US Oncology Reports Financial Results for Third Quarter 2002; Quarter Produces Earnings Per Share of $0.15, Before Unusual Charges.Business Editors & Health/Medical Writers HOUSTON--(BUSINESS WIRE)--Oct. 31, 2002 US Oncology oncology /on·col·o·gy/ (ong-kol´ah-je) the sum of knowledge regarding tumors; the study of tumors. on·col·o·gy n. , Inc. (Nasdaq:USON) today reported results for the third quarter ended Sept. 30, 2002. The company's revenue (net operating revenue operating revenue Revenue from any regular source. Revenue from sales is adjusted for discounts and returns when calculating operating revenue. Compare other revenue. less amounts retained by physicians) for the quarter was $420.2 million, compared to $375.5 million for the prior-year period and $411.0 million for the second quarter of 2002. Net operating revenue for the quarter was $541.7 million, compared to $478.7 million for the prior-year period and $531.8 million for the second quarter of 2002. Net income before unusual charges in the third quarter of 2002 was $14.9 million, or $0.15 per share, compared to $12.9 million, or $0.13 per share, for the third quarter of 2001. Net income before unusual charges for the second quarter of 2002 was $14.8 million, or $0.15 per share. Including unusual charges, net loss for the third quarter was $(36.2) million, or $(0.37) per share, compared to net income of $12.9 million, or $0.13 per share, for the third quarter of 2001, and a net loss of $(9.6) million, or $(0.10) per share, for the second quarter of 2002. Results for the third quarter of 2002 included unusual pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. , restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). and other charges of $76.8 million, consisting primarily of charges related to impairment of net revenue service agreements, practice separations and conversions.(1) "Third-quarter results demonstrate the strength of our core business and further contribute to building a foundation for future growth, as we guide the company through this year of transition," said R. Dale Dale , Sir Henry Hallett 1875-1968. British physiologist. He shared a 1936 Nobel Prize for work on the chemical transmission of nerve impulses, particularly for the isolation and study of acetylcholine (1914). Ross Ross , Sir Ronald 1857-1932. British physician. He won a 1902 Nobel Prize for proving that malaria is transmitted to humans by the bite of the mosquito. , US Oncology chairman and chief executive officer. "We experienced same-practice net operating revenue growth of $70.5 million over the third quarter of 2001. This growth validates the benefit of our commitment to numerous clinical advancements in oncology, including positron emission tomography positron emission tomography: see PET scan. positron emission tomography (PET) Imaging technique used in diagnosis and biomedical research. , intensity modulated mod·u·late v. mod·u·lat·ed, mod·u·lat·ing, mod·u·lates v.tr. 1. To adjust or adapt to a certain proportion; regulate or temper. 2. radiation therapy and to new pharmaceuticals used in cancer treatment." (1) See summary of unusual charges below. US Oncology highlights for 2002 are detailed below in the company's three areas of strategic focus - Operational Execution, Transitional Activity and Business Development. Operational Execution -- Property and equipment would increase by the fair market value of the assets, and to the extent such asset values are less than the total amount outstanding under the lease, we would recognize a charge to reflect the difference between such asset values and the amount outstanding under the synthetic lease at such time as we bring the properties onto our balance sheet; -- Assuming the purchase of the properties were financed through borrowing, or in the event the existing arrangement were required to be characterized as debt, indebtedness would increase by $72.0 million; and -- Depreciation would increase as a result of our owning the assets. Transitional Activity A key strategic objective for US Oncology is the transition of its practice management service agreements to either the earnings model or service line model. Highlights in the company's transitional activity during the third quarter included: -- The company converted two of its affiliated af·fil·i·ate v. af·fil·i·at·ed, af·fil·i·at·ing, af·fil·i·ates v.tr. 1. To adopt or accept as a member, subordinate associate, or branch: practices, representing 31 physicians, from the net revenue model to the earnings model. -- The company converted one of its earnings model affiliated practices, representing 14 physicians, to the service line model. -- Currently, 72 percent of US Oncology's net operating revenue is generated by earnings model or service line model practices, an increase from 56 percent at the end of the third quarter of 2001 and 66 percent at the end of the second quarter of 2002. -- Since announcing its service line model in September September: see month. 2001, the company has disaffiliated with 23 physicians as part of its business transition. The company anticipates up to approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 90 affiliated physicians will depart in connection with this transitional process. -- The company recorded unusual charges of $76.8 million.(1) These charges are part of restructuring and reorganizational costs that the company announced in September 2001. Since the announcement, the company has incurred $130.4 million in charges. The timing and amount of additional restructuring and reorganizational costs will depend upon the progress of the company's transitional initiatives, including modifications and terminations of existing physician practice management service agreements and implementation of operational changes, as well as changes in its estimates of its asset values during this transitional period. "This was a complex quarter for the company, with restructuring and reorganization The process of carrying out, through agreements and legal proceedings, a business plan for winding up the affairs of, or foreclosing a mortgage upon, the property of a corporation that has become insolvent. that resulted in a significant charge," said Ross. "This is consistent with the transitional initiatives we announced last year. We continue to be successful in converting net revenue practices to the earnings model. At the same time, the rate at which existing practices have converted to the service line model emphasizes the value our affiliated physicians place on the range of comprehensive management services we provide." (2) See Reconciliation of Selected Financial Data below for calculations. Business Development US Oncology has two new cancer centers scheduled to open in the fourth quarter of this year, expanding the company's outpatient outpatient /out·pa·tient/ (-pa-shent) a patient who comes to the hospital, clinic, or dispensary for diagnosis and/or treatment but does not occupy a bed. out·pa·tient n. cancer-center network to 79. The company has nine additional cancer centers in various phases of development, all of which are expected to be operational in 2003. US Oncology installed one positron emission tomography (PET) system during the third quarter. Seven PET systems - serving 11 sites - are in the development stage, two of which are scheduled to be operational by the end of this year. The company also agreed to affiliate Affiliate Relationship between two companies when one company owns substantial interest, but less than a majority of the voting stock of another company, or when two companies are both subsidiaries of a third company. See: Subsidiaries, parent company. with one new practice, representing five oncologists, under its service line model during the third quarter, effective Oct. 1. "We are refining refining, any of various processes for separating impurities from crude or semifinished materials. It includes the finer processes of metallurgy, the fractional distillation of petroleum into its commercial products, and the purifying of cane, beet, and maple sugar our service line offerings to strengthen the pricing and customization of our services to ensure ongoing responsiveness responsiveness Medtalk The ability to respond to a stimulus. See Airway responsiveness. to market needs," said Ross. "This effort, along with a strong cancer center and PET development pipeline, is laying the foundation for resumption RESUMPTION. To reassume; to promise again; as, the resumption of payment of specie by the banks is general. It also signifies to take things back; as the government has resumed the possession of all the lands which have not been paid for according to the requisitions of the law, and the of growth throughout our network in 2003." Predicting quarter-to-quarter operating results will be difficult for the next several quarters due to the implementation of the service line model, conversion of practices to either the service line or the earnings model, and termination The point where a line, channel or circuit ends. See SCSI termination and hybrid. of service agreements. Conversions to the service line model, service agreement terminations and performance of net revenue practices may result in intangible asset Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. impairment charges, the timing and magnitude magnitude, in astronomy, measure of the brightness of a star or other celestial object. The stars cataloged by Ptolemy (2d cent. A.D.), all visible with the unaided eye, were ranked on a brightness scale such that the brightest stars were of 1st magnitude and the of which are not predictable. In addition, transition activities and implementation of the service line model at new practices could continue to divert di·vert v. di·vert·ed, di·vert·ing, di·verts v.tr. 1. To turn aside from a course or direction: Traffic was diverted around the scene of the accident. 