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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2002
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 0-26190
US ONCOLOGY, INC.
(Exact name of registrant as specified in its charter)
---------------------------
Delaware 84-1213501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16825 Northchase Drive, Suite 1300, Houston, Texas 77060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (832) 601-8766
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Series A Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12-b of the Act). Yes X No___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant as of June 28, 2002 was $623,455,855 (based
upon the closing sales price of the Common Stock on The Nasdaq Stock Market on
June 28, 2002 of $8.33 per share). For purposes of this calculation, shares held
by non-affiliates exclude only those shares beneficially owned by executive
officers, directors and stockholders beneficially owning 10% or more of the
outstanding Common Stock.
There were 90,181,640 shares of the Registrant's Common Stock outstanding
on March 13, 2003. In addition, as of March 13, 2003, the Registrant had agreed
to deliver approximately 3,262,807 shares of its Common Stock on certain future
dates for no additional consideration.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement issued in connection with the
Registrant's 2003 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
Part I
As used in this report, unless the context otherwise requires, the terms, "US
Oncology," the "Company," "we," "our" and "us" refer to US Oncology, Inc. and
its consolidated subsidiaries.
Introduction
This report comprises over 85 pages of information. The length and detail
required by applicable disclosure and reporting rules can leave a reader
somewhat overwhelmed. Therefore, this introduction is designed to provide you
with some perspective regarding information contained in this report.
Our core business is providing services to physicians who treat cancer
patients. Our services are grouped under four main business lines - oncology
pharmaceutical services, cancer center services, cancer research services and
practice management services. We provide these services either individually or,
in our Physician Practice Management ("PPM") business, bundled together as a
comprehensive set of oncology practice management services. The strength of our
ongoing business model is our ability to assemble the optimal mix of these
offerings to design tailored solutions for customers.
We provide these services through two business models: the physician
practice management model, under which we provide all of the above services
under a single contract with one fee based on overall performance; and the
service line model, under which practices contract with the company to purchase
only certain of the above services, each under a separate contract, with a
separate fee methodology for each service.
This report is designed to give investors an understanding of our business
and performance, as well as to comply with relevant securities laws. The
following is a brief guide to some of the key sections of this report.
. The Business section, beginning on page 3, is intended to give
investors an overview of our business and operations, as well as
informing investors of recent strategic developments and initiatives.
. In Forward-Looking Statements and Risk Factors, beginning on page 12,
we outline some of the key risks and uncertainties that could
materially affect our business and performance or the value of our
securities. Investors should keep these risks in mind as they review
this report.
. On page 24, we present a table of Selected Financial Data, which
presents the reader with a one-page snapshot of the performance of our
business over the past five years. Investors should read this in
conjunction with the Consolidated Financial Statements and the notes
thereto.
. Management's Discussion and Analysis of Results of Operations and
Financial Condition, beginning on page 26, is designed to provide the
reader of the financial statements with a narrative on our financial
results. In that section we point to material trends in our business
and explain some of the underlying factors that drive our business
results.
. The Consolidated Financial Statements, beginning on page 49, include
an overview of our income and cash flow performance and financial
position.
. The Notes to Consolidated Financial Statements follow the financial
statements. Among other things, the notes contain our accounting
policies, detailed information on items within the financial
statements, certain commitments and contingencies, and the performance
of each of our segments.
The financial statements presented in this report were prepared in
accordance with generally accepted accounting principles. In this report, we
have discussed both recurring and nonrecurring events and trends that could
increase or decrease earnings. In Management's Discussion and Analysis of
Results of Operations and Financial Condition, we describe many such events and
items, including significant impairment, restructuring and other charges that we
have incurred over the past three years as a result of market developments and
activities related to the repositioning of our business. We have also discussed,
under the heading Forward Looking Statements and Risk Factors, possible events
or trends that typically occur in an unpredictable fashion and uncertainties
relating to our business. In addition to those trends and events discussed in
this report, it is important for investors to understand that our financial
statements rely on estimates, which are also subject to uncertainties, including
those discussed below under the heading in "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Critical Accounting Policies
and Estimates."
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Item 1. Business
US Oncology is America's premier cancer care services company. We support
the cancer care community by providing practice management, oncology
pharmaceutical services, cancer center services and cancer research services.
Our network of over 875 affiliated physicians provide care to patients in over
440 locations, including 77 outpatient cancer centers and 17 Positron Emission
Tomography (PET) installations, across 28 states. In 2002, we estimate that
those physicians provided care to over 500,000 cancer patients, including
approximately 200,000 new patients, representing 15% of the nation's newly
diagnosed cancer cases.
Our network's community-based focus allows our affiliated physicians to
provide to patients locally the latest advances in therapies, research and
technology, often within a single outpatient setting. As a result, patients
access high quality treatment with the least amount of disruption to their daily
lives. Our nationwide presence enables us to rapidly implement best practices
and share new discoveries, and our network's size affords competitive advantages
in areas such as purchasing, information systems, access to clinical research
and leading edge technology.
