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US ONCOLOGY, INC.
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US Oncology, Inc. News Release
16825 Northchase Drive, Suite 1300
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 2004
HOUSTON, April 29, 2004 - US Oncology, Inc. (Nasdaq: USON) today reported
results for the 2004 first quarter.
The company recorded year-over-year increases in net operating revenue,
earnings per share and net income for the first quarter 2004. The table below
provides a review of first quarter results, along with applicable comparisons:
($ in millions, except per share amounts)
Q1 2004 Q1 2003 % Change Q4 2003 % Change
------- ------- -------- ------- --------
Net Operating Revenue/(1)/ $662.6 $ 574.1 15.4% $ 657.3 0.8%
Revenue 525.0 447.2 17.4% 518.0 1.3%
Net income 20.1 16.3 23.8% 18.9 6.5%
EPS 0.23 0.17 30.8% 0.21 5.6%
EBITDA/(2)/ $ 56.1 $ 50.2 11.8% $ 54.7 2.4%
- --------------------------
/(1)/ See Key Operating Statistics for calculations.
/(2)/ EBITDA excludes a net gain of $0.1 million for the fourth quarter of 2003.
1
US Oncology highlights for the first quarter of 2004 are detailed
below:
. US Oncology's EBITDA/(3)/ for the first quarter was $56.1 million,
compared to $54.7 million for the fourth quarter of 2003 and $50.2
million in the first quarter of 2003.
. The company's percentage of Field EBITDA/(3)/ for the first quarter was
33 percent, compared to its percentage of Field EBITDA of 34 percent
for both the fourth quarter and first quarter of 2003.
. The company's affiliated practices' accounts receivable days
outstanding were 47 at the end of the first quarter, compared to 46 at
the end of 2003 and 50 at the end of the first quarter of 2003.
. 16.3 percent of US Oncology's first quarter revenue was generated by
practices on the net revenue model as of the end of the first quarter.
. The company generated operating cash flow for the first quarter of 2004
of $43.5 million compared to $45.5 million for the fourth quarter of
2003. During the first quarter of 2003, operating cash flow was a net
use of $1.1 million due to advance purchases of pharmaceuticals during
the first quarter of 2003. As of April 26, 2004, US Oncology had
approximately $183.0 million in cash and cash equivalents.
. The company reduced its corporate general and administrative expenses
to $12.7 million for the first quarter of 2004, a decrease of 18.6
percent from the first quarter of 2003, as a result of a reduction in
force during 2003 and other cost reduction measures.
Medical Oncology Services
First quarter medical oncology services net operating revenue was
$562.7 million, a year-over-year increase of 17.1 percent and a decrease of 0.6
percent from the fourth quarter of 2003. The company's medical oncology services
revenue during the first quarter of 2004 was $450.9 million, a year-over-year
increase of 18.7 percent and an increase of 0.8 percent from the fourth quarter
of 2003. Same practice medical oncology visits during the first quarter of 2004
increased by 0.6 percent over the same period in the prior year and decreased by
4.3 percent from the fourth quarter of 2003. The year-to-year increase is
credited to growth in pharmaceutical revenue and the addition of medical
oncologists, partially offset by the reduction in medical oncology visits from
the fourth quarter.
- ---------------------
/(3)/ See Reconciliation of Selected Financial Data for calculations.
2
Pharmaceutical expenses as a percentage of net operating revenue
increased to 46.7 percent for the first quarter of 2004, up from 43.0 percent
for the first quarter of 2003. This increase is mainly attributable to
pharmaceutical and service line revenue increasing as a percentage of total
revenue. Medical oncology services income from operations during the first
quarter of 2004 was $47.2 million, a decrease of 11.4 percent from the fourth
quarter of 2003 and 0.2 percent increase over the first quarter of 2003. The
decrease in income from operations compared to the fourth quarter of 2003 is
attributable to the decrease in visits, as well as an increase in pharmaceutical
costs as a result of the recognition by the company in the fourth quarter of
certain performance based rebates.
During the first quarter of 2004, the company affiliated with two
practices comprising 3 physicians under its pharmaceutical service line model.
In addition, since March 31, 2004, the company has affiliated with three
practices comprising 8 physicians under the pharmaceutical service line model.
Included in these affiliations during 2004 are the company's first market
entries in Montana, Tennessee and Idaho.
Cancer Center Services
The Cancer Center Services segment of the company experienced growth in
the first quarter. Net operating revenue for the first quarter of 2004 was $87.8
million, an increase of 10.8 percent over the first quarter of 2003 and 16.2
percent over the fourth quarter of 2003. Company revenue in the segment for the
first quarter of 2004 was $61.0 million, an increase of 12.4 percent over the
first quarter of 2003 and 11.2 percent over the fourth quarter of 2003. These
increases were due to four additional cancer centers in operation at the end of
the first quarter of 2003, as well as expansion of patient-care options, such as
intensity modulated radiation therapy (IMRT), positron emission tomography (PET)
and computerized tomography (CT), at many existing sites.
For the first quarter of 2004, cancer center services segment EBITDA
was $21.1 million, an increase of 22.0 percent over the first quarter of 2003
and 32.2 percent over the fourth quarter of 2003. Income from operations in the
segment increased to $13.3 million for the first quarter of 2004, compared to
$11.5 million for the first quarter of 2003 and $8.5 million for the fourth
quarter of 2003.
The increases in EBITDA and net income are attributable to increased
revenues, exiting certain markets and increases in same facility treatments. For
the first quarter of 2004, radiation treatments per day increased to 2,571 from
the fourth quarter of 2003 treatments per day of 2,443, an increase of 5.2
percent. Radiation treatments per day for the first quarter of 2003 were 2,628.
Same facility radiation treatments per day were 2,470 during the first quarter
of 2004, a decrease of 0.8 percent from the first quarter of 2003. PET scans
increased from 4,154 in the first quarter of 2003 to 6,581 in the first quarter
of 2004, an increase of 58.4 percent.
The company currently has 11 cancer centers and four PET systems in
various stages of development for network practices.
