs (which are mainly non-cash
charges), and a reduction in our revenues and earnings related to those
practices. We currently expect one additional net revenue model PPM practice to
transition to the service line model, but anticipate that a large majority of
our PPM practices will remain on the PPM model for the foreseeable future.
In addition to converting four PPM practices to the service line model, through
March 31, 2003, we have entered into service line model agreements with seven
practices, comprising 33 physicians, in new markets, including thirteen
physicians during the first quarter of 2003. Effective April 2003, we have
entered into a service line model agreement with one additional practice
comprising four physicians in a new market. 2.6% of net operating revenue in the
first quarter of 2003 is attributable to practices on the service line model as
of March 31, 2003, an increase from 1.4% as of December 31, 2002.
We terminated service agreements with four oncology practices during 2002 and
with ten physicians from one oncology practice in the first quarter of 2003. For
purposes of the following discussion and analysis, same practice revenues and
expenses exclude the results of these disaffiliated practices.
Forward-looking Statements and Risk Factors
The following statements are or may constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995: (i) certain
statements, including possible or assumed future results of operations contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," (ii) any statements contained herein regarding the prospects for
any of our business or services and our development activities relating to the
service line model, cancer centers and PET installations; (iii) any statements
preceded by, followed by or that include the words "believes", "expects",
"anticipates", "intends", "estimates", "plans" or similar expressions; and (iv)
other statements contained herein regarding matters that are not historical
facts.
US Oncology's business and results of operations are subject to risks and
uncertainties, many of which are beyond the Company's ability to control or
predict. Because of these risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements,
and investors are cautioned not to place undue reliance on such
13
statements, which speak only as of the date thereof. Factors that could cause
actual results to differ materially include, but are not limited to,
reimbursement rates for pharmaceutical products, the success of the service line
model, transition of existing practices, our ability to attract and retain
additional physicians and practices under the service line model, expansion into
new markets, our ability to develop and complete cancer centers and PET
installations, our ability to maintain good relationships with our affiliated
practices, our ability to recover the cost of our investment in cancer centers,
government regulation and enforcement, reimbursement for healthcare services,
particularly including reimbursement for pharmaceuticals, changes in cancer
therapy or the manner in which cancer care is delivered, drug utilization, our
ability to create and maintain favorable relationships with pharmaceutical
companies and other suppliers, and the operations of the Company's affiliated
physician groups. Please refer to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 and subsequent filings with the SEC,
particularly the section entitled "Risk Factors," for a more detailed discussion
of certain of these risks and uncertainties.
The cautionary statements contained or referred to herein should be considered
in connection with any written or oral forward-looking statements that may be
issued by US Oncology or persons acting on its behalf. US Oncology does not
undertake any obligation to release any revisions to or to update publicly any
forward-looking statements to reflect events or circumstances after the date
thereof or to reflect the occurrence of unanticipated events.
Critical Accounting Policies and Estimates
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 management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate these estimates, including
those related to service agreements, accounts receivable, income taxes, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances. These estimates 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 from those estimates under different
assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
condensed financial statements. These critical accounting policies include our
policy of non-consolidation, revenue recognition (including calculation of
physician compensation), general estimates of accruals and intangible asset
amortization and impairment. Please refer to the "Critical Accounting Policies"
section of our Annual Report on Form 10-K for the year ended December 31, 2002
for a more detailed discussion of such policies.
Discussion of Non-GAAP Information
In this report, we use certain measurements of our performance that are not
calculated in accordance with Generally Accepted Accounting Principles ("GAAP").
These non-GAAP measures are derived from relevant items in our GAAP financials.
A reconciliation of the non-GAAP measure to our income statement is included in
this report.
Management believes that the non-GAAP measures we use are useful to investors,
since they can provide investors with additional information that is not
directly available in a GAAP presentation. In all events, these non-GAAP
measures are not intended to be a substitute for GAAP measures, and investors
are advised to review such non-GAAP measures in conjunction
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with GAAP information provided by us. The following is a discussion of these
non-GAAP measures.
"Net operating revenue" is our revenue, plus amounts retained by our affiliated
physicians. We believe net operating revenue is useful to investors as an
indicator of the overall performance of our network, since it represents the
total revenue of all of our PPM practices, without taking into account what
portion of that is retained as physician compensation. In addition, by comparing
trends in net operating revenue to trends in our revenue, investors are able to
assess the impact of trends in physician compensation on our overall
performance.