On June 15, 1999, a wholly owned subsidiary of US Oncology, Inc. merged
with Physician Reliance Network, Inc. ("PRN"), a cancer management company. As a
result of the merger, PRN became a wholly owned subsidiary of US Oncology, Inc.,
and each holder of PRN common stock received 0.94 shares of our common stock for
each PRN share held. This transaction, which is referred to as the "AOR/PRN
merger," was accounted for under the pooling of interests method of accounting
and treated as a tax-free exchange. Certain of the selected financial data
included in Item 6 of this report have been retroactively restated to combine
the accounts of US Oncology (formerly known as American Oncology Resources,
Inc.) and PRN for all periods presented using their historical bases.
US Oncology was incorporated in October 1992 under the laws of the State of
Delaware. Our principal executive offices are located at 16825 Northchase Drive,
Suite 1300, Houston, Texas, and our telephone number is (832) 601-8766. Our
common stock is traded on the Nasdaq Stock Market under the symbol "USON." Our
website address is http://www.usoncology.com, and copies of our filings with the
Securities and Exchange Commission are available on our website under the
heading "Investor Relations."
Our Operations
We provide our network physicians with a comprehensive set of services that
empowers them to offer to cancer patients in outpatient settings a full
continuum of care, including professional medical services, chemotherapy
infusion, radiation oncology services, stem cell transplantation, clinical
laboratory, diagnostic radiology, pharmacy services and patient education. The
services include:
Oncology Pharmaceutical Services. We purchase and manage specialty oncology
pharmaceuticals for physicians. We are one of the largest buyers of oncology
pharmaceuticals within the United States, purchasing more than $800 million in
cancer drugs annually on behalf of our network physicians. In addition, we
manage 39 licensed pharmacies and over 400 admixture sites that are staffed
with 116 pharmacists and 219 pharmacy technicians.
Cancer Center Services. We develop and manage comprehensive,
community-based cancer centers, which integrate all forms of outpatient cancer
care, from the most advanced laboratory and radiology diagnostic capabilities to
chemotherapy and radiation therapy. We provide a "turn-key" service, developing
centers from the preliminary feasibility study through full operational status,
including site acquisition, architectural design, construction management,
equipment evaluation and acquisition, physician and technical staff recruiting
and billing and collection services. We have developed and manage 77
comprehensive outpatient cancer centers and 17 PET units.
Cancer Research Services. We facilitate a broad range of cancer research
and development activities through our network. We contract with pharmaceutical
and biotechnology firms to provide a comprehensive range of services, from study
concept and design to regulatory approval, including complete Phase I through
Phase IV trials, recruitment of studies, protocol writing and scientific
approval process, supported by a single Clinical Review Advisory Board. Our
1,100 research team members, working in conjunction with our network of
approximately 500 participating physicians in more than 170 research locations,
signed up more than 3,200 patients during 2002.
Other Practice Management Services. We act as the exclusive manager and
administrator of all day-to-day nonmedical business functions connected with our
affiliated practices. As such, we are responsible for physician recruiting, data
management, accounting, systems, compliance and capital allocation to facilitate
growth in practice operations.
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Physician Practice Management Model
We provide services to most of the practices in our network through
long-term comprehensive service agreements under the "physician practice
management" or "PPM" model. Under that model, when we entered into each
agreement, we paid consideration (typically consisting of cash, subordinated
notes and an agreement to deliver shares of stock at specified future dates) to
physicians and their practices to purchase the nonmedical assets of their
practices and to enter into service agreements. In addition, in most of our
affiliated practices, each physician entered into an employment or
non-competition agreement with the practice. We do not provide medical care to
patients or employ any of the affiliated practices' clinical staff who provide
medical care. However, under the terms of the service agreements with the
practices, we are responsible for the compensation and benefits of the
practices' non-physician medical personnel, and our financial statements reflect
the costs of such compensation and benefits.
Under the PPM model, we have assembled the nation's largest network of
oncologists, who care for 15 percent of the nation's new cancer cases annually.
However, the PPM model relies on significant and recurring capital investments
in intangible assets in order to expand the network. Going forward we generally
do not intend to add practices to our network in new markets through the PPM
model. Rather, we intend to expand in new markets principally by contracting
with practices to provide our core services on a non-PPM basis, through the
service line structure described below. We will continue to recruit physicians
for our existing PPM practices, and intend to continue growing existing PPM
practices through such recruitment. In certain situations, where market-specific
details warrant and there is appropriate economic return for us, we may enter
into PPM relationships in new markets.
Our PPM service agreements with practices generally have initial terms of
40 years and cannot be terminated unilaterally without cause. Each agreement
provides for reimbursement to us of all practice costs plus payment to us of a
service fee. Some of the service agreements, known as the "earnings model"
agreements, provide that this fee is a percentage of the practice's earnings
before income taxes. In others, known as "net revenue model" agreements, the fee
consists of a fixed fee, a percentage (in most states) of the practice's net
revenues and, if certain performance criteria are met, a performance fee. Where
our service agreement follows the net revenue model, the practice is entitled to
retain a fixed portion of net revenue before the service fee (other than
practice operating costs) is paid to us. The effect of this priority of payments
under the net revenue model agreements is that we bear a disproportionate share
of increasing practice costs. This is because if, after payment of operating
expenses, there are not sufficient amounts available to pay both the fixed
management fee and the fixed percentage to be retained by the practice, the
entire amount of such shortfall is a reduction to our management fee. For this
reason, we believe that the net revenue model does not provide adequate
incentives for our practices to manage costs efficiently. At the same time,
under the net revenue model, in situations where we receive no fee, since
practice costs are paid before the practice is paid its fixed portion of
revenue, additional reductions in profitability would impact physician
compensation.