3
Update on Merger Transaction
On March 20, 2004, US Oncology Holdings, Inc. ("Holdings") (which was
formerly known as Oiler Holding Corp.) and its wholly owned subsidiary, Oiler
Acquisition Corp., entered into a merger agreement with US Oncology, Inc.,
pursuant to which Oiler Acquisition Corp. will be merged with and into US
Oncology, Inc., with US Oncology, Inc. continuing as the surviving corporation.
If the transaction is consummated, US Oncology, Inc. would become a private
company owned by Holdings. Members of senior management of the company,
including its Chairman and CEO, will continue as employees of the private
entity, participate in the merger by purchasing equity securities in Holdings
and be awarded equity securities in Holdings. Both Holdings and Oiler
Acquisition Corp. are Delaware corporations that were formed by Welsh, Carson,
Anderson & Stowe IX, L.P. ("Welsh Carson") for the purpose of completing the
merger and related financing transactions. Currently, Welsh Carson directly owns
approximately 14.5% of the company's outstanding common stock and, together with
its co-investors and the directors and executive officers of US Oncology that
participate in the merger, would own all the capital stock of Holdings when and
if the merger is consummated.
If the merger is completed, each issued and outstanding share of US
Oncology common stock (other than shares owned by Welsh Carson, its co-investors
and directors and executive officers of US Oncology that participate in the
merger) will be converted into the right to receive $15.05 in cash, subject to
the rights of dissenting stockholders who exercise and perfect their appraisal
rights under Delaware law. Each outstanding option for US Oncology common stock
will be canceled in exchange for (1) the excess, if any, of $15.05 over the per
share exercise price of the option multiplied by (2) the number of shares of
common stock subject to the option, net of any applicable withholding taxes.
Outstanding rights to receive shares of common stock under existing delayed
stock delivery agreements between US Oncology and certain physicians will be
canceled in exchange for an amount in cash equal to (1) $15.05 multiplied by (2)
the number of shares of common stock otherwise issuable under the delayed stock
delivery agreements on the scheduled delivery dates, net of any applicable
withholding taxes.
US Oncology's Board of Directors approved the merger following the
unanimous recommendation of a special committee composed of independent
directors Boone Powell, Jr., Burton S. Schwartz, M.D. and Vicki H. Hitzhusen.
The special committee and the Board received an opinion from Merrill Lynch & Co.
as to the fairness, from a financial point of view, of the consideration to be
received by US Oncology stockholders (other than Welsh Carson, its affiliates
and members of US Oncology's board or management that participate in the merger)
in the merger transaction.
The closing of the merger is subject to various conditions contained in
the merger agreement, including the approval by the holders of a majority of US
Oncology's shares held by stockholders other than Welsh Carson, its co-investors
and members of US Oncology's board or management that participate in the merger,
in addition to majority stockholder approval statutorily required for a merger.
Additional conditions include the closing of financing arrangements as set forth
in bank commitment letters that have been received by Holdings, the tender of
not less than a majority of the aggregate principal amount of US Oncology's
outstanding 9 5/8% Senior Subordinated Notes due 2012, the expiration of the
applicable waiting period under the Hart-Scott-Rodino Act and other customary
conditions.
4
As we have previously disclosed, several lawsuits naming the company
and each of its directors as defendants have been filed in connection with the
proposed merger. The company believes these suits are without merit and intends
to vigorously defend itself.
We have filed preliminary proxy materials with the SEC. Once the SEC
has given clearance to these proxy materials, they will be sent to stockholders
in connection with a special meeting called in connection with the merger. We
have also filed under the Hart-Scott-Rodino Act. Depending on clearance of
regulatory authorities and the satisfaction of other conditions precedent to the
merger, we anticipate holding a meeting of stockholders to vote on the merger in
late June or early July 2004.
Financial Exhibits
Exhibits - including key operating statistics, financial statements,
reconciliation of selected financial data and financial discussion - are
included in this news release.
Conference Call
US Oncology will host a conference call for investors Thursday, April
29 at 9 a.m., CDT. Investors are invited to access the call at 1-877-615-1716
and reference password "US Oncology." The conference call also can be accessed
via Web cast. Details of the Web cast are available at www.usoncology.com under
the Investor Relations link.
A replay of the conference call will be available through May 10 at
1-800-642-1687. The access code for the replay is 6871394.
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 comprising more than 875 affiliated physicians
in over 470 sites, including 80 integrated cancer centers, in 32 states.
US Oncology's mission is to enhance access to high-quality cancer care
in America. The company's strategies to accomplish this mission include: (a)
helping practices lower their pharmaceutical and administration costs, (b)
providing the capital and expertise to expand and diversify into radiation
oncology and diagnostic radiology, (c) providing sophisticated management
services to enhance profitability, and (d) providing access to and managing
clinical research trials. In addition, the company assists practices in
negotiations with private payors, in implementing programs to enhance
efficiencies with respect to drugs and in expanding service offerings such as
positron emission tomography and intensity modulated radiation therapy.
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 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. Such
expectations are subject to risks and uncertainties, including the possibility
that the merger may not occur due to the failure of the parties to satisfy the
conditions in the merger agreement, such as the inability of Holdings to obtain
financing, the
5
failure of US Oncology to obtain stockholder approval or the occurrence of
events that would have a material adverse effect on US Oncology as described in
the merger agreement. Additional risks and uncertainties relating to the
company's operations include recent legislation relating to prescription drug
reimbursement under Medicare, including the way in which such legislation is
implemented with respect to modifications in practice expense reimbursement,
calculation of average sales price, implementation of third-party vendor
programs and other matters, the impact of the recent legislation on other
aspects of our business (such as private payor reimbursement, the company's
ability to obtain favorable pharmaceutical pricing, the ability of practices to
continue offering chemotherapy services to Medicare patients or maintaining
existing practice sites, physician response to the legislation, including with
respect to retirement or choice of practice setting, development activities, and
the possibility of additional impairments of assets, including management
services agreements), reimbursement for pharmaceutical products generally, 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
SEC, including its Annual Report on Form 10-K for 2003, as amended, and
subsequent filings, for a more extensive discussion of factors that could cause
actual results to differ materially from the company's expectations.