"Net patient revenue" is the net revenue of our affiliated practices under the
PPM model for services rendered to patients by those affiliated practices. Net
patient revenue will also include the net revenue relating to radiation
operations of practices that enter into our cancer center services agreement.
Net patient revenue is the largest component (94.3% in the first quarter of
2003) of net operating revenue. It is a useful measure because it gives
investors a sense of the overall operations of our PPM network and other
business lines in which our revenue is derived from payments for medical
services to patients and in which we are responsible for billing and collecting
such amounts.
"EBITDA" is earnings before taxes, interest, depreciation and amortization,
impairment, restructuring and other charges and loss on early extinguishment of
debt. We believe EBITDA is a commonly applied measurement of financial
performance. We believe EBITDA is useful to investors because it gives a measure
of operational performance without taking into account items that we do not
believe relate directly to operations - such as depreciation and amortization,
which are typically based on predetermined asset lives, and thus not indicative
of operational performance, or that are subject to variations that are not
caused by operational performance - such as tax rates or interest rates. EBITDA
is a key tool used by management in assessing our business performance both as a
whole and with respect to individual sites or product lines.
"Field EBITDA" is EBITDA plus physician compensation and corporate general and
administrative expenses. Like net operating revenue, Field EBITDA provides an
indication of our overall network operational performance, without taking into
account the effect of physician compensation and corporate general and
administrative expense.
We exclude unusual charges from EBITDA and Field EBITDA because we view these
charges as extraneous to our core operations on a going forward basis. The
unusual charges relate principally to our transitional activity and strategic
repositioning, and are discussed in more detail in our annual report on Form
10-K for 2002 under the caption "Loss on Early Extinguishment of Debt."
Results of Operations
The Company was affiliated (including under the service line model) with the
following number of physicians by specialty:
March 31,
-----------
2003 2002
---- ----
Medical oncologists....................................... 693 671
Radiation oncologists..................................... 115 127
Other oncologists......................................... 39 30
--- ---
Total oncologists...................................... 847 828
Diagnostic radiologists................................... 38 39
--- ---
Total physicians....................................... 885 867
=== ===
15
The Company was affiliated with the following number of physicians by business
model:
March 31,
-----------
2003 2002
---- ----
PPM ............................................................. 817 867
Service line..................................................... 68 --
--- ---
885 867
=== ===
The following table sets forth the sources for growth in the number of
physicians affiliated with the Company:
March 31,
------------
2003 2002
---- ----
Affiliated physicians, beginning of period....................... 884 868
Physician practice affiliations.................................. 13 --
Recruited physicians............................................. 9 7
Physician practice separations................................... (10) --
Retiring/Other................................................... (11) (8)
---- ----
Affiliated physicians, end of period............................. 885 867
==== ====
The following table sets forth the number of cancer centers and PET units
managed by the Company:
March 31,
-----------
2003 2002
---- ----
Cancer centers.................................................... 76 77
PET units......................................................... 17 13
The following table sets forth the key operating statistics as a measure of the
volume of services provided by our PPM practices:
Three Months Ended
March 31,
------------------
2003 2002
-------- -------
Medical oncology visits................................... 585,686 617,213
Radiation treatments...................................... 165,542 163,011
PET scans................................................. 4,154 2,924
New patients enrolled in research studies................. 874 848
The following table sets forth the percentages of revenue represented by certain
items reflected in the Company's Condensed Consolidated Statement of Operations
and Comprehensive Income. The following information should be read in
conjunction with our unaudited condensed consolidated financial statements and
notes thereto included elsewhere herein.
16
Three Months Ended
March 31,
------------------
2003 2002
----- -----
Revenue.................................................... 100.0% 100.0%
Operating expenses:
Pharmaceuticals and supplies............................ 55.1 50.5
Field compensation and benefits......................... 19.7 22.0
Other field costs....................................... 10.5 12.2
General and administrative.............................. 3.5 3.5
Restructuring charge.................................... -- 0.2
Depreciation and amortization........................... 4.2 4.6
----- -----
Income from operations..................................... 7.0 7.0
Interest expense, net...................................... (1.2) (1.4)
Loss on early extinguishment of debt....................... -- (3.5)
----- -----
Income before income taxes................................. 5.8 2.1
Income tax provision....................................... (2.2) (0.8)
----- -----
Net income................................................. 3.6% 1.3%
===== =====
Net Operating Revenue.