Beginning in November of 2000, we commenced a network-wide initiative to
convert our affiliated practices from the net revenue model to the earnings
model. We believe that the earnings model more appropriately aligns our economic
interests with those of our affiliated practices, particularly in an environment
of decreasing margins. In addition, we have negotiated, and intend to continue
to negotiate, terminations of certain service agreements that we do not believe
will attain satisfactory performance under either model. During 2001 and 2002,
we have successfully converted seventeen practices formerly under the net
revenue model to the earnings model. We continue to pursue other conversions.
Changing the manner in which fees are calculated has and will in some cases
result in management fees that are, at least in the short term, lower than those
that would have been received under the net revenue model. 73.4% of our 2002
fourth quarter revenue was derived from practices that were on the earnings
model or service line model as of March 1, 2003. We intend to continue to
convert practices that were on the revenue model to the earnings model or to
allow them to terminate their PPM arrangement and adopt the service line
structure, as described below. In some cases we may also disaffiliate entirely
from a group. We have disaffiliated from eight practices, comprising 45
physicians since November 2000.
Service Line Structure
In September 2001, we announced an initiative to offer our core
cancer-related services nationwide to oncology practices that are outside of our
current network under what we call the "service line structure," which allows
oncology practices to obtain our services without entering into comprehensive
service agreements that would call for our involvement in all business aspects
of their day-to-day operations. Under the service line structure, we do not pay
consideration to physicians in new markets to acquire the nonmedical assets of
their practices. We believe that the service line structure, when compared to
the PPM model, allows us to expand more rapidly into new markets without
incurring capital investments
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in intangible assets, with a higher return on assets and lower compliance and
reimbursement risks. During 2002, we refined the service line structure
significantly and believe it will appeal to large numbers of oncologists outside
our network, since new physicians may affiliate with us and utilize our core
services while maintaining complete ownership and control of their oncology
practices' assets. During 2002, we executed definitive agreements with four new
practices under the service line structure.
Our existing affiliated practices will be given a choice of maintaining a
PPM relationship with us or transitioning to a service line relationship.
Existing affiliated practices that choose to remain under the PPM model will
continue to be managed according to existing agreements, and we will continue to
attempt to convert net revenue model service agreements to the earnings model.
In certain cases, we may acquire the nonmedical assets of additional physician
practices under the PPM model and integrate those physicians with an existing
practice under the PPM model. During 2002, three of our PPM practices,
comprising 23 physicians, converted to the service line model. In addition,
another practice, comprising 11 physicians, converted to the service line model
effective February 1, 2003.
The Service Lines
To implement our service line strategy, we have reorganized management and
operation of our business under four distinct service lines. We began segment
reporting according to those service lines in the first quarter of 2002. For
management and reporting purposes, our existing PPM operations are divided into
the various service line offerings included in the PPM relationship. See Note 12
to Consolidated Financial Statements.
Oncology Pharmaceutical Services
The oncology pharmaceutical services service line combines all of our core
competencies and service offerings related to oncology drugs into a single,
coordinated business division. The division provides a comprehensive, integrated
solution to all of the drug needs of an oncology practice, from purchasing drugs
and supplies to mixing and managing drugs for infusion, to post-use evaluation
and data aggregation. As a result of market feedback, we are offering a variety
of contract options under which practices may contract to purchase only selected
services under this service line, with an option to upgrade to a fully
integrated pharmacy solution. The division is aimed at providing efficient, high
quality management of drugs from the manufacturer to the patient, including the
following service offerings:
. Purchasing. Coordination of purchasing for oncology drugs and group
purchasing organization services.
. Inventory Management. Tracking of drug usage and reduction of waste,
implementation of network-wide systems and protocols and coordination
of drug replacement assistance with respect to unused expired drugs
and drugs for indigent patients.
. Admixture Services. Coordination of comprehensive mixing services for
oncology drugs.
. Information Services. Data aggregation and analysis regarding drug
usage for use by physicians, pharmaceutical companies and patients.
. National Network Participation. Coordination of meetings and
discussions among other network physicians regarding treatment
protocols, drug effectiveness and other pharmacy-related issues.
. Retail Pharmacy. In addition to providing pharmaceutical services for
our affiliated practices that allow them to infuse drugs in their
offices, we expect that the oncology pharmaceutical services division
will permit us to participate in the market for retail pharmaceuticals
in the oncology arena. Although most oncology drugs continue to be
administered in the physician's office, in the event additional
self-administered therapies become available, our network of trained
pharmacists, combined with the other core competencies of the network,
will enable us to serve patients in a convenient retail pharmacy
context as well.