2. management attention from other development activities. (1) See summary of unusual charges below. Financial Exhibits Exhibits - including key operating statistics, financial statements, reconciliation of selected financial data, schedule of third quarter unusual charges and financial discussion - are included in this press release. Conference Call US Oncology will host a conference call for investors Thursday Thursday: see week. , Oct. 31, at 9 a.m., CST CST abbr. 1. Central Standard Time 2. convulsive shock treatment CST Central Standard Time Noun 1. . Investors are invited to access the call at 888/560-8502 and reference password A secret word or code used to serve as a security measure against unauthorized access to data. It is normally managed by the operating system or DBMS. However, the computer can only verify the legitimacy of the password, not the legitimacy of the user. See NCSC. "US Oncology." A replay of the call will be available through Nov. 8 at 800/813-5523. 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 “Houston” redirects here. For other uses, see Houston (disambiguation). Houston (pronounced /'hjuːstən/) is the largest city in the state of Texas and the , is America's premier cancer-care services company. The company provides comprehensive services to a network of affiliated practices - comprised of more than 850 affiliated physicians in over 440 sites, including 77 outpatient cancer centers - in 28 states, with the mission of expanding access to and improving the quality of cancer care in local communities and advancing the delivery of care. These practices care for 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 A contract under seal. A specialty is a written document that has been sealed and delivered and is given as security for the payment of a specifically indicated debt. oncology pharmaceuticals for affiliated practices. -- Cancer Center Services. The company develops and manages comprehensive, community-based cancer centers, which integrate all aspects of outpatient cancer care, from laboratory and radiology radiology, branch of medicine specializing in the use of X rays, gamma rays, radioactive isotopes, and other forms of radiation in the diagnosis and treatment of disease. diagnostic capabilities to chemotherapy chemotherapy (kē'mōthĕr`əpē), treatment of disease with chemicals or drugs. One chemotherapeutic approach is the development of selectively toxic substances, i.e. and radiation therapy. -- Cancer Research Services. The company facilitates a broad range of cancer research and development activities through its network. -- 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 day-to-day adj. 1. Occurring on a routine or daily basis: the day-to-day movements of the stock market. 2. 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 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 criteria (krītēr´ē  ),n. are met, a performance fee. The company also markets its aforementioned a·fore·men·tioned adj. Mentioned previously. n. The one or ones mentioned previously. aforementioned Adjective mentioned before Adj. 1. core services The introduction to this article provides insufficient context for those unfamiliar with the subject matter. Please help [ improve the introduction] to meet Wikipedia's layout standards. You can discuss the issue on the talk page. 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. This press release contains forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. , 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 press 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 the success of the service line model, transition of existing practices, our ability to maintain good relationships with existing practices, proposed changes to accounting rules related to its leasing facility, expansion into new markets, our ability to complete cancer centers and PET facilities currently in development, our ability to complete negotiations and enter into agreements with practices currently negotiating with us, reimbursement Reimbursement Payment made to someone for out-of-pocket expenses has incurred. for health-care services, continued efforts by payors to lower their costs, government regulation and enforcement, continued relationships with pharmaceutical companies and other vendors, 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 Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for 2001 and subsequent SEC filings, for a more extensive discussion of factors that could cause actual results to differ materially from the company's expectations.
US ONCOLOGY, INC.
Key Operating Statistics
($ in millions)
(unaudited)
% %
Q3 2002 Q3 2001 Change YTD 2002 YTD 2001 Change
-------- -------- ------- ---------- ---------- -------
Net operating
revenue $541.7 $478.7 13.2% $1,574.4 $1,444.4 9.0%
Physician
compensation 121.5 103.2 17.7% 351.9 317.4 10.9%
-------- -------- ---------- ----------
USON revenue $420.2 $375.5 11.9% $1,222.5 $1,127.0 8.5%
======== ======== ========== ==========
Medical Oncology/Hematology:
---------------------------
Medical
oncologists 670 677 (1.0%) 670 677 (1.0%)
Medical
oncology
visits 595,484 589,527 1.0% 1,830,332 1,806,974 1.3%
Radiation Oncology:
------------------
Radiation
oncologists 123 127 (3.1%) 123 127 (3.1%)
Radiation
treatments
per day 2,510 2,499 0.4% 2,544 2,516 1.1%
Total cancer
centers 77 76 1.3% 77 76 1.3%
Imaging/Diagnostics/Other:
-------------------------
Diagnostic
radiologists/
other
oncologists 77 69 11.6% 77 69 11.6%
PET scans 3,084 1,747 76.5% 9,096 4,003 127.2%
Total PET
installations 14 9 55.6% 14 9 55.6%
Research
accruals 821 967 (15.1%) 2,435 2,916 (16.5%)
Total
physicians 870 873 (0.3%) 870 873 (0.3%)
Days sales
outstanding 47 56 (16.1%) 47 56 (16.1%)
US ONCOLOGY, INC.
Consolidated Income Statement
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2002 2001 2002 2001
--------- --------- ----------- -----------
Revenue $420,177 $375,499 $1,222,501 $1,127,002
Operating expenses:
Pharmaceuticals and
supplies 223,149 192,515 634,964 577,147
Field compensation and
benefits 84,108 81,005 256,401 239,983
Other field costs 49,027 43,915 143,288 135,991
General and
administrative 16,622 14,662 45,892 43,450
Depreciation and
amortization 17,111 17,373 53,329 51,926
Impairment, restructuring
and other charges 76,831 0 116,804 5,868
--------- --------- ----------- -----------
466,848 349,470 1,250,680 1,054,365
Income (loss) from
operations (46,671) 26,029 (28,179) 72,637
Interest expense, net (6,073) (5,216) (17,856) (18,596)
--------- --------- ----------- -----------
Income (loss) before
income taxes and
extraordinary loss (52,744) 20,813 (46,035) 54,041
Income taxes 16,539 (7,909) 13,989 (20,536)
--------- --------- ----------- -----------
Net income (loss) before
extraordinary loss (36,205) 12,904 (32,046) 33,505
--------- --------- ----------- -----------
Extraordinary loss on
early extinguishment of
debt, net of income
taxes of $5,181 0 0 (8,452) 0
--------- --------- ----------- -----------
Net income (loss) $(36,205) $12,904 $(40,498) $33,505
========= ========= =========== ===========
Net income (loss) before
extraordinary loss per
share - diluted ($0.37) $0.13 ($0.32) $0.33
Extraordinary loss per
share - diluted $0.00 $0.00 ($0.09) $0.00
--------- --------- ----------- -----------
Net income (loss) per
share - diluted ($0.37) $0.13 ($0.41) $0.33
========= ========= =========== ===========
Excluding unusual
charges(3) $0.15 $0.13 $0.44 $0.37
========= ========= =========== ===========
Shares used in per share
calculations - diluted 97,148 100,351 98,845 100,235
Field EBITDA, excluding
unusual charges(3) $185,365 $161,238 $539,740 $491,287
Cash earnings per share,
excluding unusual
charges(3) $0.19 $0.17 $0.55 $0.48
(3) Unusual charges include impairment, restructuring and other costs
of $76,831, $39,268 and $705 in Q3 2002, Q2 2002 and Q1 2002,
respectively, extraordinary loss of $8,452, net of taxes on the
early extinguishment of debt in Q1 2002, and restructuring costs
of $5,868 in 2001. See summary of unusual charges on page 11.
US ONCOLOGY, INC.
Condensed Consolidated Statement of Cash Flows
($ in thousands)
(unaudited)
Nine Months Ended
September 30,
2002 2001
--------- ---------
Net cash provided from operating activities $133,862 $161,107
Cash flows from investing activities:
--------------------------------------
Acquisition of property and equipment (45,114) (48,155)
Net payments in affiliation transactions - (1,005)
Net proceeds in separation transactions 3,150 -
--------- ---------
Net cash used in investing activities (41,964) (49,160)
Cash flows from financing activities:
--------------------------------------
Proceeds from Credit Facility 24,500 25,000
Repayment of Credit Facility (24,500) (122,500)
Proceeds from Senior Subordinated Notes 175,000 -
Repayment of Senior Secured Notes (100,000) -
Repayment of other indebtedness (24,602) (12,518)
Purchase of Treasury stock (24,534) -
Deferred financing costs (7,449) -
Premium payment upon early extinguishment of debt (11,731) -
Payments in lieu of stock issuances (3,481) -
Proceeds from exercise of stock options 2,309 3,438
--------- ---------
Net cash provided by (used) in financing
activities 5,512 (106,580)
--------- ---------
Increase in cash and equivalents 97,410 5,367
Cash and equivalents:
--------------------------------------
Beginning of period 20,017 3,389
--------- ---------
End of period $117,427 $8,756
========= =========
US ONCOLOGY, INC.