Net operating revenue includes two components - net patient revenue and our
other revenue:
.. Net patient revenue. We report net patient revenue for those business lines
under which our revenue is derived from payments for medical services to
patients and we are responsible for billing those patients. Currently, net
patient revenue consists of patient revenue of affiliated practices under
the PPM model. Net patient revenue also will include revenues of practices
that enter into service line agreements for Cancer Center Services.
.. Service line revenue. Revenues from pharmaceutical services rendered by us
under our Oncology Pharmaceutical Services service line agreement
.. Other revenue. Other revenue includes revenue from pharmaceutical research,
informational services and activities as a group purchasing organization.
The following table shows the components of our net operating revenue for the
three months ended March 31, 2003 and 2002 (in thousands):
Three Months Ended
March 31,
-------------------
2003 2002
-------- --------
Net patient revenue....................................... $541,142 $483,190
Other revenue............................................. 32,986 17,692
-------- --------
Net operating revenue..................................... $574,128 $500,882
======== ========
Net patient revenue is recorded when services are rendered based on established
or negotiated charges reduced by contractual adjustments and allowances for
doubtful accounts. Differences between estimated contractual adjustments and
final settlements are reported in the period when final settlements are
determined. Net operating revenue is reduced by amounts retained by the
practices under our services agreement to arrive at the amount we report as
revenue in our financial statements.
17
Net operating revenue increased from $500.9 million in the first quarter of 2002
to $574.1 million in the first quarter of 2003, an increase of $73.2 million, or
14.6%. Same practice net operating revenue (which excludes the results of
practices with which we disaffiliated since January 1, 2002) increased from
$479.4 million for the first quarter of 2002 to $571.9 million for the quarter
of 2003, an increase of $92.5 million, or 19.3%. Revenue growth was attributable
to increases in pharmaceutical revenue and, to a lesser extent, diagnostic
revenue. Other revenue increased from $17.7 million in the first quarter of 2002
to $33.0 million in the first quarter of 2003, an increase of $15.3 million or
86.4%. This increase was attributable to $16.4 million of operating revenue
under new service line agreements, as well as an increase in group purchasing
organization revenues, partially offset by a decline in research revenues.
The following table shows our net operating revenue by segment for the three
months ended March 31, 2003 and 2002 (in thousands):
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------ ------------------
Oncology pharmaceutical services..... $262,788 $205,632
Other practice management services... 217,880 201,234
-------- --------
Medical oncology ................. 480,668 406,866
Cancer center services............... 79,292 77,735
Other segment operating revenue...... 14,168 16,281
-------- --------
$574,128 $500,882
======== ========
Our medical oncology net operating revenue is comprised of (i) our oncology
pharmaceutical services revenue, which represents the revenue attributable to
our providing drugs to medical oncologists under either the PPM model or the
service line model, plus (ii) our other practice management services revenue,
since this represents our PPM model revenue derived from providing other
services to medical oncologists. A portion of the other practice management
services revenue is attributable to revenues of affiliated practices derived
from pharmaceuticals. Revenue attributable to services provided in connection
with radiation oncology and diagnostic radiology under either the PPM model or
the service line model appears as cancer center services revenue.
Medical oncology net operating revenue increased from $406.9 million in the
first quarter of 2002 to $480.7 million for the first quarter of 2003, an
increase of $73.7 million or 18.1%. The growth in medical oncology revenue is
primarily attributable to more expensive chemotherapy agents and additional
supportive care drugs, rather than increased patient volume. During the first
quarter of 2003, medical oncology visits decreased by 5.1% compared to the same
prior year period as a result of PPM practice disaffiliations and conversions to
the service line model since service line model visits are not included in our
patient volume statistics. Same practice medical oncology visits for the first
quarter of 2003 increased 2.6% over the same prior year period. Also
contributing to the increase in medical oncology revenue is the addition of our
new service line agreements of $16.4 million and increased group purchasing
organization revenues of $2.3 million.