Currently, we intend to offer various contractual arrangements to new practices
under the oncology pharmaceutical service line, which involve different levels
of service. These include agreements for different mixes of purchasing and
pharmacy management and consulting services, including a complete purchasing,
pharmacy management and full admixture offering. Each of these offerings
includes a fee structure that involves a payment for pharmaceuticals, as well as
a payment for the pharmacy services we offer. We are also authorized by
practices to receive fees from pharmaceutical companies in our
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capacity as a group purchasing organization. The agreements are typically
short-term agreements, terminable by either side without cause on short notice.
Cancer Center Services
This division provides expertise in outpatient cancer center
development and operations and access to capital for development. The portfolio
of service offerings includes the full range of outpatient cancer center
development and management, including deployment of radiation therapeutic and
diagnostic technology, including PET. Both the economic arrangement and the
types of services offered by this division under the service line structure
remain largely unchanged from the manner in which we conduct business in this
segment today at earnings model practices. We currently manage 77 comprehensive
outpatient cancer centers and 17 PET units located in urban, suburban and rural
settings, all under PPM arrangements. We currently do not operate any cancer
centers under the service line structure.
The division provides a "turn-key" service, developing centers from the
preliminary feasibility study through full operational status, including site
acquisition, architectural design, construction management, equipment evaluation
and acquisition, and physician and technical staff recruiting. Once a center is
operational, the division provides full operations and facilities management,
including marketing and other related services. Practices benefit from having
access to low-cost capital, operational expertise gained from pioneering
outpatient cancer centers, the latest technology to enhance patient care and
diversified revenue sources.
The Cancer Center Services division manages all aspects of the
development and operation of comprehensive outpatient cancer centers. Throughout
all stages of the process of developing and operating a cancer center, we and
the local physicians collectively make all material decisions and coordinate
strategic and planning activities, including:
. Market Evaluation. Market assessment, including evaluation of
competition, alternative treatment sources, demographic trends,
referral patterns and patient base and assessment of opportunities
for expansion.
. Pre-Construction Analysis and Planning. Site selection, managing
planning and zoning requirements, developing preliminary space
requirements, coordinating certificate of need or similar approval
process, conducting site engineering and environmental studies,
developing a master site plan, preliminary project cost estimates,
financial planning and a preliminary staffing and equipment plan.
. Construction. Coordination and supervision of all aspects of the
construction of the cancer center including analysis of conformity
with project costs and schedule goals.
. Equipment Services. Equipping and furnishing the center,
coordinating installation and in-service training for center staff
and maintaining of equipment.
. Personnel. Assisting with recruitment of technical and other staff
to operate the center, including physicists, dosimetrists,
radiation therapists, nurses, social workers, dieticians,
secretaries, clerical staff, data managers and research staff.
. Operations. Management of all of the day-to-day business operations
of the cancer center, including provision of supplies, management
of necessary information systems, front office operations, billing
and collection, financial planning and reporting, benchmarking and
introduction of network best practices.
. Marketing, Payor Relationships and Strategic Planning. Assistance
in developing competitive fee schedules and negotiations with
payors, monitoring of payor contract compliance, marketing and
strategic planning services, including physician recruitment,
strategic partnerships and new service opportunities.
Under the service line structure, cancer center services will be
conducted pursuant to leases and service agreements with fifteen-year terms.
Under the leases for both equipment and real estate, the affiliated practices
will pay our economic cost related to the property. In addition, we will receive
a service fee equal to 30% of net earnings from radiation operations, subject to
a fee rebate to the extent certain performance criteria are achieved by the
practice. The agreements will include mutual non-competition covenants.
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Cancer Research Services
This division provides a full range of oncology drug development
services, from study concept and design to regulatory approval, including
complete Phase I-IV clinical trials. The division contracts with pharmaceutical
and biotechnology firms and focuses on bringing investigational therapies to
cancer patients through our network of community-based oncology researchers.
The division provides a complete range of research and development
support services, including recruitment of studies, protocol writing and
scientific approval process, supported by a single Clinical Review Advisory
Board. A team of research professionals, which includes the study principal
investigator, site investigator, site sub-investigator, research
nurse/coordinator, clinical research assistants, project managers and data
coordinator/manager, supervises each research project. Study management services
include study initiation and monitoring, patient accrual, project management,
protocol implementation, data management and statistical analysis. A central
Institutional Review Board provides research oversight.
We currently supervise 102 clinical trials with accruals of more than
3,200 patients during 2002. We have completed more than 200 trials in
conjunction with our network of approximately 500 participating physicians in
more than 170 research locations.
The Cancer Research Services service line provides a range of services
designed to give affiliated practices and their patients access to a wide
selection of the latest clinical trials. This division is also responsible for
our stem cell transplant program. We contract with pharmaceutical companies and
others needing research services, generally on a per trial basis. We pay
physicians for each trial based upon economic considerations unique to each
trial.
Practice Management Services
Under our physician practice management arrangements, we act as the
exclusive manager and administrator of all day-to-day nonmedical business
functions connected with affiliated practices.