Condensed Consolidated Balance Sheet
($ in thousands)
September 30, December 31,
2002 2001
-------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and equivalents $117,427 $20,017
Accounts receivable 269,936 275,884
Other current assets 107,121 85,986
-------------- -------------
Total current assets 494,484 381,887
Property and equipment, net 281,790 286,218
Service agreements, net and other assets 343,128 426,562
-------------- -------------
Total assets $1,119,402 $1,094,667
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $305,441 $280,006
Long-term indebtedness 204,223 128,826
-------------- -------------
Total liabilities 509,664 408,832
Minority interests 10,579 9,067
Stockholders' equity 599,159 676,768
-------------- -------------
Total liabilities and stockholders'
equity $1,119,402 $1,094,667
============== =============
Note: Certain reclassifications have been made to the December 31,
2001 balance sheet to conform to the current presentation. These
reclassifications had no effect on earnings or cash flows.
US ONCOLOGY, INC.
Reconciliation of Selected Financial Data
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
2002 2001 2002 2001
---------------- ----------------
Net Income / EPS before unusual
charges and extraordinary loss
------------------------------------
Income(loss) before taxes and
extraordinary loss (52,746) 20,813 (46,035) 54,041
Unusual charges 76,831 0 116,804 5,868
---------------- ----------------
Income before taxes, unusual charges
and extraordinary loss 24,085 20,813 70,769 59,909
Tax rate 38.0% 38.0% 38.0% 38.0%
---------------- ----------------
Net income before unusual charges
and extraordinary loss 14,933 12,904 43,877 37,144
================ ================
Weighted average shares outstanding
- diluted 97,148 100,351 98,845 100,235
================ ================
EPS before unusual charges and
extraordinary loss $0.15 $0.13 $0.44 $0.37
================ ================
EBITDA / Field EBITDA before unusual
charges and extraordinary loss
------------------------------------
Income before taxes, unusual charges
and extraordinary loss 24,085 20,813 70,769 59,909
Depreciation expense 12,153 11,340 36,689 35,037
Amortization expense 4,959 6,033 16,641 16,889
Interest expense 6,073 5,216 17,856 18,596
---------------- ----------------
EBITDA before unusual charges and
extraordinary loss 47,270 43,402 141,955 130,431
General & administrative expenses 16,623 14,662 45,893 43,450
Physician compensation 121,472 103,174 351,892 317,406
---------------- ----------------
Field EBITDA before unusual charges
and extraordinary loss 185,365 161,238 539,740 491,287
================ ================
Cash Earnings Per Share before
unusual charges and extraordinary loss
---------------------------------------
Income before taxes, unusual charges
and extraordinary loss 24,085 20,813 70,769 59,909
Amortization expense 4,959 6,033 16,641 16,889
---------------- ----------------
29,044 26,846 87,410 76,798
Tax rate 38.0% 38.0% 38.0% 38.0%
---------------- ----------------
Cash Earnings 18,007 16,645 54,194 47,615
================ ================
Weighted average shares outstanding 97,148 100,351 98,845 100,235
================ ================
Cash earnings per share before
unusual charges
and extraordinary loss $0.19 $0.17 $0.55 $0.48
================ ================
US ONCOLOGY, INC.
Schedule of Third Quarter 2002 Unusual Charges
(in thousands, except per share data)
(unaudited)
Impair-
ment
of Net
Conversion Revenue Affiliate
to Model Practice Processing A/R
Service Service Disaffi- Centrali- Allowance Total
Line Agree- liations zation
ments
Write-off of
service
agreements $13,054 $51,007 $4,253 $68,314
Gain on sale
of practice
assets (1,063) (2,352) (3,415)
Personnel
reduction
costs $882 882
Reserve for
affiliate
receivables $11,050 11,050
---------- -------- -------- ---------- --------- --------
$11,991 $51,007 $1,901 $882 $11,050 $76,831
========== ======== ======== ========== ========= ========
US Oncology Inc.
Financial Discussion
Third Quarter 2002
The following financial discussion should be read in conjunction conjunction, in astronomy conjunction, in astronomy, alignment of two celestial bodies as seen from the earth. Conjunction of the moon and the planets is often determined by reference to the sun. with the company's financial statements and other information included in this press release, as well as the company's filings with the Securities and Exchange Commission. General We provide comprehensive services to our network of affiliated practices, made up of more than 850 affiliated physicians 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 management, outpatient cancer center operations, cancer research and development services and other practice management services. 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 the overall practice, and the service line model, under which physicians 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 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 en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: to retain a fixed portion of its net revenue before any service fee is paid, provided that all operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. have been reimbursed. We believe that the earnings model properly aligns practice priorities with respect to appropriate business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets and cost control, with us and the practice sharing proportionately pro·por·tion·ate adj. Being in due proportion; proportional. tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates To make proportionate. in practice profitability, while the net revenue model results in us disproportionately dis·pro·por·tion·ate adj. Out of proportion, as in size, shape, or amount. dis  pro·por bearing the impact of increases or declines in
operating margins Operating MarginA ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: . For this reason, we have, since 2001, been negotiating with practices under the net revenue model to convert to the earnings model. In October October: see month. 2001, we commenced a strategy to focus our operations on three core service lines: Oncology Pharmaceutical Management, Outpatient Cancer Center Operations, and Cancer Research and Development Services and began marketing these core services through a non-PPM model. Under the new model, which we refer to as the "service line model," each of those core service lines is offered to physician groups under a separate contract, and we do not necessarily provide the other practice management services described above. We are continuing to operate under the PPM model, but are affording our PPM practices the opportunity to terminate Terminate (terminat.exe) was a shareware modem terminal and host program for MS-DOS and compatible operating systems developed from the early to the late 1990s by the Dane Bo Bendtsen. The last release (5. their existing service agreements, repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. certain of their operating assets Operating Assets Another term for working capital. , and enter into new service line model agreements. We currently expect that a large percentage of existing affiliated practices will remain on the PPM model for the foreseeable fore·see tr.v. fore·saw , fore·seen , fore·see·ing, fore·sees To see or know beforehand: foresaw the rapid increase in unemployment. future. Results of Operations The following table sets forth the percentages of revenue represented by certain items reflected in the Company's Statement of Operations See Income statement. and Comprehensive Income. The following information should be read in conjunction with our unaudited condensed con·dense v. con·densed, con·dens·ing, con·dens·es v.tr. 1. To reduce the volume or compass of. 2. To make more concise; abridge or shorten. 3. Physics a. consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge and notes thereto there·to adv. 1. To that, this, or it. 2. Archaic In addition to that; furthermore. thereto Adverb Formal 1. to that or it 2. included elsewhere herein.