6
US ONCOLOGY, INC.
Exhibit 1
Key Operating Statistics
($ in millions)
(unaudited)
Q1 2004 Q1 2003 % Change
------- ------- --------
Net operating revenue $ 662.6 $ 574.1 15.4%
Amounts retained by affiliated practices (137.6) (126.9) 8.5%
-------- ------- -----
Revenue $ 525.0 $ 447.2 17.4%
======== ======== =====
Physician Summary:
------------------
PPM physicians 801 817 (2.0)%
Service Line physicians 96 68 41.2%
-------- -------- -----
Total physicians 897 885 1.4%
======== ======== =====
Medical Oncology/Hematology:
----------------------------
Medical oncologists 738 693 6.5%
Medical oncology visits (1) 578,708 585,686 (1.2)%
Other oncologists 37 39 (5.1)%
Radiation Oncology:
-------------------
Radiation oncologists 122 115 6.1%
Radiation treatments per day 2,571 2,628 (2.2)%
Total cancer centers 80 76 5.3%
Imaging/Diagnostics:
--------------------
Diagnostic radiologists 0 38 N/A
PET installations 3 1 N/A
Total PET installations 24 17 41.2%
PET scans 6,581 4,154 58.4%
New patients enrolled in research studies 743 874 (15.0)%
Days sales outstanding 47 50 (6.0)%
(1) Visits only include information for practices affiliated under
the practice management model and do not include results of
service line practices.
7
US ONCOLOGY, INC.
Exhibit 2
Consolidated Income Statement
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
---------
2004 2003
---- ----
Revenue $ 524,996 $ 447,210
Operating expenses:
Pharmaceuticals and supplies 309,549 246,628
Field compensation and benefits 94,566 87,893
Other field costs 52,145 46,958
General and administrative 12,684 15,576
Depreciation and amortization 18,954 18,813
--------- ---------
487,898 415,868
Income from operations 37,098 31,342
Other income (expense):
Interest expense, net (4,382) (5,132)
--------- ---------
Income before income taxes 32,716 26,210
Income taxes (12,596) (9,960)
--------- ---------
Net income $ 20,120 $ 16,250
========= =========
Net income per share - basic $ 0.23 $ 0.17
========= =========
Net income per share - diluted $ 0.23 $ 0.17
========= =========
Shares used in per share calculations - basic 85,988 92,972
Shares used in per share calculations - diluted 89,276 94,632
8
US ONCOLOGY, INC.
Exhibit 3
Condensed Consolidated Statement of Cash Flows
($ in thousands)
(unaudited)
Three Months Ended
March 31,
---------
2004 2003
---- ----
Net cash provided (used) by operating activities $ 43,530 $ (1,123)
Cash flows from investing activities:
-------------------------------------
Acquisition of property and equipment (21,546) (16,878)
-------- --------
Net cash used in investing activities (21,546) (16,878)
Cash flows from financing activities:
-------------------------------------
Repayment of other indebtedness (7,816) (9,536)
Purchase of treasury shares (4,247) (3,482)
Proceeds from exercise of stock options 17,586 339
-------- --------
Net cash provided (used) by financing activities 5,523 (12,679)
-------- --------
Increase (decrease) in cash and equivalents 27,507 (30,680)
Cash and equivalents:
---------------------
Beginning of period 124,514 105,564
-------- --------
End of period $152,021 $ 74,884
======== ========
9
US ONCOLOGY, INC.
Exhibit 4
Condensed Consolidated Balance Sheet
($ in thousands)
(unaudited)
March 31, 2004 December 31, 2003
------------------ ---------------------
ASSETS
Current assets:
Cash and equivalents $ 152,021 $ 124,514
Accounts receivable 317,589 304,507
Other receivables 44,590 47,738
Prepaids and other current assets 18,498 18,451
Inventories 2,065 7,481
Due from affiliates 39,696 43,629
---------- -----------
Total current assets 574,459 546,320
Property and equipment, net 362,524 356,125
Service agreements, net 235,817 239,108
Deferred income taxes 8,915 10,915
Other assets 22,011 22,551
---------- -----------
Total assets $1,203,726 $ 1,175,019
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 74,849 $ 79,748
Accounts payable 159,466 160,628
Due to affiliates 71,985 64,052
Accrued compensation costs 19,324 26,316
Income taxes payable 30,463 19,810
Other accrued liabilities 33,539 41,847
---------- -----------
Total current liabilities 389,626 392,401
Deferred revenue 6,387 5,349
Long-term indebtedness 185,495 188,412
---------- -----------
Total liabilities 581,508 586,162
Minority interests 10,391 10,497
Stockholders' equity 611,827 578,360
---------- -----------
Total liabilities and stockholders' equity $1,203,726 $ 1,175,019
========== ===========
10
US ONCOLOGY, INC.
Exhibit 5
Reconciliation of Selected Financial Data
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
---------
2004 2003
---- ----
Net Income / EPS
- ----------------
Income before income taxes $ 32,716 $ 26,210
Tax rate 38.5% 38.0%
-------- --------
Net income $ 20,120 $ 16,250
======== ========
Weighted average shares outstanding - diluted 89,276 94,632
======== ========
EPS $ 0.23 $ 0.17
======== ========
EBITDA / Field EBITDA
- ---------------------
Income before income taxes $ 32,716 $ 26,210
Depreciation 14,858 14,410
Amortization 4,096 4,403
Interest expense, net 4,382 5,132
-------- --------
EBITDA 56,052 50,155
General & administrative 12,684 15,576
Amounts retained by affiliated practices 137,652 126,918
-------- --------
Field EBITDA $206,388 $192,649
======== ========
11
Discussion of Non-GAAP Information
In this release, we use certain measurements of our performance that are
not calculated in accordance with generally accepted accounting principles of
the United States ("GAAP"). These non-GAAP measures are derived from relevant
items in our GAAP financials. A reconciliation of each 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 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 includes the
total revenue of all of our PPM practices and other business lines, without a
reduction to reflect the portion 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
and revenue from sales of pharmaceuticals directly to patients by retail
pharmacies owned by us. Net patient revenue is the largest component (91.1% for
the three months ended March 31, 2004) of net operating revenue. It is a useful
measure because it gives investors a sense of the overall operations of our PPM
network because we are responsible for billing and collecting such amounts.