We provide management services that extend to all business aspects of
an oncology group's operations, as well as all of the services offered under the
other three service lines. We believe our management services free oncologists
to focus on providing high quality medical care.
Strategic Services. The management agreement with each practice
provides for creation of a policy board composed of our representatives and the
affiliated physician group. The primary function of this board is to develop and
adopt a strategic plan for the group designed to improve the performance of the
practice, including an annual budget. The policy board outlines physician
recruiting goals, identifies services and equipment to be added, identifies
desirable payor relationships, identifies other oncology groups that are
possible affiliation candidates and seeks to facilitate communication with other
affiliated physician groups in our network.
Financial Services. We seek to improve the operating and financial
performance of the physician group. For each group we develop an annual budget.
We also provide comprehensive financial analysis to the affiliated physician
group in connection with managed care contracting. We provide billing,
collection, reimbursement, tax and accounting services and implement our cash
management system.
Administrative Services. We provide an array of administrative services
to improve the operations of the group. We manage the facilities used by the
physicians and, in consultation with the physicians, determine the number and
location of practice sites. We implement our integrated management information
system to support practice management, billing functions and patient record
keeping. In addition, we provide the regulatory expertise to assist the group in
complying with increasingly complex laws and regulations applicable to oncology
practices.
Personnel Management. We employ and manage all nonmedical personnel of
the physician group, including the executive director, controller and
secretarial and other administrative personnel. We evaluate these employees,
make staffing decisions, provide and manage employee benefits and implement
personnel policies and procedures. We also provide administrative services to
the physician group's employees.
We also provide other key support services, including:
. marketing
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. recruiting of physicians and staff
. continuing education
. network communications
. public policy and patient advocacy
Texas Oncology, P.A., an affiliated oncology practice with locations
throughout Texas under the earnings model, is our largest customer, accounting
for approximately 24% of our revenues in 2002. No other practice accounts for
more than 10% of our revenue. Medicare and Medicaid are our practices' largest
payors accounting for 43% in 2002. No other payor accounts for more than 10% of
net patient revenue.
Competition
We operate in highly competitive industries. Some of our competitors
have greater financial, technical, marketing and managerial resources than we
have. To the extent that competitors are owned by pharmaceutical manufacturers,
retail pharmacies, insurance companies, HMOs or hospitals, they may have pricing
advantages that are unavailable to us and other independent companies.
Pharmaceutical Management. The specialty pharmaceutical industry is
highly competitive and is undergoing consolidation. The industry is fragmented,
with many public and private companies focusing on different product or customer
niches. We are unique in our exclusive focus on oncology pharmaceuticals. Some
of our current and potential competitors include:
. specialty pharmacy distributors, such as Accredo Health,
Incorporated, Caremark Rx, Inc., Priority Healthcare Corporation
and Gentiva Health Services, Inc.;
. specialty pharmacy divisions of national wholesale distributors;
. pharmacy benefit management companies, such as Express Scripts,
Inc. (minority-owned by New York Life Insurance Co.), Merck-Medco
Managed Care, LLC (an affiliate of Merck & Co., Inc.) and
AdvancePCS;
. hospital-based pharmacies;
. retail pharmacies;
. home infusion therapy companies;
. group purchasing organizations (GPOs);
. manufacturers that sell their products both to distributors and
directly to users, including clinics and physician offices; and
. hospital-based comprehensive cancer care centers and other
alternate site health care providers.
Outpatient Health Care Centers. Outpatient care is a growing trend, but
the sector is highly fragmented, with no other company focusing exclusively on
comprehensive cancer centers. Many hospitals and regional medical centers
operate outpatient care centers, offering primary care, urgent care, diagnostic
imaging like MRIs and heart scans, minor surgery (known as ambulatory surgery
centers or ASCs), and a range of other specialties including oncology. Although
fragmented and predominantly locally-focused, our strongest competitors are
hospitals or joint ventures between hospitals and oncology practices who
finance, build and operate comprehensive cancer centers adjacent to a large
hospital or as a satellite location within the hospital system. Companies such
as SurgiCare, Inc. (for ASCs) and Outpatient Imaging Affiliates (for diagnostic
radiology imaging) also build and operate outpatient care centers, often in
partnership with hospitals or HMOs. Some of these companies could attempt to
enter or expand their presence in the oncology market.
With respect to research activities, the contract research organization
industry is fragmented, with several hundred small limited-service providers and
several large full-service contract research organizations with global
operations. We compete against large contract research organizations and site
management organizations that may have access to more financial resources than
we do.
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Affiliated Practices. Our profitability depends in large part on the
continued success of our affiliated practices. The business of providing health
care services is highly competitive. The affiliated practices face competition
from several sources, including sole practitioners, single- and multi-specialty
practices, hospitals and managed care organizations.
Regulation
General. The health care industry is highly regulated, and there can be
no assurance that the regulatory environment in which we and our affiliated
practices operate will not change significantly and adversely in the future. In
general, regulation and scrutiny of health care providers and related companies
are increasing.