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Pharmaceuticals and supplies 53.1 51.3 51.9 51.2
Field compensation and benefits 20.0 21.6 21.0 21.3
Other field costs 11.7 11.7 11.7 12.1
General and administrative 3.9 3.9 3.8 3.8
Impairment, restructuring and other
charges 18.3 -- 9.5 0.5
Depreciation and amortization 4.1 4.6 4.4 4.6
------ ------ ------ ------
Income (loss) from operations (11.1) 6.9 (2.3) 6.5
Interest expense, net (1.4) (1.4) (1.5) (1.7)
------ ------ ------ ------
Income (loss) before income taxes, and
extraordinary loss (12.5) 5.5 (3.8) 4.8
Income tax benefit (provision) 3.9 (2.1) 1.2 (1.8)
------ ------ ------ ------
Net income (loss) before extraordinary
loss (8.6) 3.4 (2.6) 3.0
Extraordinary loss, net of income taxes - -- (0.7) --
------ ------ ------ ------
Net income (loss) (8.6)% 3.4% (3.3)% 3.0%
====== ====== ====== ======
Net Operating Revenue. Net operating revenue includes two components - net patient revenue and our other revenue: -- Property and equipment would increase by the fair market value of the assets, and to the extent such asset values are less than the total amount outstanding under the lease, we would recognize a charge to reflect the difference between such asset values and the amount outstanding under the synthetic lease at such time as we bring the properties onto our balance sheet; -- Assuming the purchase of the properties were financed through borrowing, or in the event the existing arrangement were required to be characterized as debt, indebtedness would increase by $72.0 million; and -- Depreciation would increase as a result of our owning the assets. The following table shows the components of our net operating revenue for the three and nine months ended September 30, 2002 and 2001 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- --------- ----------- -----------
Net patient revenue $514,742 $463,013 $1,513,309 $1,402,241
Other revenue 26,907 15,660 61,084 42,167
--------- --------- ----------- -----------
Net operating revenue $541,649 $478,673 $1,574,393 $1,444,408
========= ========= =========== ===========
Net patient revenue for services provided to patients by the practices are 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 $1,444.4 million in the first nine months of 2001 to $1,574.4 million in the first nine months of 2002, an increase of $130.0 million, or 9.0%. Same practice net operating revenue (which excludes the results of practices with which we disaffiliated since January January: see month. 30, 2001 and service line practices) increased from $1,372.9 million for the first nine months of 2001 to $1,540.0 million for the first nine months of 2002, an increase of $167.0 million, or 12.2%. Net operating revenue increased from $478.7 million for the third quarter of 2001 to $541.7 million for the third quarter of 2002, an increase of $63.0 million, or 13.2%. Same practice net operating revenue increased from $464.7 million for the third quarter of 2001 to $535.2 million for the third quarter of 2002, an increase of $70.5 million, or 15.2%. Revenue growth was caused by increases in revenues attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to pharmaceuticals. However, this growth is primarily attributable to increased utilization utilization, n 1. the extent to which a given group uses a particular service in a specified period. Although usually expressed as the number of services used per year per 100 or per 1000 persons eligible for the service, utilization rates may be of more expensive chemotherapy agents and additional supportive care supportive care, n medical and other interventions that attempt to support and make comfortable rather than to cure. drugs, rather than increased patient volume. During the third quarter of 2002, medical oncology visits increased 1.0% over the same period during the prior year and declined by 3.6% from the second quarter of 2002. In the outpatient cancer center product line, revenues declined, primarily as a result of our disaffiliation disaffiliation Social medicine The loss or absence of social cohesion and contact with family and/or former friends and peers. See Homelessness, Mission, Runaway. with a radiation oncology radiation oncology n. The branch of radiology that deals with the use of ionizing radiation to treat cancers. radiation oncology facility during the third quarter and our sale of technical assets with respect to certain technical radiology revenues during the second quarter, with only revenues related to PET services increasing. PET scans PET scan (pĕt) or positron emission tomography (pŏz`ĭtrŏn' ĭmĭsh`ən təmŏg`rəfē) increased from 4,003 in the first nine months of 2001 to 9,096 in the first nine months of 2002, an increase of 5,093 or 127.2%. PET scans increased from 1,747 in the third quarter of 2001 to 3,084 for the third quarter of 2002, an increase of 1,337 or 76.5%. The increase in the number of PET scans is attributable to our opening five PET units since September 30, 2001, as well as growth of 68.0% in the number of treatments on the nine PET units that were operational during the first nine months of 2001. We currently have nine cancer centers and seven PET installations in various stages of development. We expect to open two cancer centers and two PET installations during the remainder of 2002. The following table shows our net operating revenue by segment for the three months ended September 30, 2002 and June June: see month. 30, 2002, and the nine months ended September 30, 2002 (in thousands). Since this is the first year in which we have reportable segments, and for which sufficient information is now available to permit such reporting, no prior year comparable information is available:
Three Months Three Months Nine Months
Ended Ended Ended
September 30, June 30, September 30,
2002 2002 2002
------------- ------------- -------------
Oncology pharmaceutical
management $234,635 $224,952 $665,219
Other practice management
services 215,505 213,335 630,141
------------- ------------- -------------
Medical oncology 450,140 438,287 1,295,360
Outpatient cancer center
operations 73,948 78,509 230,192
Other 17,561 14,999 48,841
------------- ------------- -------------
$541,649 $531,795 $1,574,393
============= ============= =============
Medical oncology net operating revenue increased from $438.3 million in the second quarter of 2002 to $450.1 million for the third quarter of 2002, an increase of $11.9 million or 2.7%. This increase was due to the increased utilization of certain drugs, partially offset by a decline in medical oncology visits. Outpatient cancer center operations net operating revenue decreased from $78.5 million in the second quarter of 2002 to $73.9 million for the third quarter of 2002, a decrease of $4.6 million, or 5.8%. This decrease is attributable to our disaffiliation with a radiation oncology facility during the third quarter and our sale of technical assets with respect to certain technical radiology revenues during the second quarter. Currently 96.3% of our net operating revenue is derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. under the PPM model. The following table shows the amount of operating revenue we derived under each type of service agreement for the three and nine months ended September 30, 2002 and 2001 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------------------------- ----------------------
Revenue % Revenue % Revenue % Revenue %
-------- ----- -------- ----- ---------- ----- ---------- -----
Earnings
model $368,153 68.0 $280,387 58.6 $1,070,213 68.0 $826,367 57.2
Net
revenue
model 156,978 29.0 189,957 39.7 469,481 29.8 594,529 41.2
Service
line
model 6,020 1.1 0 0.0 7,576 0.5 0 0.0
Other 10,498 1.9 8,329 1.7 27,123 1.7 23,512 1.6
-------- ----- -------- ----- ---------- ----- ---------- -----
$541,649 100.0 $478,673 100.0 $1,574,393 100.0 $1,444,408 100.0
======== ===== ======== =====-========== ===== ========== =====
During the first nine months of 2002, five net revenue model practices accounting for 7.2% of our net operating revenue for the first nine months of 2002 converted to the earnings model. Since the beginning of 2001 and through September 30, 2002, seventeen Seventeen novel of young love. [Am. Lit.: Booth Tarkington Seventeen in Magill I, 882] See : Adolescence practices accounting for 28.6% of net operating revenue in the first nine months of 2002 have converted from the net revenue model to the earnings model. As of September 30, 2002, twenty-five service agreements were on the earnings model and twelve service agreements were on the net revenue model. In addition during the first nine months of 2002, we transitioned three PPM practices from the earnings model to the service line model and commenced operations at two new practices under the service line model. Also, during the first nine months of 2002, we disaffiliated with practices consisting of twenty-three physicians, which had been operating under the net revenue model. These practices represented 3.6% of our net operating revenue for the first nine months of 2002. 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- --------- ----------- -----------
Net operating revenue $541,649 $478,673 $1,574,393 $1,444,408
Amounts retained by the
practices (121,472) (103,174) (351,892) (317,406)
--------- --------- ----------- -----------
Revenue $420,177 $375,499 $1,222,501 $1,127,002
========= ========= =========== ===========
Amounts retained by practices increased from $317.4 million for the first nine months of 2001 to $351.9 million for the first nine months of 2002, an increase of $34.5 million, or 10.9%. Amounts retained by practices increased from $103.2 million in the third quarter of 2001 to $121.5 million in the third quarter of 2002, an increase of $18.3 million, or 17.7%. 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 22.0% to 22.4% for the nine months ended September 30, 2001 and 2002, respectively, and from 21.6% to 22.4% for the third quarters of 2001 and 2002, respectively, as a result of increased profitability and improved operating margins prior to physician compensation and general and administrative expenses. Revenue increased from $411.0 million for the second quarter of 2002 to $420.2 million for the third quarter of 2002, an increase of $9.2 million, or 2.2%. Revenue growth was caused by increases in pharmaceutical revenues. The following table shows our revenue by segment for the three months ended September 30, 2002 and June 30, 2002 and the nine months ended September 30, 2002 (in thousands):