"EBITDA" is earnings before taxes, interest, depreciation and amortization.
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.
"EBITDA Margin" is EBITDA divided by net operating revenue. Like EBITDA and
Field EBITDA, EBITDA margin provides an indication of our overall operational
performance, without taking into account the effect of physician compensation
and corporate general and administrative expense.
12
Financial Discussion
Introduction
The following discussion should be read in conjunction with financial
information appearing elsewhere in this release. In addition, see
"Forward-Looking Statements and Risk Factors" included in our Annual Report on
Form 10-K for 2003 filed with the Securities and Exchange Commission (SEC).
General
We provide comprehensive services to our network of affiliated practices,
made up of more than 875 affiliated physicians in over 470 sites, with the
mission of expanding access to and improving the quality of cancer care in local
communities. The services we offer include:
.. Medical Oncology Services. We purchase and manage specialty oncology
pharmaceuticals for our affiliated practices. Annually, we are responsible
for purchasing, delivering and managing more than $1.2 billion of
pharmaceuticals through a network of 45 licensed pharmacies, 145
pharmacists and 278 pharmacy technicians. 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.
.. Cancer Center Services. We develop and manage comprehensive,
community-based cancer centers, which integrate all aspects of outpatient
cancer care, from laboratory and radiology diagnostic capabilities to
chemotherapy and radiation therapy. We have developed and operate 80
integrated community-based cancer centers and manage over one million
square feet of medical office space. We also have installed and manage 24
Positron Emission Tomography Systems (PET).
.. Cancer Research Services. We facilitate a broad range of cancer research
and development activities throughout our network. We contract with
pharmaceutical and biotechnology firms to provide a comprehensive range of
services relating to clinical trials. We currently supervise 222 clinical
trials, supported by our network of approximately 620 participating
physicians in more than 170 research locations.
We provide 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 one fee
13
based on overall performance; and the service line model, under which practices
contract with the company to purchase only the pharmaceutical aspects of medical
oncology services and/or cancer research services, each under a separate
contract, with a separate fee methodology for each service. Most of our revenue
(90.2% during the first quarter 2004) was derived under the PPM model.
Our Strategy
Our mission is to increase access to and advance the delivery of
high-quality cancer care in America. We do this by offering physicians services
to enable them to provide cancer patients with a full continuum of care,
including professional medical services, chemotherapy infusion, radiation
oncology, diagnostic services, access to clinical trials, patient education and
other services, primarily in a community setting. We aim to enhance efficiency
and lower cost structures at our affiliated practices, while enabling them to
continue to deliver quality patient care.
We believe that in today's marketplace, particularly in light of recent
reductions in Medicare reimbursement and continued pressures on overall
reimbursement, the most successful oncology practices will be those that have a
preeminent position in their local market, that are diversified beyond medical
oncology and that have implemented efficient management. We believe that our
services best position practices to attain these characteristics.
We intend to continue to offer practices and physicians the opportunity to
take advantage of our services through a comprehensive strategic alliance,
encompassing all of the management services we offer. We also continue to offer
medical oncology practices who do not wish to obtain comprehensive services our
less comprehensive, lower cost "service line" option.
During the last several years, we have worked to enhance the platform upon
which we hope to build. Our model conversions and disaffiliations have
stabilized our network by aligning our incentives with those of our affiliated
practices, better ensuring that our economic arrangements are sustainable and
eliminating the distraction of underperforming practices and assets.
Economic Models
Most of our revenue is derived under the PPM model. Under the PPM model, we
provide all of our services to a physician practice under a single management
agreement under which we are appointed exclusive business manager, responsible
for all of the non-clinical aspects of the physicians' practice.
Our PPM agreements are long-term agreements (generally with initial terms
of 25 to 40 years) and cannot be terminated unilaterally without cause.
Physicians joining the PPM practices
14
are required to enter into employment or non-competition agreements with the
practice. Prior to 2002, we generally paid consideration to physicians in
physician groups in exchange for the group's selling us operating assets and
entering into such long-term contracts or joining an already affiliated group.
Historically, we also have helped affiliated groups expand by recruiting
individual physicians without buying assets or paying consideration for service
agreements.
We intend to continue to expand our business, both by recruiting new
physicians and by affiliating with new groups. We will pay consideration for
operating assets of groups and may, under some circumstances, pay other
consideration.
Under most of our PPM agreements, we are compensated under the "earnings
model." Under that model, we are reimbursed for all expenses we incur in
connection with managing a practice, and are paid an additional fee based upon a
percentage of the practice's earnings before income taxes, subject to certain
adjustments. During the first quarter of 2004, 73.9% of our revenue was derived
from affiliated practices managed under agreements on the earnings model. PPM
agreements accounting for 16.3% of our revenue are under the net revenue model
described below. In some states, our agreements provide for a fixed management
fee.
Of our first quarter 2004 revenue, 8.2% was derived under the service line
model. Under our service line agreements, fees include payment for
pharmaceuticals and supplies used by the group, reimbursement for certain
pharmacy related expenses and payment for the other services we provide. Rates
for our services typically are based on the level of services required by the
practice.
Realignment of Net Revenue Model Practices
Under the net revenue model, our fee consists of a fixed amount, plus a
percentage of net revenues, plus, if certain performance criteria are met, a
performance fee. Under these agreements, once we have been reimbursed for
expenses, the practice is entitled to retain a fixed portion of revenues before
any additional service fee is paid to us. The effect of this priority of
payments is that we bear a disproportionate share of increasing practice costs,
since if there are insufficient funds to pay both our fee and the fixed amount
to be retained by the practice, the entire amount of the shortfall reduces our
management fee. Rapidly increasing pharmaceutical costs have increased practice
revenues and thus the amounts retained by physicians. At the same time rising
costs have eroded margins, leaving less available to pay our management fees.