There are currently several federal and state initiatives relating to
the provision of health care services, the legal structure under which those
services are provided, access to health care, disclosure of health care
information, costs of health care and the manner in which health care providers
are reimbursed for their services. The Office of the Inspector General is
focusing on, among other issues, clinical research, physician coding,
pharmaceutical relationships, credit balances and group purchasing organization
activities, which may result in government actions that could negatively impact
our operations. It is not possible to predict whether any such initiatives will
result in new or different rules or regulations or other actions or what their
form, effective dates or impact on us will be.
Our affiliated practices are intensely regulated at the federal, state
and local levels. Although these regulations often do not directly apply to us,
if a practice is found to have violated any of these regulations and, as a
result, suffers a decrease in its revenues or an increase in costs, our results
of operations might be materially and adversely affected.
Licensing and Certificate of Need Requirements. Every state imposes
licensing requirements on clinical staff, individual physicians and on
facilities operated or utilized by health care providers. Many states require
regulatory approval, including certificates of need, before (1) establishing
certain types of health care facilities, (2) offering certain services or (3)
expending amounts in excess of statutory thresholds for health care equipment,
facilities or programs.
Privacy Regulations. The Department of Health and Human Services
published new privacy regulations on December 28, 2000 under the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"), which impact our
affiliated practices' operations with respect to the transfer of data, including
between us and our affiliated practices. Also a part of HIPAA, are security and
electronic signature standards that regulate how we maintain personally
identifiable health information in our databases. We believe we are taking
appropriate measures to comply with these requirements, which will require
significant expenditures by us.
Fee-Splitting; Corporate Practice of Medicine and Pharmacy. The laws of
many states prohibit physicians from splitting professional fees with
non-physicians and prohibit non-physician entities, such as US Oncology, from
practicing medicine and from employing physicians to practice medicine. The laws
in most states regarding the corporate practice of medicine have been subjected
to limited judicial and regulatory interpretation. We believe our current and
planned activities do not constitute fee-splitting or the practice of medicine
as contemplated by these laws. However, there can be no assurance that future
interpretations of such laws will not require structural and organizational
modification of our existing relationships with the practices. In addition,
statutes in some states in which we do not currently operate could require us to
modify our affiliation structure. Comparable state laws prohibit the
practice of pharmacy by entities not licensed as pharmacies.
Medicare/Medicaid Fraud and Abuse Provisions. Federal law prohibits the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare or other federal or state health program patients
or patient care opportunities, or in return for the purchase, lease or order of
any item or service that is covered by Medicare or other federal or state
health program. Pursuant to this law, the federal government has pursued a
policy of increased scrutiny of transactions among health care providers in an
effort to reduce potential fraud and abuse relating to government health care
costs.
The Medicare and Medicaid anti-kickback amendments (the "Anti-Kickback
Amendments') provide criminal penalties for individuals or entities
participating in the Medicare or Medicaid programs who knowingly and willfully
offer, pay, solicit or receive remuneration in order to induce referrals for
items or services reimbursed under such programs. In addition to federal
criminal penalties, the Social Security Act provides for civil monetary
penalties and exclusion of violators from participation in the Medicare or
Medicaid programs.
A violation of the Anti-Kickback Amendments requires the existence of
all of these elements: (i) the offer, payment, solicitation or receipt of
remuneration; (ii) the intent to induce referrals; (iii) the ability of the
parties to make or influence
9
referrals of patients; (iv) the provision of services that are reimbursable
under any governmental health programs; and (v) patient coverage under any
governmental program. Fulfilling all of the requirements of the applicable
regulatory safe harbors ensures that a party has not violated the Anti-Kickback
Amendments. We believe that all compensation we receive is for our services. We
also believe that we are not in a position to make or influence referrals of
patients or services reimbursed under any governmental health programs to our
affiliated practices. Consequently, we do not believe that the service fees
payable to us should be viewed as remuneration for referring or influencing
referrals of patients or services covered by such programs as prohibited by the
Anti-Kickback Amendments. To our knowledge, there have been no case law
decisions regarding service agreements similar to ours that would indicate that
such agreements violate the Anti-Kickback Amendments. Further, we believe that
since we are not a provider of medical services under our PPM model, and are not
in a position to refer patients to any particular medical practice, the
remuneration we receive for providing services does not violate the
Anti-Kickback Amendments. However, because of the breadth of the Anti-Kickback
Amendments and the government's active enforcement thereof, there can be no
assurance that future interpretations of such laws will not require modification
of our existing relationships with practices.
In situations where we operate a licensed pharmacy, we would be a
provider. Although we believe our offerings under that service line comply with
law, there is a risk that our status as provider could bring greater scrutiny to
those arrangements.
Prohibitions of Certain Referrals. The Omnibus Budget Reconciliation
Act of 1993 includes a provision that significantly expands the scope of the
Ethics in Patient Referral Act, also known as the "Stark Bill." The Stark Bill
originally prohibited a physician from referring a Medicare or Medicaid patient
to any entity for the provision of clinical laboratory services if the physician
or a family member of the physician had an ownership interest in or compensation
relationship with the entity. The revisions to the Stark Bill prohibit a
referral to an entity in which the physician or a family member has an ownership
interest or compensation relationship if the referral is for any of a list of
"designated health services." The Stark Bill and its current and future
regulations apply directly to providers, not to us under the PPM model. There
can be no assurance, however, that interpretations of such laws will not
indirectly affect our existing relationships with affiliated practices.