Three Three Nine
Months Months Months
Ended Ended Ended
Sept. 30, June 30, Sept. 30,
2002 2002 2002
------------ ----------------------
Oncology pharmaceutical management $232,846 $225,439 $664,538
Other practice management services 120,520 117,753 355,271
------------ ---------- -----------
Medical oncology 353,366 343,192 1,019,809
Outpatient cancer center
operations 49,952 54,076 157,086
Other 16,859 13,704 45,606
------------ ---------- -----------
$420,177 $410,972 $1,222,501
============ ========== ===========
Medicare and Medicaid Medicare and Medicaid U.S. government programs in effect since 1966. Medicare covers most people 65 or older and those with long-term disabilities. Part A, a hospital insurance plan, also pays for home health visits and hospice care. are the practices' largest payors. During the first nine months of 2002, approximately 43% of the practices' net patient revenue was derived from Medicare and Medicaid payments and 39% was so derived in the comparable period last year. During the third quarter of 2002, approximately 43% of the practices' net patient revenue was derived from Medicare and Medicaid payments and 41% was so derived in the comparable period last year. This percentage varies among practices. No other single payor payor (payer) n. The one who must make payment on a promissory note. accounted for more than 10% of our revenues in the first nine months of 2002 and 2001. Pharmaceuticals and Supplies. Pharmaceuticals and supplies expense, which includes drugs, medications and other supplies used by the practices, increased from $577.1 million in the first nine months of 2001 to $635.0 million in the same period of 2002, an increase of $57.8 million, or 10.0%. Pharmaceuticals and supplies expense increased from $192.5 million in the third quarter of 2001 to $223.1 million in the third quarter of 2002, an increase of $30.6 million, or 15.9%. As a percentage of revenue, pharmaceuticals and supplies increased from 51.2% in the first nine months of 2001 to 51.9% in the same period in 2002 and increased from 51.3% in the third quarter of 2001 to 53.1% in the third quarter of 2002. The increase was attributable to an increase in the percentage of our revenue attributable to pharmaceuticals as a result of higher levels of drug utilization and more expensive drugs and to a lesser extent the conversion of three practices to, and the addition of two practices in new markets under the service line model. Such increases were partially offset by more favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. drug pricing with respect to some drugs. We expect that third-party payors, particularly government payors, will continue to negotiate or mandate A judicial command, order, or precept, written or oral, from a court; a direction that a court has the authority to give and an individual is bound to obey. A mandate might be issued upon the decision of an appeal, which directs that a particular action be taken, or upon a 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. Current governmental focus on average wholesale price (AWP AWP Awaiting Parts (military equipment status) AWP Average Wholesale Price AWP Annual Work Plan AWP Associated Writing Programs AWP Amusement with Prizes AWP Any Willing Provider AWP Aerial Work Platform ) as a basis for reimbursement could also lead to a wide-ranging wide-rang·ing adj. Covering a wide area; including much: a pianist's wide-ranging repertoire; a wide-ranging interview. reduction in the reimbursement for pharmaceuticals by payors. Payors also continue to implement both voluntary and mandatory Peremptory; obligatory; required; that which must be subscribed to or obeyed. Mandatory statutes are those that require, as opposed to permit, a particular course of action. programs in which the practice must obtain drugs they administer To give an oath, as to administer the oath of office to the president at the inauguration. To direct the transactions of business or government. Immigration laws are administered largely by the Immigration and Naturalization Service. to patients from a third party. In turn, the third party, rather than the practice, bills and receives payment for the drugs directly from the payor. 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 relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc certain pharmaceutical agents, we have adopted 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 model should have a similar effect, since our revenues and earnings are not directly dependent on pharmaceutical margins under that model. In addition, we have numerous efforts underway 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 usage patterns (rather than growth), we believe that our overall margins will continue 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 $240.0 million in the first nine months of 2001 to $256.4 million in the comparable 2002 period, an increase of $16.4 million or 6.8%. Field compensation and benefits increased from $81.0 million in the third quarter of 2001 to $84.1 million in the third quarter of 2002, an increase of $3.1 million, or 3.8%. As a percentage of revenue, field compensation and benefits decreased from 21.3% in the first nine months of 2001 to 21.0% in the first nine months of 2002 and decreased from 21.6% in the third quarter of 2001 to 20.0% in the third quarter of 2002. The increase in costs is attributed to increases in employee compensation rates to address shortages of certain key personnel such as oncology nurses oncology nurse Nursing A nurse specialized in treating and caring for people with cancer Salary $53K + 2% bonus. See Oncology. and radiation technicians. We continue to experience a severe shortage of qualified radiation personnel, with a vacancy VACANCY. A place which is empty. The term is principally applied to cases where an office is not filled. 2. By the constitution of the United States, the president has the power to fill up vacancies that may happen during the recess of the senate. rate up to 20%. This scarcity Scarcity The basic economic problem which arises from people having unlimited wants while there are and always will be limited resources. Because of scarcity, various economic decisions must be made to allocate resources efficiently. of full-time full-time adj. Employed for or involving a standard number of hours of working time: a full-time administrative assistant. full employees requires us to hire more expensive temporary employees, and to incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. significant costs in recruitment recruitment /re·cruit·ment/ (re-krldbomact´ment) 1. the gradual increase to a maximum in a reflex when a stimulus of unaltered intensity is prolonged. 2. efforts. The decrease as a percentage of revenue is attributable to pharmaceutical revenues increasing at a more rapid rate than compensation and benefits. Other Field Costs. Other field costs, which consist of rent, utilities, repairs and maintenance, insurance and other direct field costs, increased from $136.0 million in the first nine months of 2001 to $143.3 million in the first nine months of 2002, an increase of $7.3 million or 5.4%. Other field costs increased from $43.9 million in the third quarter of 2001 to $49.0 million in the third quarter of 2002, an increase of $5.1 million, or 11.6%. As a percentage of revenue, other field costs decreased from 12.1% in the first nine months of 2001 to 11.7% in the first nine months of 2002 and remained at 11.7% for the third quarters of 2001 and 2002. The decrease for the first nine months is attributable to economies of scale realized by increased pharmaceutical revenues. General and Administrative. General and administrative expenses increased from $43.5 million for the first nine months of 2001 to $45.9 million for the first nine months of 2002, an increase of $2.4 million, or 5.6%. General and administrative expenses increased from $14.7 million in the third quarter of 2001 to $16.6 million in the third quarter of 2002, an increase of $2.0 million, or 13.4%. In 2002, several new personnel positions have been created to help manage and support our introduction of the service line model combined with the implementation of our program to provide industry advisory services advisory services advisory services provided to the public, in their capacity as owners and managers of animals, are an important part of veterinary science. They may be provided by government bureaux, by commercial companies who deal in pharmaceuticals or animals or animal to pharmaceutical companies and other vendors. We anticipate incurring in·cur tr.v. in·curred, in·cur·ring, in·curs 1. To acquire or come into (something usually undesirable); sustain: incurred substantial losses during the stock market crash. 2. additional general and administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. during the remainder of 2002 and early 2003, as we add additional resources in our sales and marketing areas in connection with the foregoing business lines. As a percentage of revenue, general and administrative costs remained steady at 3.8% in the first nine months of 2001 and 2002 and 3.6% in the third quarters of 2001 and 2002. Overall, we experienced steady operating margins from the first nine months of 2001 to the first nine months of 2002, with earnings before taxes, interest, depreciation and amortization, impairment, restructuring and other charges and extraordinary loss (EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become ), as a percentage of revenue, remaining at 11.6%. The following is the EBITDA of our operations by operating segment for the three months ended September 30, 2002 and June 30, 2002 and the nine months ended September 30, 2002 (in thousands). Since this is the first year in which we have reportable segments, and for which sufficient information is now available to permit such reporting, no prior year comparable information is available.