Cancer Center Services net operating revenue increased from $77.7 million in the
first quarter of 2002 to $79.3 million for the first quarter of 2003, an
increase of $1.6 million, or 2.0%. This increase is attributable to increased
radiology revenue from PET services partially offset by our disaffiliation with
a radiation oncology facility during the third quarter of 2002 and our sale of
technical radiology assets during the second quarter of 2002. Diagnostic
revenues increased over the prior year period as a result of an increase in PET
services. PET scans increased from 2,924 in the first quarter of 2002 to 4,154
in the first quarter of 2003, an increase of 42.1%. The
18
increase in the number of PET scans is attributable to our opening four PET
units since March 31, 2002, as well as growth of 21.7% in the number of
treatments on the thirteen PET units that were operational during the first
quarter of 2002. Radiation treatments increased from 163,011 in the first
quarter of 2002 to 165,542 in the first quarter of 2003, or 1.6%. Since March
31, 2002, we have disaffiliated with three radiation oncology practices with
operations in five cancer centers and closed two other cancer centers. In
addition, we have opened five cancer centers since March 31, 2002. Same practice
radiation treatments increased from 155,819 in the first quarter of 2002 to
160,909 in the first quarter of 2003, or 3.3%. We currently have nine cancer
centers and six PET installations in various stages of development.
Other segment net operating revenue decreased from $16.3 million in the first
quarter of 2002 to $14.2 million in the first quarter of 2003, a decrease of
$2.1 million, or 12.8%. The decrease is primarily attributable to a decrease in
research revenues.
95.2% of our net operating revenue for the first quarter of 2003 was derived
from practices under the PPM model as of March 31, 2003. The following table
shows the amount of operating revenue we derived under each type of service
agreement at the end of the respective period for the three months ended March
31, 2003 and 2002 (in thousands):
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------ ------------------
Revenue % Revenue %
-------- ------- -------- -------
Earnings model........................ $389,630 67.9% $312,198 62.3%
Net revenue model .................... 156,864 27.3% 174,915 34.9%
Service line model.................... 16,430 2.9% -- 0.0%
Other................................. 11,204 1.9% 13,769 2.8%
-------- ----- -------- -----
$574,128 100.0% $500,882 100.0%
======== ===== ======== =====
During the first quarter of 2003, one net revenue model practice accounting for
0.8% of our net operating revenue for 2002 converted to the earnings model.
Since the beginning of 2001 and through March 31, 2003, eighteen practices
accounting for 27.0% of net operating revenue in 2002 have converted from the
net revenue model to the earnings model. As of March 31, 2003, twenty-six
service agreements were on the earnings model and twelve service agreements were
on the net revenue model. In addition during the first quarter of 2003, we
transitioned one PPM practice from the revenue model to the service line model
and commenced operations at three new practices under the service line model.
Also during the first quarter of 2003, we disaffiliated with ten physicians who
practiced at the net revenue model practice that converted to the earnings
model.
Revenue. Our revenue is net operating revenue, less the amount of net operating
revenue retained by our affiliated physician practices under PPM service
agreements. The following presents the amounts included in determination of our
revenue (in thousands):
Three Months Ended
March 31,
---------------------
2003 2002
--------- ---------
Net operating revenue.................................. $ 574,128 $ 500,882
Amounts retained by the practices...................... (126,918) (109,597)
--------- ---------
Revenue............................................. $ 447,210 $ 391,285
========= =========
19
Amounts retained by practices increased from $109.6 million in the first quarter
of 2002 to $126.9 million in the first quarter of 2003, an increase of $17.3
million, or 15.8%. Such increase in amounts retained by practices is directly
attributable to the growth in net patient revenue combined with the increase in
profitability of affiliated practices. Amounts retained by practices as a
percentage of net operating revenue increased from 21.9% to 22.1% for the first
quarters of 2002 and 2003, respectively.
Revenue increased from $391.3 million for the first quarter of 2002 to $447.2
million for the first quarter of 2003, an increase of $55.9 million, or 14.3%.
Revenue growth was caused by increases in revenues attributable to
pharmaceuticals, and to a lesser extent, an increase in other revenues.
The following table shows our revenue by segment for the three months ended
March 31, 2003 and 2002 (in thousands):
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------ ------------------
Oncology pharmaceutical management services ... $262,534 $206,253
Other practice management services ............ 117,290 116,931
-------- --------
Medical oncology ........................... 379,824 323,184
Cancer center services ........................ 54,305 53,058
Other segment revenue ......................... 13,081 15,043
-------- --------
$447,210 $391,285
======== ========
Medicare and Medicaid are the practices' largest payors. During the first three
months of 2003 approximately 43% of the PPM practices' net patient revenue was
derived from Medicare and Medicaid payments, and 42% was derived from those
sources in the comparable period last year. This percentage varies among
practices. No other single payor accounted for more than 10% of our revenues in
the first three months of 2003 or 2002.