The net revenue model does not appropriately align our economic incentives
with those of our affiliated practices, since the parties do not have similar
motivation to control costs or efficiently utilize capital. For this reason, we
have been seeking to convert net revenue model practices to the earnings
15
model since the beginning of 2001. In some cases, net revenue model practices
have converted instead to the service line model or disaffiliated entirely. Of
our 2000 revenue, 56.3% was derived from net revenue model practices, while only
16.3% of our first quarter 2004 revenue was derived from practices under the net
revenue model as of March 31, 2004. We no longer enter into new affiliations
under the net revenue model.
Conversions and disaffiliations have helped to stabilize our operating
platform. The percentage of Field EBITDA that we retained as management fees
(not including reimbursement for practice expenses) declined from 42% in 1999 to
38% in 2000 and 35% in 2001. With the implementation of our realignment
strategy, the percentage of Field EBITDA has been steady, at 34% in both 2003
and 2004. For the three months ended March 31, 2004 the percentage of Field
EBITDA was 33%.
Since announcing our initiative to convert practices away from the net
revenue model in November 2000, we have recorded charges of $251.3 million
relating to impairment of net revenue model practices resulting either from
termination of those agreements or the determination that their carrying values
were not recoverable. As of March 31, 2004, only one net revenue model service
agreement, with a carrying value of $22.2 million, was reflected on our balance
sheet.
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.
Our business and results of operations are subject to risks and
uncertainties, many of which are beyond our 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 statements, which
speak only as of the date thereof.
The merger transaction discussed above is subject to numerous risks and
uncertainties, including the possibility that the merger may not occur due to
the failure of the parties to satisfy the conditions in the merger agreement,
such as the inability of Holdings to obtain financing, our failure
16
to obtain stockholder approval or the occurrence of events that would have a
material adverse effect on us as described in the merger agreement.
Additional risks and uncertainties relating to our operations include
recent legislation relating to prescription drug reimbursement under Medicare,
including the way in which such legislation is implemented with respect to
modifications in practice expense reimbursement, calculation of average sales
price, implementation of third-party vendor programs and other matters, the
impact of the recent legislation on other aspects of our business (such as
private payor reimbursement, our ability to obtain favorable pharmaceutical
pricing, the ability of practices to continue offering chemotherapy services to
Medicare patients or maintaining existing practice sites, physician response to
the legislation, including with respect to retirement or choice of practice
setting, development activities, and the possibility of additional impairments
of assets, including management services agreements), reimbursement for
pharmaceutical products generally, 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 our affiliated physician practices. Please refer to our
filings with the SEC, including our Annual Report on Form 10-K for 2003, as
amended, for a more extensive discussion of factors that could cause actual
results to differ materially from our expectations.
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 or persons acting on our behalf. We do 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 (GAAP). 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
17
agreements, accounts receivable, intangible assets, 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. In addition, as circumstances change, we may revise the basis of
our estimates accordingly. For example, in the past we have recorded charges to
reflect revisions in our valuations of accounts receivable as a result of actual
collections patterns or a sale of accounts receivable. We maintain decentralized
billing systems and continue to upgrade and modify those systems. We take this
into account as we continue to evaluate receivables and record appropriate
reserves, based upon the risks of collection inherent in such a structure. In
the event subsequent collections are higher or lower than our estimates, results
of operations in subsequent periods could be either positively or negatively
impacted as a result of such prior estimates. This risk is particularly relevant
for periods in which there is a significant shift in reimbursement from large
payors, such as the recent changes in Medicare reimbursement.
Please refer to the "Critical Accounting Policies" section of our Annual
Report on Form 10-K for the year ended December 31, 2003 for a discussion of our
critical accounting policies. Management believes such critical accounting
policies affect its more significant judgments and estimates used in the
preparation of our consolidated condensed financial statements. These critical
accounting policies include our policy of non-consolidation of the results of
affiliated practices, revenue recognition (including calculation of physician
compensation), general estimates of accruals, including accruals relating to
accounts receivable, and intangible asset amortization and impairment.
Recent Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. It
requires that the assets, liabilities and results of the activity of variable
interest entities be consolidated into the financial statements for the company
that has controlling financial interest. It also provides the framework for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. Additionally,
in December 2003, the FASB released a revised version of FIN 46 (FIN 46R)
clarifying certain aspects of FIN 46 and providing certain entities with
exemptions from the requirements of FIN 46. The adoption of FIN 46R in January
2004 had no impact on the Company's financial position, results of operations or
cash flows for the three months ended March 31, 2004.
18
From time to time, the FASB, the SEC and other regulatory bodies seek to
change accounting rules, including rules applicable to our business and
financial statements. We cannot assure you that future changes in accounting
rules would not require us to make restatements.
Discussion of Non-GAAP Information
In this report, we use certain measurements of our performance that are not
calculated in accordance with GAAP. These non-GAAP measures are derived from
relevant items in our GAAP financials. A reconciliation of each 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 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 includes the
total revenue of all of our PPM practices and other business lines, without a
reduction to reflect the portion 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
and revenue from sales of pharmaceuticals directly to patients by retail
pharmacies owned by us. Net patient revenue is the largest component (91.1% for
the three months ended March 31, 2004) of net operating revenue. It is a useful
measure because it gives investors a sense of the overall operations of our PPM
network and the amounts for which we are responsible for billing and collecting.
"EBITDA" is earnings before taxes, interest, depreciation and amortization.
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.
19
"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.
"EBITDA Margin" is EBITDA divided by net operating revenue. Like EBITDA and
Field EBITDA, EBITDA margin provides an indication of our overall operational
performance, without taking into account the effect of physician compensation
and corporate general and administrative expense.