Pharmacy Regulation. Our pharmaceutical service line, and our
pharmacies in particular, are subject to the operating and security standards of
the Food and Drug Administration (the "FDA"), the United States Drug Enforcement
Administration, various state boards of pharmacy and comparable agencies. Such
standards affect the prescribing of pharmaceuticals (including certain
controlled substances), operating of pharmacies (including nuclear pharmacies),
and packaging of pharmaceuticals. Complying with the standards, especially as
they change from time to time, could be extremely costly for us and could limit
the manner in which we implement this segment. While we believe that our
arrangements with our affiliated practices comply with the Anti-Kickback
Amendments and any relevant safe harbors as well as the Stark Law and its
exceptions, there can be no assurance that our pharmacy function will not
subject us to additional governmental review or an adverse determination.
Antitrust. We and our affiliated practices are subject to a range of
antitrust laws that prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and division of markets. We believe we are in
compliance with these laws, but there can be no assurance that a review of US
Oncology or our affiliated practices would not result in a determination that
could adversely affect our operations and the operations of our affiliated
practices. Furthermore, because of the size and scope of our network, there is a
risk that we could be subjected to greater scrutiny by government regulators
with regard to antitrust issues.
Reimbursement Requirements. In order to participate in the Medicare and
Medicaid programs, our affiliated practices must comply with stringent
reimbursement regulations, including those that require certain health care
services to be conducted "incident to" or otherwise under a physician's
supervision. Different states also impose differing standards for their Medicaid
programs, including utilizing an actual-cost-based system for reimbursement of
pharmaceuticals, instead of average wholesale price based methodologies.
Satisfaction of all reimbursement requirements is required under our compliance
program. The practices' failure to comply with these requirements could
negatively affect our results of operations.
Enforcement Environment. In recent years, federal and state governments
have launched several initiatives aimed at uncovering behavior that violates the
federal civil and criminal laws regarding false claims and fraudulent billing
and coding practices. Such laws require physicians to adhere to complex
reimbursement requirements regarding proper billing and coding in order to be
compensated for medical services by governmental payors. Our compliance program
requires adherence to applicable law and promotes reimbursement education and
training; however, because we perform services for our practices, it is likely
that governmental investigations or lawsuits regarding practices' compliance
with reimbursement
10
requirements would also encompass our activities. A determination that billing
and coding practices of the affiliated practices are false or fraudulent could
have a material adverse effect on us.
The Federal False Claims Act is a frequently employed vehicle for
identifying and enforcing billing, reimbursement and other regulatory
violations. In addition to the government bringing claims under the Federal
False Claims Act, qui tam, or "whistleblower," actions may be brought by private
individuals on behalf of the government. A violation under the False Claims Act
occurs each time a claim is submitted to the government or each time a false
record is used to get a claim approved, when the claim is false or fraudulent
and the defendant acted knowingly. Under the False Claims Act, defendants face
exclusion from the Medicare/Medicaid programs and monetary damages of $5,500 to
$11,000 for each false claim, as well as treble damages.
Compliance. We have a comprehensive compliance program designed to
assist us, our employees and our affiliated practices in complying with
applicable law. We regularly monitor developments in health care law and modify
our agreements and operations as changes in the business and regulatory
environment require. While we believe we will be able to structure our
agreements and operations in accordance with applicable law, there can be no
assurance that our arrangements will not be successfully challenged.
Employees
As of December 31, 2002, we directly employed 4,007 people. As of
December 31, 2002, our PPM affiliated practices employed 4,957 people (excluding
the network physicians). Under the terms of the service agreements with the
affiliated practices, we are responsible for the compensation and benefits of
the practices' non-physician medical personnel. No employee of US Oncology or of
any affiliated practice is a member of a labor union or subject to a collective
bargaining agreement. We consider our relations with our employees to be good.
Service Marks
We have registered the service mark "US Oncology" with the United
States Patent and Trademark Office.
Item 2. Properties
We lease our corporate headquarters in Houston, Texas. We or the
affiliated practices own, lease or sublease the facilities where the clinical
staffs provide medical services. In connection with the development of
integrated cancer centers, we have acquired or leased land valued at
approximately $39.0 million. We anticipate that, as our affiliated practices
grow, expanded facilities will be required.
In addition to conventional medical office space, we have developed
comprehensive cancer centers that are generally free-standing facilities in
which a full range of outpatient cancer treatment services is offered in one
facility. At December 31, 2002, we operated 79 integrated cancer centers and had
nine cancer centers under development. Of the 79, 50 were leased and 29 owned,
ranging in size from 4,700 square feet to 112,400 square feet. Nineteen of the
centers are leased under a synthetic leasing facility under which the assets are
included on our balance sheet, as a result of an amendment to that facility
effective December 31, 2002. Since December 31, 2002, we have sold two of the 19
cancer centers in the leasing facility in connection with disaffiliations.