Pharmaceuticals and Supplies. Pharmaceuticals and supplies expense, which
includes drugs, medications and other supplies used by the practices, increased
from $197.6 million in the first quarter of 2002 to $246.6 million in the same
period of 2003, an increase of $49.0 million, or 24.8%. As a percentage of
revenue, pharmaceuticals and supplies increased from 50.5% in the first quarter
of 2002 to 55.1% in the same period in 2003. The increase was attributable to
more expensive drugs and to a lesser extent the conversion of four affiliated
practices to, and the addition of seven practices in new markets under, the
service line model since March 31, 2002.
We expect that third-party payors will continue to negotiate or mandate the
reimbursement rates for pharmaceuticals and supplies, with the goal of lowering
reimbursement rates, and that such lower reimbursement rates together with
shifts in revenue mix may continue to adversely impact our margins with respect
to such items. In both regulatory and litigation activity, federal and state
governments are focusing on decreasing the amount governmental programs pay for
drugs. Current governmental focus on average wholesale price (AWP) as a basis
for reimbursement could also lead to a wide-ranging reduction in the
reimbursement for pharmaceuticals by both governmental and commercial payors.
Commercial payors also continue to try to implement both voluntary and mandatory
programs in which the practice must obtain drugs they administer to patients
from a third party and that third party, rather than the practice, receives
payment for the drugs directly from the payor, and to otherwise reduce drug
expenditures. We continue to believe that single-source drugs, possibly
including oral drugs, will continue to be introduced at a rapid pace, thus
further negatively impacting margins. In response to this decline in margin
relating to certain pharmaceutical agents, we have adopted
20
several strategies. The successful conversion of net revenue model practices to
the earnings model will help reduce the impact of the increasing cost of
pharmaceuticals and supplies and the effect of reduced levels of reimbursement.
Likewise, the implementation of the service line structure should have a similar
effect, since our revenues and earnings are not directly dependent on
pharmaceutical margins of practices under that model. In addition, we have
numerous efforts under way to reduce the cost of pharmaceuticals by negotiating
discounts for volume purchases and by streamlining processes for efficient
ordering and inventory control and are assessing other strategies to address
this trend. We also continue to seek to expand into areas that are less affected
by lower pharmaceutical margins, such as radiation oncology and diagnostic
radiology. However, as long as pharmaceuticals continue to become a larger part
of our revenue mix as a result of changing treatment patterns (rather than
growth of our business), we believe that our overall margins could continue to
be adversely impacted. In addition, the pharmacy service line is a lower-margin
business than our PPM model. Although we believe it reduces risk in certain
respects, to the extent we add additional service line practices under the
pharmacy service line, we would expect our overall margin percentages to be
adversely impacted.
Field Compensation and Benefits. Field compensation and benefits, which includes
salaries and wages of our field-level employees and the practices' employees
(other than physicians), increased from $86.1 million in the first quarter of
2002 to $87.9 million in the first quarter of 2003, an increase of $1.8 million,
or 2.1%. As a percentage of revenue, field compensation and benefits decreased
from 22.0% in the first quarter of 2002 to 19.7% in the first quarter of 2003.
The decrease as a percentage of revenue is attributable to pharmaceutical
revenues increasing at a more rapid rate than compensation and benefits. Same
practice field compensation and benefits increased 7.9% in the first quarter of
2003 as compared to the same prior year period.
Other Field Costs. Other field costs, which consist of rent, utilities, repairs
and maintenance, insurance and other direct field costs, decreased from $47.9
million in the first quarter of 2002 to $47.0 million in the first quarter of
2003, a decrease of $0.9 million, or 1.9%. As a percentage of revenue, other
field costs decreased from 12.2% in the first quarter of 2002 to 10.5% in the
first quarter of 2003. The decrease for the first quarter is attributable to the
closure of two cancer centers and the sale of five cancer centers resulting from
the disaffiliation of two radiation oncology practices since March 31, 2002.
Same practice other field costs increased 3.3% in the first quarter of 2003 as
compared to the same prior year period.
General and Administrative. General and administrative expenses increased from
$13.6 million in the first quarter of 2002 to $15.6 million in the first quarter
of 2003, an increase of $2.0 million, or 14.9%. Throughout 2002, several new
personnel positions had been created to help manage and support our introduction
of the service line model. As a percentage of revenue, general and
administrative costs remained steady at 3.5% in the first quarters of both 2002
and 2003.