20
Results of Operations
The company was affiliated (including under the service line) with the
following number of physicians, by specialty:
March 31,
-------------------------
2004 2003
-------- --------
Medical oncologists/hematologists ......... 738 693
Radiation oncologists ..................... 122 115
Other oncologists ......................... 37 39
-------- --------
Total oncologists/hematologists ........ 897 847
Diagnostic radiologists ................... - 38
-------- --------
Total physicians ....................... 897 885
======== ========
The following table sets forth the sources for growth in the number of
physicians affiliated with the company:
Three Months Ended
March 31,
-------------------------
2004 2003
-------- --------
Affiliated physicians, beginning of period .. 897 884
Physician practice affiliations ............. 3 13
Recruited physicians ........................ 13 9
Physician practice separations .............. (13) (10)
Retiring/Other .............................. (3) (11)
------- -------
Affiliated physicians, end of period ........ 897 885
======= =======
The following table sets forth the number of cancer centers and PET units
managed by the company:
Three Months Ended
March 31,
-------------------------
2004 2003
-------- --------
Cancer Centers, beginning of period ....... 78 79
Cancer Centers opened ..................... 3 -
Cancer Centers closed ..................... (1) -
Cancer Centers disaffiliated .............. - (3)
------- -------
Cancer Centers, end of period ............. 80 76
======= =======
PET Systems ............................... 24 17
======= =======
21
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,
--------------------------
2004 2003
----- -----
Medical oncology visits /(1)/ .................... 578,708 585,686
Radiation treatments ............................. 164,557 165,542
PET scans ........................................ 6,581 4,154
CT scans ......................................... 23,082 16,090
New patients enrolled in research studies ........ 743 874
(1) Medical oncology visits include consults by medical oncologists under
our PPM model only and do not include service line results.
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.
Three Months Ended
March 31,
--------------------------
2004 2003
----- -----
Revenue .......................................... 100.0% 100.0%
Operating expenses:
Pharmaceuticals and supplies .................. 59.0 55.1
Field compensation and benefits ............... 18.0 19.7
Other field costs ............................. 9.9 10.5
General and administrative .................... 2.4 3.5
Depreciation and amortization ................. 3.6 4.2
------- -------
Income from operations ........................... 7.1 7.0
Interest expense, net ............................ (0.9) (1.2)
-------- --------
Income before income taxes ....................... 6.2 5.8
Income tax provision ............................. (2.4) (2.2)
-------- -------
Net income ....................................... 3.8% 3.6%
======= =======
22
Net Operating Revenue. Net operating revenue includes two components - net
patient revenue and our other revenue:
The following table shows the components of our net operating revenue for
the three months ended March 31, 2004 and 2003 (in thousands):
Three Months Ended
March 31,
--------------------------
2004 2003
----- -----
Net patient revenue .......................... $ 603,426 $ 541,142
Other revenue ................................ 59,222 32,986
---------- ----------
Net operating revenue ........................ $ 662,648 $ 574,128
========== ==========
Net Patient Revenue. Under our PPM model, we are responsible for billing
and collecting all practice revenues. We disclose "net patient revenue" to give
you a sense of the size and operating trends of the business which we manage.
Net patient revenue comprises all of the revenues for which we bill and collect
for affiliated practices under the PPM model. We collect all of the receivables,
control cash management functions and are responsible for paying all expenses at
our PPM practices.
We retain all the amounts we collect in respect of practice receivables. On
a monthly basis, we calculate what portion of revenues our practices are
entitled to retain by subtracting our accrued fees and accrued practice expenses
from accrued revenues. We pay practices this remainder in cash, which they use
primarily for physician compensation. These amounts we remit to physician groups
are excluded from our revenue, since they are not part of our fees. By paying
physicians on a cash basis for accrued amounts, we finance their working
capital.
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.
Other Revenue. Our other revenues are primarily derived in three areas:
. Service line fees. In the medical oncology services area under our service
line agreements, we bill practices on a monthly basis for services
rendered. These revenues include payment from the practices for all of the
pharmaceutical agents used by the practice for which we are obligated to
pay the pharmaceutical manufacturers, and a service fee for the pharmacy
related services we provide.
. GPO and data fees. We receive fees from pharmaceutical companies for acting
as a group purchasing organization (GPO) for our affiliated practices, as
well as for providing informational and other services to pharmaceutical
companies. GPO fees are typically based
23
upon the volume of drugs purchased by the practices. Fees for other
services include amounts paid for data we collect and compile.
. Research fees. We receive fees for research services from pharmaceutical
and biotechnology companies. These fees are separately negotiated for each
study and typically include some management fee, as well as per patient
accrual fees and fees for achieving various study milestones.
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.
Net operating revenue increased from $574.1 million in the first quarter of
2003 to $662.6 million in the first quarter of 2004, an increase of $88.5
million, or 15.4%. Same practice net operating revenue (which excludes the
results of practices with which we disaffiliated since January 1, 2003)
increased from $561.2 million for the first quarter of 2003 to $662.3 million
for the quarter of 2004, an increase of $101.1 million, or 18.0%. Revenue growth
was attributable to increases in medical oncology revenue and cancer center
revenue.
Other revenue increased from $33.0 million in the first quarter of 2003 to
$59.2 million in the first quarter of 2004, an increase of $26.2 million, or
79%. This increase was attributable to $27.1 million of operating revenue under
the service line agreements, as well as an increase in group purchasing
organization revenues, offset by a decline in research revenues.
The following table shows our net operating revenue by segment for the
three months ended March 31, 2004 and 2003 (in thousands):
Three Months Ended
March 31,
--------------------------
2004 2003
----- -----
Medical oncology services ...................... $ 562,704 $ 480,668
Cancer center services ......................... 87,836 79,292
Other services ................................. 12,108 14,168
--------- ---------
$ 662,648 $ 574,128
========= =========
Medical oncology services net operating revenue increased from $480.7
million in the first quarter of 2003 to $562.7 million for the first quarter of
2004, an increase of $82.0 million or 17.1%. $27.1 million of such increase is
attributed to growth in the service line model, including $7.8 million
24
attributable to new markets, $8.2 million attributable to a conversion from the
PPM model during the second quarter of 2003 and $11.1 million attributable to
growth in the service line business existing during the first quarter of 2003.