Three Months Three Months Nine Months
Ended Ended Ended
September 30, June 30, September 30,
2002 2002 2002
-------------- ------------- -------------
Oncology pharmaceutical
management $23,114 $20,761 $62,149
Other practice management
services 22,429 23,613 69,529
-------------- ------------- -------------
Medical oncology 45,543 44,374 131,678
Outpatient cancer center
operations 15,155 17,938 49,076
Other 3,195 1,846 7,094
-------------- ------------- -------------
63,893 64,158 187,848
General and administrative
expenses (16,623) (15,708) (45,893)
-------------- ------------- -------------
$47,270 $48,450 $141,955
============== ============= =============
The decrease in EBITDA for the outpatient cancer center operations is attributable to our disaffiliation with a radiation oncology facility during the third quarter and our sale of technical assets with respect to certain technical radiology revenues during the second quarter. Impairment, restructuring and other charges. In the fourth quarter of 2000, we comprehensively analyzed an·a·lyze tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es 1. To examine methodically by separating into parts and studying their interrelations. 2. Chemistry To make a chemical analysis of. 3. our operations and cost structure, focusing on our non-core assets and activities to determine whether they were still consistent with our strategic direction. As a result, we recorded a restructuring charge restructuring charge The expense of reorganizing a company's operations. A restructuring charge is an infrequent expense that generally results from asset writedowns or facility closings. during the fourth quarter of 2000. Details of the restructuring charge activity relating to that charge for the first nine months of 2002 are as follows (in thousands):
Accrual at Accrual at
December 31, Payments September 30,
2001 2002
------------- -------- -------------
Severance of employment agreement $215 $(18) $197
Site closures 1,081 (241) 840
------------- -------- -------------
Total $1,296 $(259) $1,037
============= ======== =============
During the first quarter of 2001, we announced plans to further reduce overhead costs overhead costs see fixed costs. and recognized additional pre-tax restructuring charges of $5.9 million, consisting of (i) a $3.1 million charge relating to the elimination of approximately 50 personnel positions, (ii) a $2.5 million charge for remaining lease obligations and related improvements at sites we decided to close and (iii) a $0.3 million charge relating to software applications we decided to abandon abandon v. to intentionally and permanently give up, surrender, leave, desert, or relinquish all interest or ownership in property, a home or other premises, a right of way, and even a spouse, family, or children. . Details of the restructuring charge activity relating to that charge for the first nine months of 2002 are as follows (in thousands):
Accrual at Accrual at
December 31, Payments September 30,
2001 2002
--------------- ----------- --------------
Costs related to personnel
reductions $213 $(213) $-
Closure of facilities 1,132 (177) 955
--------------- ----------- --------------
Total $1,345 $(390) $955
=============== =========== ==============
During the first nine months of 2002, we have incurred impairment and restructuring costs related to transitional activity, including the following: -- Property and equipment would increase by the fair market value of the assets, and to the extent such asset values are less than the total amount outstanding under the lease, we would recognize a charge to reflect the difference between such asset values and the amount outstanding under the synthetic lease at such time as we bring the properties onto our balance sheet; -- Assuming the purchase of the properties were financed through borrowing, or in the event the existing arrangement were required to be characterized as debt, indebtedness would increase by $72.0 million; and -- Depreciation would increase as a result of our owning the assets. In that context, we recognized the following impairment, restructuring and other charges during the three months and nine months ending September 30, 2002 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2002
------------------
Write-off of service agreements $68,314 $107,999
Gain on sale of practice assets,
net (3,415) (5,433)
Personnel reduction costs 882 1,791
Allowance on an affiliate
receivable 11,050 11,050
Consulting costs for
implementing service line 0 1,397
------------------ ------------------
$76,831 $116,804
================== ==================
The following is a detailed summary of the third quarter charges (in thousands):
Impair-
ment of
Net
Con- Prac- Revenue
version tice Model
to Disaf- Service Processing Affi-
Service filia- Agree- Centrali- liate A/R
Line tions ments zation Allowance Total
-------- -------- -------- ---------- ---------- --------
Write-off of
ser-
vice
agreements $13,054 $4,253 $51,007 $68,314
Gain on sale
of practice
assets (1,063) (2,352) (3,415)
Personnel
reduction
costs $882 882
Allowance on
an
affiliate
receivable __ __ __ __ $11,050 11,050
------- -------- -------- ---------- ---------- --------
$11,991 $1,901 $51,007 $882 $11,050 $76,831
======== ======== ======== ========== ========== ========
During the first nine months of 2002, we transitioned three of our PPM practices with 23 physicians to the service line model, including one such transition in the third quarter. In each transaction, the existing PPM service agreement was terminated ter·mi·nate v. ter·mi·nat·ed, ter·mi·nat·ing, ter·mi·nates v.tr. 1. To bring to an end or halt: , the practice repurchased its assets, and future consideration owing to owing to prep. Because of; on account of: I couldn't attend, owing to illness. owing to prep → debido a, por causa de physicians for their initial affiliation affiliation (  fil´ēā´sh with the Company was either accelerated or
forfeited for·feit n. 1. Something surrendered or subject to surrender as punishment for a crime, an offense, an error, or a breach of contract. 2. Games a. . We also disaffiliated with physicians in four net revenue markets during the third quarter and terminated a service agreement in one market with respect to certain radiology sites during the second quarter. In these terminations, practice assets were repurchased and fees were paid in connection with the termination. Consideration remaining to the physicians (if any) with respect to their original PPM affiliation transaction was accelerated. The impairment of service agreements during the third quarter was a non-cash, pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern charge of $68.3 million comprising (i) a $13.0 million charge related to a PPM service agreement that was terminated in connection with conversion to the service line model, (ii) a $51.0 million charge related to three net revenue model service agreements that became impaired See assistive technology. during the third quarter based upon our analysis of projected cash flows under those agreements, taking into account developments in those markets during the third quarter and (iii) a $4.3 million charge related to a group of physicians under a net revenue model service agreement with which we disaffiliated during the third quarter. The remainder of the charge relating to impairment of service agreements for the first nine months of 2002 was a non-cash, pretax charge of $33.8 million related to a net revenue model service agreement that became impaired during the second quarter based upon our analysis of projected cash flows under that agreement, taking into account developments in that market during the second quarter. The $3.4 million net gain on sale of practice assets during the third quarter comprised (a) net payments of $4.3 million paid by converting and disaffiliating physicians and (b) a $0.3 million net recovery of working capital assets capital assets n. equipment, property, and funds owned by a business. (See: capital, capital account) , partially offset by a $1.1 million net charge arising from our accelerating consideration that would have been due to physicians in the future in connection with those transactions. During the second quarter we recognized a $2.0 million net gain on sale of practice assets. During that quarter, we terminated a service agreement as it related to certain radiology sites and sold the related assets, including the right to future revenues attributable to radiology technical fee revenue at those sites, in exchange for delivery to us of 1.1 million shares of our common stock. In connection with that sale, we also recognized a write-off Write-Off A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues. of a receivable of $0.5 million due from the physicians and agreed to make a cash payment to the buyer of $0.6 million to reflect purchase price adjustments during the third quarter. The transaction resulted in a $3.9 million gain based on the market price as of the date of the termination. This gain was partially offset by a $1.9 million net impairment of working capital assets relating to service line conversions, disaffiliations and potential disaffiliations. During the third quarter, in connection with our transition, we commenced an initiative to further centralize cen·tral·ize v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es v.tr. 1. To draw into or toward a center; consolidate. 2. certain of our accounting and financial reporting functions at our headquarters in Houston Houston, city (1990 pop. 1,630,553), seat of Harris co., SE Tex., a deepwater port on the Houston Ship Channel; inc. 1837. Economy The fourth largest city in the nation and the largest in the entire South and Southwest, Houston is a port of entry; , resulting in a $0.9 million charge for personnel reduction costs. Management believes that such centralization cen·tral·ize v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es v.tr. 1. To draw into or toward a center; consolidate. 2. will enhance efficiency and improve internal operating controls of those functions. During the first and second quarters of 2002, we recognized $0.6 million and $0.3 million, respectively, for personnel reduction costs. During the third quarter, we recognized an $11.1 million allowance related to an $11.1 million receivable due to us from one of our affiliated practices. In the course of our PPM activities, we advance amounts to physician groups and retain fees based upon our estimates of practice performance. Subsequent events and related adjustments may result in the creation of a receivable with respect to certain amounts advanced. During the third quarter, we made the determination that a portion of such amounts owed by physician practices to us may have become uncollectible Adj. 1. uncollectible - not capable of being collected; "a bad (or uncollectible) debt" bad invalid - having no cogency or legal force; "invalid reasoning"; "an invalid driver's license" due to, among other things, the age of the receivable and circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or relating to practice operations. During the second quarter we recognized $1.0 million in professional fees for consultants advising us on the implementation of the service line. During the first quarter of 2002, we also recognized charges of $0.4 million in consulting fees related to our introduction of the service line model. As discussed above, during the first nine months of 2002, we have recorded charges related to the impairment of certain net revenue model service agreements. From time to time, we evaluate our intangible assets for impairment, which involves an analysis comparing the aggregate expected future cash flows Expected future cash flows Projected future cash flows associated with an asset. under each agreement to its carrying value Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. as an intangible asset on our balance sheet. In estimating future cash flows, we consider past performance as well as known trends that are likely to affect future performance. In some cases we also take into account our current activities with respect to that agreement that may be aimed at altering performance or reversing trends. All of these factors used in our estimates are subject to error and uncertainty. Interest. Net interest expense decreased from $18.6 million in the first nine months of 2001 to $17.9 million for the first nine months of 2002, a decrease of $0.7 million or 4.0%. Net interest expense increased from $5.2 million in the third quarter of 2001 to $6.1 million in the third quarter of 2002, an increase of $0.9 million, or 16.4%. As a percentage of revenue, net interest expense decreased from 1.7% for the first nine months of 2001 to 1.5% for the first nine months of 2002 and remained at 1.4% for the third quarters of 2001 and 2002. Such decreases are due to lower borrowing levels during the first nine months of 2002. On February February: see month. 