Overall, we experienced a decline in operating margins with earnings before
taxes, interest, depreciation and amortization, impairment, restructuring and
other charges and extraordinary loss on early extinguishment of debt (EBITDA),
as a percentage of revenue, decreasing from 11.8% in the first quarter of 2002
to 11.2% in the first quarter of 2003.
The following is the EBITDA of our operations by operating segment for the three
months ended March 31, 2003 and 2002 (in thousands):
21
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------ ------------------
Oncology pharmaceutical services ..... $ 25,761 $ 18,274
Other practice management services ... 21,355 23,420
-------- --------
Medical oncology .................. 47,116 41,694
Cancer center services ............... 17,359 15,983
Other segment EBITDA ................. 1,256 2,053
-------- --------
65,731 59,730
General and administrative expenses .. (15,576) (13,562)
-------- --------
$ 50,155 $ 46,168
======== ========
The decrease in EBITDA for the other practice management services is
attributable to our disaffiliation with five oncology practices since March 31,
2002.
Medical oncology EBITDA margin deceased from 10.2% in the first quarter of 2002
to 9.8% in the first quarter of 2003. This decrease is attributable to an
increase in lower margin drugs.
Cancer Center Services EBITDA margin increased from 20.6% in the first quarter
of 2002 to 21.9% in the first quarter of 2003. This increase is attributable to
exiting from unprofitable sites, investment in technology, such as intensity
modulated radiation therapy, and growth in same practice treatments.
Interest. Net interest expense decreased from $5.4 million in the first quarter
of 2002 to $5.1 million in the first quarter of 2003, a decrease of $0.3
million, or 5.3%. As a percentage of revenue, net interest expense decreased
from 1.4% for the first quarter of 2002 to 1.2% for the first quarter of 2003.
Such decreases are due to lower borrowing levels during the first quarter of
2003 and to a lesser extent, an increase in interest income resulting from
improved operating cash flows since March 31, 2002. On February 1, 2002, we
refinanced our indebtedness by issuing $175 million in 9.625% Senior
Subordinated Notes due 2012 and repaying in full our existing senior secured
notes and terminating our existing credit facility. Our previously existing $100
million senior secured notes bore interest at a fixed rate of 8.42% and would
have matured as to $20 million in each of 2002-2006. Lower levels of debt during
the first three months of 2003, as compared to the same period in 2002,
partially offset by the increased rate of interest contributed to the decrease
of interest expense.
Loss on Early Extinguishment of Debt. During the first quarter of 2002, we
recorded a loss of $13.6 million, before income taxes of $5.2 million, in
connection with the early extinguishment of our $100 million Senior Secured
Notes due 2006 and our existing credit facility. The loss consisted of payment
of a prepayment penalty of $11.7 million on the Senior Secured Notes and a
write-off of unamortized deferred financing costs of $1.9 million related to the
terminated debt agreements.
The Company adopted Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections" (SFAS 145) effective January 1, 2003. Among other
matters, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. In
connection with its adoption, gains and losses from extinguishments of debt are
no longer classified as extraordinary items in the Company's statement of
operations. In addition prior period financial statements were reclassified to
reflect the new standard. As such, the
22
Company reclassified the $13,633 extraordinary loss on early extinguishment of
debt recorded in the three months ended March 31, 2002 as a separate component
of interest expense, net in its condensed consolidated statement of operations.
Income Taxes. We recognized an effective tax rate of 38.0% for the first quarter
of 2003 and for the same prior year period.
In September 2001, we announced in a press release that our introduction of the
service line structure and transition away from the net revenue model, and the
related realignment of our business would cause us to record unusual charges for
write-offs of service agreements and other assets and other charges. These
charges include the impairment, restructuring and other charges and loss on
early extinguishment of debt we have recorded during 2002. Throughout 2002, we
had recorded $10.3 million in unusual cash charges and $153.4 million in unusual
non-cash charges in connection with our transition process. We have not
recognized any unusual charges in the first quarter of 2003.