The remainder of the growth in medical oncology services revenue is attributable
to increased fees for drug administration and use of more expensive chemotherapy
agents and additional supportive care drugs. Growth of medical oncology services
revenue during the first quarter of 2004 was partially offset by a 1.2% decline
in medical oncology visits compared to the same period during 2003, as a result
of PPM practice disaffiliations and conversions to the service line model.
Service line model visits are not included in our patient volume statistics.
Cancer center services net operating revenue increased from $79.3 million
in the first quarter of 2003 to $87.8 million for the first quarter of 2004, an
increase of $8.5 million, or 10.8%. This increase is attributable to the
addition of IMRT, an increase in radiology revenue from CT and PET scans and
additional cancer centers. PET scans increased from 4,154 in the first quarter
of 2003 to 6,581 in the first quarter of 2004, an increase of 58.4%. This growth
was attributable to an increase in same-facility PET scans per day of 20.6% and
the addition of 8 PET systems during 2003 and the first quarter of 2004.
Radiation treatments decreased slightly from 165,542 in the first quarter of
2003 to 164,557 in the first quarter of 2004, or 0.6%. Same practice radiation
treatments increased from 156,827 in the first quarter of 2003 to 158,102 in the
first quarter of 2004, or 0.8%. In addition, since the first quarter of 2003 we
have added a net total of 4 cancer centers (taking into account closures and
disaffiliations). We currently have 11 cancer centers and 4 PET systems in
various stages of development.
Other services net operating revenue decreased from $14.2 million in the
first quarter of 2003 to $12.1 million for the first quarter of 2004, a decrease
of $2.1 million, or 14.5%. The decrease is attributable to a decrease in
research revenue. Patients enrolled in research trials decreased from 874 in the
first quarter of 2003 to 743 in the first quarter of 2004.
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,
---------------------------
2004 2003
---------- ----------
Net operating revenue ........................... $ 662,648 $574,128
Amounts retained by affiliated practices ........ (137,652) (126,918)
--------- ---------
Revenue ..................................... $ 524,996 $ 447,210
========= =========
Amounts retained by practices increased from $126.9 million in the first
quarter of 2003 to $137.7 million in the first quarter of 2004, an increase of
$10.7 million, or 8.5%. Such increase in
25
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 affiliated practices as a percentage of net
operating revenue decreased from 22.1% to 20.8% for the first quarters of 2003
and 2004, respectively, primarily as a result of increases in service line model
revenues. Under the service line model, net operating revenue does not include
amounts retained by practices.
Revenue increased from $447.2 million for the first quarter of 2003 to
$525.0 million for the first quarter of 2004, an increase of $77.8 million, or
17.4%. Revenue growth was caused by increases in net operating revenues.
The following table shows our revenue by segment for the three months ended
March 31, 2004 and 2003 (in thousands):
Three Months Ended
March 31,
-------------------------------
2004 2003
---------- ----------
Medical oncology services .......... $ 450,928 $ 379,824
Cancer center services ............. 61,064 54,305
Other services ..................... 13,004 13,081
--------- ---------
$ 524,996 $ 447,210
========= =========
Medicare and Medicaid are the practices' largest payors. For the three
months ended March 31, 2004 and 2003, the affiliated practices derived
approximately 42% and 41% respectively, of their net patient revenue from
services provided under the Medicare program and approximately 3% and 2%
respectively, of their net patient revenue from services provided under the
state Medicaid programs. Capitation revenues were less than 1% of total net
patient revenue in 2004 and 2003. Changes in the payor reimbursement rates,
particularly Medicare and Medicaid due to its concentration, or affiliated
practices' payor mix can materially and adversely affect the Company's revenues.
Pharmaceuticals and Supplies. Pharmaceuticals and supplies expense, which
includes drugs, medications and other supplies used by the practices, increased
from $246.6 million in the first quarter of 2003 to $309.5 million in the same
period of 2004, an increase of $62.9 million, or 25.5%. As a percentage of
revenue, pharmaceuticals and supplies increased from 55.1% in the first quarter
of 2003 to 59.0% in the same period in 2004, primarily because of an increase in
our service line business and an increase in pharmaceutical revenue as a
percentage of total revenue.
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 $87.9 million in the first
quarter of 2003 to $94.6 million in the first quarter of 2004, an increase of
$6.7 million, or 7.6%. As a percentage of revenue, field compensation and
benefits decreased from 19.7% in the first quarter of 2003 to 18.0% in the first
quarter of 2004. The decrease as a
26
percentage of revenue is primarily attributable to economies of scale resulting
from the increase in pharmaceutical revenues and diagnostic and radiation
revenue.
Other Field Costs. Other field costs, which consist of rent, utilities,
repairs and maintenance, insurance and other direct field costs, increased from
$47.0 million in the first quarter of 2003 to $52.1 million in the first quarter
of 2004, an increase of $5.2 million, or 11.0%. As a percentage of revenue,
other field costs decreased from 10.5% in the first quarter of 2003 to 9.9% in
the first quarter of 2004 as a result of growth in pharmaceutical, diagnostic
and radiation revenue.
General and Administrative. General and administrative expenses decreased
from $15.6 million in the first quarter of 2003 to $12.7 million in the first
quarter of 2004, a decrease of $2.9 million, or 18.6% due to reductions in
personnel and other costs during 2003, as well as expenses for strategic
planning and lobbying costs incurred during the first quarter of 2003. As a
percentage of revenue, general and administrative costs decreased from 3.5% in
the first quarter 2003 to 2.4% in the first quarter 2004.
Overall, we experienced a decline in operating margins with earnings before
taxes, interest, depreciation and amortization, EBITDA, as a percentage of
revenue, decreasing from 11.2% in the first quarter of 2003 to 10.7% in the
first quarter of 2004.