1, 2002, we refinanced our indebtedness INDEBTEDNESS. The state, of being in debt, without regard to the ability or inability of the party to pay the same. See 1 Story, Eq. 343; 2 Hill. Ab. 421. 2. by issuing $175 million in 9.625% Senior Subordinated Subordinated A claim ranked lower in priority than other claims. Common stock claims are always subordinated to debt. 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 nine months of 2002, as compared to the same period in 2001, partially offset by the increased rate of interest contributed to the decrease of interest expense. Income Taxes. For the first nine months of 2002, we recognized a tax benefit of 19.2 million, after extraordinary loss, resulting in an effective tax rate of 32.1%, compared to 38.0% for the same prior year period. For the third quarter of 2002, we recognized an income tax benefit of $16.5 million as a result of the impairment and restructuring charges discussed above. The effective tax rate in the three and nine month periods ended September 30, 2002 reflects management's estimate of the limited extent to which we will be able to deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. the impairment, restructuring and other charges at the state level. Extraordinary Loss. During the first quarter of 2002, we recorded an extraordinary loss of $13.6 million, before income taxes of $5.2 million, in connection with the early extinguishment The destruction or cancellation of a right, a power, a contract, or an estate. Extinguishment is sometimes confused with merger, though there is a clear distinction between them. of our $100 million Senior Secured Notes due 2006 and our existing credit facility. The loss consisted of a prepayment penalty Prepayment penalty A fee a borrower pays a lender when the borrower repays a loan before its scheduled time of maturity. 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. 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 re·a·lign tr.v. re·a·ligned, re·a·lign·ing, re·a·ligns 1. To put back into proper order or alignment. 2. To make new groupings of or working arrangements between. of our business would cause us to record unusual charges for write-offs of service agreements and other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. and other charges. These charges include the impairment, restructuring and other charges and extraordinary loss we have recorded during 2002. Through September 30, we had recorded $10.6 million in unusual cash charges and $119.8 million in unusual non-cash charges Non-Cash Charge A charge off, made by a company against earnings, that does not require an initial outlay of cash. Notes: Non-cash charges are typically against the depreciation, amortization, and depletion accounts on a company's balance sheet. in connection with our transition process. In that September 2001 press release, we disclosed dis·close tr.v. dis·closed, dis·clos·ing, dis·clos·es 1. To expose to view, as by removing a cover; uncover. 2. To make known (something heretofore kept secret). that if all of our PPM model practices converted to the service line we would anticipate incurring approximately $480 million in such charges. Although that analysis would still hold true if all practices converted, we do not believe full conversion is likely and do not believe that we are likely to recognize the full $480 million amount in connection with our transition. Net Income. Net income decreased from $33.5 million, or $0.33 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share, in the first nine months of 2001 to a net loss of $(40.5) million, or $(0.41) per share, in the first nine months of 2002, a decrease of $74.0 million or 220.9%. Net income as a percentage of revenue changed from 3.0% for the first nine months of 2001 to (3.3)% for the first nine months of 2002 and from 3.4% in the third quarter of 2001 to (8.6)% in the third quarter of 2002. Included in net income for the first nine months of 2002 are impairment, restructuring and other charges of $116.8 million and an extraordinary loss on early extinguishment of debt of $8.5 million, net of income taxes. Excluding the extraordinary loss and impairment, restructuring and other charges, net income for the nine months ended September 30, 2002 would have been $43.9 million, which represents earnings per share of $0.44. Included in net income for the nine months ended September 30, 2001 were pre-tax restructuring charges of $5.9 million. Excluding the restructuring charges, net income for the first nine months of 2001 would have been $37.1 million, which represents earnings per share of $0.37. Liquidity and Capital Resources As of September 30, 2002, we had net working capital of $189.0 million, including cash and cash equivalents of $117.4 million. We had current liabilities Current Liabilities Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year. of $305.4 million, including $19.3 million in current maturities of long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. , and $204.2 million of long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. indebtedness. During the first nine months of 2002, we provided $133.9 million in net operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. , invested $42.0 million, and provided cash from financing activities in the amount of $5.5 million. As of October 24, 2002, we had cash and cash equivalents of $115.6 million. Cash Flows From Operating Activities During the first nine months of 2002, we generated $133.9 million in cash flows from operating activities as compared to $161.1 million in the comparable prior year period. The decrease in cash flow is attributable to (i) advance purchases of certain pharmaceutical products during the first nine months of 2002 in order to obtain favorable pricing and qualify for certain rebates, (ii) reduction in number of accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying days outstanding, and (iii) timing of certain working capital payments. Our accounts receivable days outstanding as of September 30, 2002, decreased to 47 days from 50 days as of December December: see month. 31, 2001, as compared to a decrease to 56 days as of September 30, 2001, from 67 days as of December 31, 2000. Cash Flows from Investing Activities During the first nine months of 2002 and 2001, we expended ex·pend tr.v. ex·pend·ed, ex·pend·ing, ex·pends 1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend. 2. $45.1 million and $48.2 million in capital expenditures and financed an additional $8.6 million and $16.8 million through various leasing facilities, respectively. During the first nine months of 2002 and 2001, we expended $23.9 million and $21.8 million on the development and construction of cancer centers, respectively. In addition, we expended $8.8 million and $6.8 million on installation of PET centers, respectively, during the nine months ended September 30, 2002 and 2001, of which $8.0 million and $5.6 million, respectively, was financed through various equipment operating leases Operating Lease A lease contract that allows the use of an asset, but does not convey rights similar to ownership of the asset. Notes: An operating lease is not capitalized it is accounted for as a rental expense. . Maintenance capital expenditures were $20.5 million and $25.2 million in the first nine months of 2002 and 2001, respectively. For all of 2002, we anticipate expending a total of approximately $30 to $35 million on maintenance capital expenditures and approximately $40 to $45 million on development of new cancer centers and PET installations. Expected capital expenditures on cancer center and PET development are below forecasted amounts due to the Company's focus on transitional activity. Cash Flows from Financing Activities During the first nine months of 2002, we provided cash from financing activities of $5.5 million as compared to cash used of $106.6 million in the first nine months of 2001. Such increase in cash flow is primarily attributed to the proceeds 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 Prepayment 1. The payment of a debt obligation prior to its due date. 2. The excess payment over a scheduled debt repayment amount. Notes: 1. Examples include deferred expenses such as rent and early loan repayments. 2. premium paid as a result of early extinguishment of our Senior Secured Notes due 2006. In addition, we expended $24.5 million to repurchase 2.9 million shares of our Common Stock during the second and third quarters of 2002. Additionally, we received 1.1 million shares of our Common Stock in exchange for certain technical assets in the second quarter of 2002. Subsequent to September 30, 2002, we repurchased 1.2 million shares of our Common Stock, bringing the total number of shares acquired through repurchase and exchange for assets to 5.2 million through October 17, 2002. Historically, we satisfied our development and transaction needs through various debt and equity financings Equity Financing The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation. and through borrowings under a $175 million syndicated revolving credit Revolving Credit A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. facility with First Union National Bank (First Union), as a lender LENDER, contracts. He from whom a thing is borrowed. 2. The contract of loan confers rights, and imposes duties on the lender. 1. The lender has the right to revoke the loan at his mere pleasure; 9 Cowen, R. 687; 8 Johns. Rep. 432; 1 T. R. 480; 2 Campb. Rep. and as an agent for various other lenders. We also used a $75 million synthetic Synthetic A financial instrument that is created artificially by simulating another instrument with the combined features of a collection of other assets. Notes: leasing facility in connection with developing integrated cancer centers. Availability of new advances under the leasing facility terminated in June 2001. We discuss this in more detail below. 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 float v. float·ed, float·ing, floats v.intr. 1. a. To remain suspended within or on the surface of a fluid without sinking. b. 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 Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. in a private offering under Rule 144A Rule 144A A Securities & Exchange Commission rule modifying a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves. 