The principal category of those prior charges related to the impairment of
service agreements. Service agreements were impaired either because of a
termination of the agreement (both in disaffiliations and conversions to the
service line) or because we determined that the agreement was impaired based on
expected future cash flow under the agreement. The latter category of impairment
related exclusively to net revenue model practices. Currently, our balance sheet
reflects $23.5 million in service agreements under the net revenue model and
$226.0 million under the earnings model. Based upon the potential for continued
declining performance, we would anticipate that the net revenue model
agreements, if not converted to the earnings model, could become impaired in the
future. At present, we would not expect earnings model agreements to become
impaired, except in the case of disaffiliations or service line conversions.
Accordingly, management currently expects that the total amount of charges in
connection with our transition is unlikely to exceed $200 million, absent
additional disaffiliations or conversions.
Net Income. Net income increased from $5.3 million, or $0.05 per diluted share,
in the first quarter of 2002 to $16.3 million, or $0.17 per share, in the first
quarter 2003, an increase of $11.0 million or 207.7%. Net income as a percentage
of revenue increased from 1.3% in the first quarter of 2002 to 3.6% in the first
quarter of 2003. Included in net income for the first quarter of 2002 are
restructuring charges of $0.7 million and a loss on early extinguishment of debt
of $13.6 million. Excluding these charges, net income for the first quarter of
2002 would have been $14.2 million, which represents earnings per share of
$0.14.
Liquidity and Capital Resources
As of March 31, 2003, we had net working capital of $220.3 million, including
cash and cash equivalents of $74.9 million. We had current liabilities of $288.5
million, including $13.4 million in current maturities of long-term debt, and
$264.5 million of long-term indebtedness. During the first quarter of 2003, we
used $1.1 million in net operating cash flow, invested $16.9 million, and used
cash from financing activities in the amount of $12.7 million. As of May 6,
2003, we had cash and cash equivalents of $116.2 million.
Cash Flows From Operating Activities
During the first quarter of 2003, we used $1.1 million in cash flows from
operating activities as compared to $20.1 million in the comparable prior year
period. The decrease in cash flow is primarily attributable to payments of $33.1
million for advance purchases of certain pharmaceutical products during the
first quarter of 2003 in order to obtain favorable pricing and qualify for
certain rebates.
23
Cash Flows from Investing Activities
During the first quarter of 2003 and 2002, we expended $16.9 million and $14.7
million in capital expenditures, including $12.8 million and $7.4 million on the
development and construction of cancer centers, respectively. Maintenance
capital expenditures were $3.8 million and $6.9 million in the first quarters of
2003 and 2002, respectively. For all of 2003, we anticipate expending a total of
approximately $30-$35 million on maintenance capital expenditures and
approximately $55-$60 million on development of new cancer centers and PET
installations.
Cash Flows from Financing Activities
During the first quarter of 2003, we used cash from financing activities of
$12.7 million as compared to cash provided of $47.5 million in the quarter of
2002. Such decrease in cash flow is primarily attributed to the proceeds in 2002
from the issuance of our Senior Subordinated Notes due 2012, net of the cash
payments for the retirement of our previously existing indebtedness, including a
prepayment premium paid as a result of early extinguishment of our Senior
Secured Notes due 2006. In addition, we expended $3.5 million to repurchase
399,000 shares of our Common Stock during the first quarter of 2003.
On February 1, 2002, we entered into a five-year $100 million syndicated
revolving credit facility and terminated our existing syndicated revolving
credit facility. Proceeds under that credit facility may be used to finance the
development of cancer centers and new PET facilities, to provide working capital
or for other general business purposes. No amounts have been borrowed under that
facility. Our credit facility bears interest at a variable rate that floats with
a referenced interest rate. Therefore, to the extent we have amounts outstanding
under the credit facility in the future, we would be exposed to interest rate
risk under our credit facility.
On February 1, 2002, we issued $175 million in 9.625% Senior Subordinated Notes
due 2012 to various institutional investors in a private offering under Rule
144A under the Securities Act of 1933. The notes were subsequently exchanged for
substantially identical notes in an offering registered under the Securities Act
of 1933. The notes are unsecured, bear interest at 9.625% annually and mature in
February 2012. Payments under those notes are subordinated in substantially all
respects to payments under our new credit facility and certain other debt.
We entered into a leasing facility in December 1997, under which a lessor entity
acquired properties and paid for construction of certain of our cancer centers
and leased them to us. It matures in June 2004. As of March 31, 2003, we had
$70.2 million outstanding under the facility and no further amounts are
available under that facility. The annual rent under the lease is approximately
$3.2 million, based on interest rates in effect as of March 31, 2003.