The following is the EBITDA of our operations by operating segment for the
three months ended March 31, 2004 and 2003 (in thousands):
Three Months Ended March 31, 2004:
Medical Cancer Unallocated
Oncology Center Corporate
Services Services Other Expenses Total
--------- --------- --------- ----------- -----------
Net operating revenue ................. $ 562,704 $ 87,836 $ 12,108 $ -- $ 662,648
Amounts retained by affiliated
practices ........................... (111,776) (26,772) 896 -- (137,652)
--------- --------- --------- ----------- ----------
Revenue ............................... 450,928 61,064 13,004 -- 524,996
Operating expenses .................... (403,729) (47,750) (12,897) (23,522) (487,898)
--------- --------- --------- ----------- ----------
Income (loss) from operations ......... 47,199 13,314 107 (23,522) 37,098
Depreciation and amortization ......... 10 7,865 241 10,838 18,954
--------- --------- --------- ----------- ----------
EBITDA ................................ $ 47,209 $ 21,179 $ 348 $ (12,684) $ 56,052
========= ========= ========= =========== ==========
27
Three Months Ended March 31, 2003:
Medical Cancer Unallocated
Oncology Center Corporate
Services Services Other Expenses Total
--------- --------- --------- ----------- -----------
Net operating revenue ................. $ 480,668 $ 79,292 $ 14,168 $ -- $ 574,128
Amounts retained by affiliated
practices ........................... (100,844) (24,987) (1,087) -- (126,918)
--------- --------- --------- ---------- ----------
Revenue ............................... 379,824 54,305 13,081 -- 447,210
Operating expenses .................... (332,728) (42,782) (12,033) (28,324) (415,868)
--------- --------- --------- ---------- ----------
Income (loss) from operations ......... 47,096 11,523 1,048 (28,324) 31,342
Depreciation and amortization ......... 20 5,836 209 12,748 18,813
--------- --------- --------- ---------- ----------
EBITDA ................................ $ 47,116 $ 17,359 $ 1,257 $ (15,576) $ 50,155
========= ========= ========= ========== ==========
Medical oncology services EBITDA margin decreased from 9.8% in the first
quarter of 2003 to 8.4% in the first quarter of 2004. This decrease is
attributable to an increase in lower margin pharmaceuticals and increase in
service line revenues.
Cancer center services EBITDA margin increased from 21.9% in the first
quarter of 2003 to 24.1% in the first quarter of 2004. This increase is
attributable to exiting from unprofitable sites, investment in technology such
as intensity modulated radiation therapy (IMRT), CT and PET, and growth in same
practice treatments.
Interest. Net interest expense decreased from $5.1 million in the first
quarter of 2003 to $4.4 million in the first quarter of 2004, a decrease of $0.8
million, or 14.6%, because of a reduction in outstanding indebtedness. As a
percentage of revenue, net interest expense decreased from 1.2% for the first
quarter of 2003 to 0.9% for the first quarter of 2004.
Income Taxes. We recognized an effective tax rate of 38.5% for the first
quarter of 2004 and 38.0% for the first quarter of 2003.
Net Income. Net income increased from $16.3 million, or $0.17 per diluted
share, in the first quarter of 2003 to $20.1 million, or $0.23 per share, in the
first quarter 2004, an increase of $3.9 million or 23.8%. Net income as a
percentage of revenue increased from 3.6% in the first quarter of 2003 to 3.8%
in the first quarter of 2004.
28
Liquidity and Capital Resources
As of March 31, 2004, we had net working capital of $184.8 million,
including cash and cash equivalents of $152.0 million. We had current
liabilities of $389.6 million, including $74.8 million in current maturities of
long-term debt, and $185.5 million of long-term indebtedness. During the first
quarter of 2004, we provided $43.5 million in net operating cash flow, invested
$21.5 million, and provided cash from financing activities in the amount of $5.5
million. As of April 26, 2004, we had cash and cash equivalents of approximately
$183.0 million.
Cash Flows from Operating Activities
During the first quarter of 2004, we provided $43.5 million in cash flows
from operating activities as compared to using $1.1 million in the comparable
prior year period. The increase in cash flow is primarily due to advance
purchases of certain pharmaceutical products paid for during 2003, and timing of
certain working capital payments.
Cash Flows from Investing Activities
During the first quarter of 2004 and 2003, we had $21.5 million and $16.9
million in capital expenditures, including $19.4 million and $13.1 million on
the development and construction of cancer centers, respectively. Maintenance
capital expenditures were $2.1 million and $3.8 million in the first quarters of
2004 and 2003, respectively. For all of 2004, 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, which may be acquired pursuant to operating leases or purchased.
Cash Flows from Financing Activities
During the first quarter of 2004, we provided cash from financing
activities of $5.5 million as compared to cash used of $12.7 million in 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 systems, 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 revolving 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
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2012. Payments under those notes are subordinated in substantially all respects
to payments under our revolving credit facility and certain other debt.
We entered into a leasing facility in December 1997, which we have used to
finance the acquisition and development of cancer centers. Since December 31,
2002, the lease has been classified as indebtedness on our financial statements
since we have guaranteed 100% of the residual value of the properties in the
lease since that date. As of March 31, 2004, we had $67.3 million outstanding
under the facility and no further amounts are available under that facility. The
annual cost of the lease is approximately $2.9 million, based on interest rates
in effect as of March 31, 2004. The lease matures in June 2004. We anticipate
refinancing substantially all of our indebtedness in connection with the merger
transaction described above. We intend to extend the maturity of the lease to
allow such a refinancing in the event the merger transaction does not close
prior to its maturity. In the event the merger is not consummated or if we do
not extend the term, we would pay the lease in full at its maturity and
anticipate having sufficient cash available to make such payment.
Because the lease payment floats with a referenced interest rate, we are
also exposed to interest rate risk under the leasing facility. An increase of
one percent in the referenced rate would result in an increase in lease payments
of approximately $0.7 million annually.
Borrowings under the revolving credit facility and advances under the
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 revolving
credit facility, 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 revolving credit facility, 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 security under the
revolving credit facility and the guarantee obligations of our leasing facility.
We are currently in compliance with covenants under our 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 centers. It is likely that our
capital needs in the next several years 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.
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