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 Unsecured A loan or equity interest that is given without any guarantee of payment, performance, satisfaction or opportunity for return from the recipient. No property, interest or security is used as collateral in either a guarantee or a pledge. , 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 used the proceeds from the Senior Subordinated Notes to repay in full our existing $100 million in Senior Secured Notes due 2006, including payment of a prepayment penalty of $11.7 million due as a result of our repayment Repayment The act of paying back a debt. Notes: Everyone has to repay their debts eventually. See also: Debt, Defeasance, Loan of the notes before their scheduled maturity. We also used proceeds from the Senior Subordinated Notes to pay fees and related expenses of $4.8 million associated with issuing those notes and to pay fees and related expenses of $2.7 million in connection with the new credit facility. During the first quarter of 2002, we recognized the prepayment penalty of $11.7 million and a write-off of unamortized deferred financing costs related to the terminated debt agreements of $1.9 million, which were recorded as an extraordinary item during the first quarter of 2002. Our introduction of the service line structure and transition away from the net revenue model and the related realignment of our business required an amendment or refinancing Refinancing An extension and/or increase in amount of existing debt. of our existing facilities. The new credit facility and Senior Subordinated Notes give us flexibility in this regard. In addition, we believe that the longer maturity of the Senior Subordinated Notes adds stability to our capital structure. We have entered into an operating lease arrangement known as a "synthetic lease Synthetic Lease An operating lease that is structured in a way so that it is not recorded as a liability on the balance sheet. Instead, it is considered to be an expense on the income statement. ," under which a special purpose entity has acquired title to properties, paid construction costs and leased to us the real estate and equipment at some of our cancer centers. The synthetic lease facility was funded by a syndicate Syndicate organized crime unit throughout major cities of the United States. [Am. Hist.: NCE, 2018] See : Gangsterism of financial institutions. A synthetic lease is preferable to a conventional real estate lease since the lessee One who rents real property or Personal Property from another. A lessee of land is a tenant. Cross-references Landlord and Tenant. lessee n. the person renting property under a written lease from the owner (lessor). benefits from attractive interest rates, the ability to claim depreciation under tax laws and the ability to participate in the development process. We entered into the synthetic lease in December 1997. It matures in June 2004. As of September 30, 2001, we had $72.0 million outstanding under the synthetic lease facility and no further amounts are available under that facility. The annual lease cost of the synthetic lease is approximately $3.6 million, based on interest rates in effect as of September 30, 2002. The lessor One who rents real property or Personal Property to another. A lessor of land is a landlord. Cross-references Landlord and Tenant. lessor n. the owner of real property who rents it to a lessee pursuant to a written lease. under the synthetic lease holds real estate assets (based on original acquisition and construction costs) of approximately $55.4 million and equipment of approximately $16.6 million (based on original acquisition cost) at nineteen locations. The lease is renewable in one-year adj. 1. completing its life cycle within a year. Adj. 1. one-year - completing its life cycle within a year; "a border of annual flowering plants" annual phytology, botany - the branch of biology that studies plants increments, but only with consent of the financial institutions that are parties thereto. If the lease is not renewed re·new v. re·newed, re·new·ing, re·news v.tr. 1. To make new or as if new again; restore: renewed the antique chair. 2. 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 includes 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 Residual value Usually refers to the value of a lessor's property at the time the lease expires. residual value The price at which a fixed asset is expected to be sold at the end of its useful life. of at least 85% of the total amount outstanding for the properties. The guarantees are secured by substantially all of our assets. If the properties were sold to a third party at a price such that we were required to make a residual value guarantee payment, such amount would be recognized as an expense in our statement of operations. A synthetic lease is an operating lease according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. accounting principles generally accepted in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. "GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ." Thus, our obligations under the synthetic lease are not recorded as debt and the underlying properties and equipment are not recorded as assets on our balance sheet. Our rental RENTAL. A roll or list of the rents of an estate containing the description of the lands let, the names of the tenants, and other particulars connected with such estate. This is the same as rent roll, from which it is said to be corrupted. payments (which approximate ap·prox·i·mate v. To bring together, as cut edges of tissue. adj. 1. Relating to the contact surfaces, either proximal or distal, of two adjacent teeth; proximate. 2. Close together. interest amounts under the synthetic lease financing) are treated as operating rent commitments, and are excluded from our aggregate debt maturities. On February 27, 2002, the FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). determined that synthetic lease properties meeting certain criteria would be required to be recognized as assets with a corresponding liability effective January 1, 2003. Our synthetic lease meets these criteria. The determination is not final and is subject to additional rule-making procedures, but assuming the determination becomes a formal accounting pronouncement and assuming that we do not alter the arrangement to maintain off-balance sheet treatment under the new rules, we would expect to recognize additional property and equipment with a corresponding liability on our balance sheet as of January 1, 2003. If we were to purchase all of the properties currently covered by the synthetic lease or if changes in accounting rules or treatment of the lease were to require us to reflect the properties on our balance sheet, the impact to the consolidated financial statements would be as follows: -- Property and equipment would increase by the fair market value of the assets, and to the extent such asset values are less than the total amount outstanding under the lease, we would recognize a charge to reflect the difference between such asset values and the amount outstanding under the synthetic lease at such time as we bring the properties onto our balance sheet; -- Assuming the purchase of the properties were financed through borrowing, or in the event the existing arrangement were required to be characterized as debt, indebtedness would increase by $72.0 million; and -- Depreciation would increase as a result of our owning the assets. Acquiring the properties may require us to borrow Borrow To obtain or receive money on loan with the promise or understanding that it will be repaid. additional funds. We may not be able to do so, particularly if we are required to purchase the properties as the result of an event of default. Any borrowing would also likely reduce the amount we could borrow for other purposes. In addition, changes in future operating decisions or changes in the fair market values of underlying leased properties or the associated rentals could result in significant charges or acceleration acceleration, change in the velocity of a body with respect to time. Since velocity is a vector quantity, involving both magnitude and direction, acceleration is also a vector. In order to produce an acceleration, a force must be applied to the body. of charges in our statement of operations for leasehold An estate, interest, in real property held under a rental agreement by which the owner gives another the right to occupy or use land for a period of time. leasehold n. abandonments or residual value guarantees. Because the synthetic lease payment floats Payment float Company-written checks that have not yet cleared. 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. During October 2002, we entered into an amendment to the synthetic lease that, once effective, would allow greater operational flexibility with respect to the properties covered by the synthetic lease. The amendment will only become effective at our election and, in order to make the amendment effective, we will be required to fully guarantee 100% of the residual value of the synthetic lease properties, which would require us to reflect on our balance sheet amounts outstanding under the lease and the underlying properties under the lease. This amendment will give us more latitude latitude, angular distance of any point on the surface of the earth north or south of the equator. The equator is latitude 0°, and the North Pole and South Pole are latitudes 90°N and 90°S, respectively. to implement key operational initiatives during this transitional period in our business, by, for example, allowing us to close under-performing facilities or move equipment within our network. We are currently in the process of evaluating the cancer center assets leased under the synthetic lease to determine the appropriate asset values at which those assets would be brought onto our balance sheet. To the extent such asset values are less than the total amount outstanding under the lease, we would recognize a charge to reflect the difference between such asset values and the amount outstanding under the synthetic lease at such time as we bring the properties onto our balance sheet. We expect that the timing of such activity would be in the fourth quarter of 2002. 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 London Interbank Offered Rate A short-term interest rate often quoted as a 1,3,6-month rate for U.S.dollars. , based on a defined formula. The credit facility, synthetic leasing facility and Senior Subordinated Notes contain affirmative AFFIRMATIVE. Averring a fact to be true; that which is opposed to negative. (q.v.) 2. It is a general rule of evidence that the affirmative of the issue must be proved. Bull. N. P. 298 ; Peake, Ev. 2. 3. and negative covenants A provision found in an employment agreement or a contract of sale of a business that prohibits an employee or seller from competing in the same area or market. A negative covenant is commonly used by businesses, particularly those that depend upon trade secrets for their , 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 pledge n. 1. A solemn binding promise to do, give, or refrain from doing something: signed a pledge never to reveal the secret; a pledge of money to a charity. 2. a. as security under the credit facility and 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. 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, as well as implementation of the service line structure, with less emphasis than in past years on transactions with medical oncology practices. 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. This press 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 press 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 the success of the service line model, transition of existing practices, our ability to maintain good relationships with existing practices, proposed changes to accounting rules related to its leasing facility, expansion into new markets, our ability to complete cancer centers and PET facilities currently in development, 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, 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 2001 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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