Since December 31, 2002, we guarantee 100% of the residual value of the
properties in the lease and therefore, include the $70.2 million outstanding
under the lease as indebtedness on our financial statements. We also include
assets under the lease as assets on our balance sheet based upon our
determination of fair values of those properties at December 31, 2002 and
recognized an impairment charge of $20.0 million. During the first quarter we
began to recognize a depreciation charge in respect of the assets in the leasing
facility amounting to $0.9 million. We did not recognize depreciation expense
for those off-balance-sheet assets prior to December 31, 2002.
The lease is renewable in one-year increments with the consent of the financial
institutions that are parties thereto. If the lease is not renewed at maturity
or otherwise terminates, we must either purchase the properties under the lease
for the total amount outstanding or market the properties to third parties.
Defaults under the lease, which include cross-defaults to other material debt,
could result in such a termination, and require us to purchase or remarket the
properties. If we sell the properties to third parties, we have guaranteed a
residual value of 100% of the total amount outstanding for the properties. The
guarantees are collateralized by substantially all of our assets.
24
Because the synthetic lease payment floats with a referenced interest rate, we
are also exposed to interest rate risk under the synthetic lease. A 1% increase
in the referenced rate would result in an increase in lease payments of $0.7
million annually.
Borrowings under the revolving credit facility and advances under the synthetic
leasing facility bear interest at a rate equal to a rate based on prime rate or
the London Interbank Offered Rate, based on a defined formula. The credit
facility, synthetic leasing facility and Senior Subordinated Notes contain
affirmative and negative covenants, including the maintenance of certain
financial ratios, restrictions on sales, leases or other dispositions of
property, restrictions on other indebtedness and prohibitions on the payment of
dividends. Events of default under our credit facility, synthetic leasing
facility and Senior Subordinated Notes include cross-defaults to all material
indebtedness, including each of those financings. Substantially all of our
assets, including certain real property, are pledged as collateral under the
credit facility and the guarantee obligations of our synthetic leasing facility.
We are currently in compliance with covenants under our synthetic leasing
facility, revolving credit facility and Senior Subordinated Notes, with no
borrowings currently outstanding under the revolving credit facility. We have
relied primarily on cash flows from our operations to fund working capital and
capital expenditures for our fixed assets.
We currently expect that our principal use of funds in the near future will be
in connection with the purchase of medical equipment, investment in information
systems and the acquisition or lease of real estate for the development of
integrated cancer centers and PET units, possible repurchases of the Company's
common stock, as well as implementation of the service line structure, with less
emphasis than in past years on transactions with medical oncology practices. We
believe that cash generated from operations will be sufficient to satisfy our
capital needs in the next several years; however, it is possible that our
capital needs will exceed the cash generated from operations. Thus, we may incur
additional debt or issue additional debt or equity securities from time to time.
Capital available for health care companies, whether raised through the issuance
of debt or equity securities, is quite limited. As a result, we may be unable to
obtain sufficient financing on terms satisfactory to management or at all.
This news release contains forward-looking statements, including statements that
include the words "believes," "expects," "anticipates," "estimates," "intends,"
"plans," "projects," or similar expressions and statements regarding our
prospects. All statements concerning expected financial results, business
development activities, the benefits of the service line model and all other
statements other than statements of historical fact included in this news
release are forward-looking statements. Although the company believes that the
expectations reflected in such statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Matters that
could further impact future results and financial condition include
reimbursement rates, including in particular, reimbursement for pharmaceutical
products, the success of the service line model, transition of existing
practices, our ability to maintain good relationships with existing practices,
expansion into new markets and development of existing markets, our ability to
complete cancer centers and PET facilities currently in development, our ability
to recover the costs of our investments in cancer centers, our ability to
complete negotiations and enter into agreements with practices currently
negotiating with us, reimbursement for health-care services, continued efforts
by payors to lower their costs, government regulation and enforcement, continued
relationships with pharmaceutical companies and other vendors, changes in cancer
therapy or the manner in which care is delivered, drug utilization, increases in
the cost of providing cancer treatment services and the operations of the
company's affiliated physician practices. Please refer to the company's filings
with the Securities and Exchange Commission, including its Annual Report on
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Form 10-K for 2002 and subsequent SEC filings, for a more extensive discussion
of factors that could cause actual results to differ materially from the
company's expectations.
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