Item 3. Legal Proceedings
The provision of medical services by our affiliated practices entails
an inherent risk of professional liability claims. We do not control the
practice of medicine by the clinical staff or their compliance with regulatory
and other requirements directly applicable to practices. In addition, because
the practices purchase and prescribe pharmaceutical products, they face the risk
of product liability claims. Although we maintain insurance coverage, we do not
currently maintain malpractice coverage for ourselves, and successful
malpractice, regulatory or product liability claims asserted against us or one
of the practices could have a material adverse effect on us.
We have become aware that we and certain of our subsidiaries and
affiliated practices are the subject of qui tam lawsuits (commonly referred to
as "whistle-blower" suits) that remain under seal, meaning they were filed on a
confidential basis with a U.S. federal court and are not publicly available or
disclosable. The United States has determined not to intervene in any of the qui
tam suits we are aware of and all but one of such suits has been dismissed, but
the individuals who filed the remaining claim of which we are aware may still
pursue the litigation, although none of those individuals has indicated an
intent to do so. Because qui tam actions are filed under seal, there is a
11
possibility that we could be the subject of other qui tam actions of which we
are unaware. We intend to continue to investigate and vigorously defend
ourselves against any and all such claims, and we continue to believe that we
conduct our operations in compliance with law.
Qui tam suits are brought by private individuals, and there is no
minimum evidentiary or legal threshold for bringing such a suit. The Department
of Justice is legally required to investigate the allegations in these suits.
The subject matter of many such claims may relate both to our alleged actions
and alleged actions of an affiliated practice. Because the affiliated practices
are separate legal entities not controlled by us, such claims necessarily
involve a more complicated, higher cost defense, and may adversely impact the
relationship between us and the practices. If the individuals who file
complaints and/or the United States were to prevail in these claims against us,
and the magnitude of the alleged wrongdoing were determined to be significant,
the resulting judgment could have a material adverse financial and operational
effect on us including potential limitations in future participation in
governmental reimbursement programs. In addition, addressing complaints and
government investigations requires us to devote significant financial and other
resources to the process, regardless of the ultimate outcome of the claims.
We and our network physicians are defendants in a number of lawsuits
involving employment and other disputes and breach of contract claims. In
addition, we are involved from time to time in disputes with, and claims by, our
affiliated practices against us. Although we believe the allegations are
customary for the size and scope of our operations, adverse judgments,
individually or in the aggregate, could have a material adverse effect on us.
Forward-Looking Statements and Risk Factors
The following are or may contain forward-looking statements within the
meaning of the U.S. federal securities laws: (i) certain statements, including
possible or assumed future results of operations, contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," (ii)
any statements contained herein regarding our prospects; (iii) any statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," "estimates," "plans," "projects" or similar
expressions; and (iv) all statements concerning expected financial results,
business development activities and all other statements other than statements
of historical fact.
Our business and results of operations are subject to risks and
uncertainties, many of which are beyond our ability to control or predict.
Because of these risks and uncertainties, actual results may differ materially
from those expressed or implied by forward-looking statements, and investors are
cautioned not to place undue reliance on such statements, which speak only as of
the date thereof.
In addition to the specific risk factors described below, factors that
could cause actual results to differ materially include, but are not limited to,
reimbursement rates for pharmaceutical products, the success of the service line
model, transition or disaffiliation of existing practices, our ability to
attract and retain additional physicians and practices under the service line
model, expansion into new markets, our ability to develop and complete cancer
centers and PET installations, our ability to maintain good relationships with
our affiliated practices, our ability to recover the cost of our investment in
cancer centers, government regulation and enforcement, reimbursement for
healthcare services, changes in cancer therapy or the manner in which cancer
care is delivered, drug utilization, our ability to create and maintain
favorable relationships with pharmaceutical companies and other suppliers, and
the operations of our affiliated practices.
The cautionary statements contained or referred to herein should be
considered in connection with any written or oral forward-looking statements
that may be issued by us or persons acting on our behalf. We do not undertake
any obligation to release any revisions to or to update publicly any
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
In general, because our revenues depend upon the revenues of our
affiliated practices, any of the risks below that harm the economic performance
of the practices will, in turn, harm us.
Declining reimbursement from governmental payors for pharmaceutical products
used by oncologists could adversely affect us.
We cannot assure you that payments under state or federal government
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to these programs. We also cannot assure you that the services that we
provide and the facilities that we operate meet or will continue to meet the
requirements for participation in these programs.
12
There is a continued risk of declining reimbursement for
pharmaceuticals used by oncologists as a result of changes in reimbursement
methodology. Currently, Medicare and most Medicaid programs reimburse providers
for oncology drugs based on the Average Wholesale Price (AWP) of the drugs. AWP
is determined by third-party information services using data furnished by
pharmaceutical companies. The U.S. Department of Health and Human Services
Centers for Medicare and Medicaid Services (CMS) has previously announced its
intention to change the basis of AWP, which would have resulted in substantially
lowered reimbursement from federal government programs for chemotherapy agents
and other pharmaceutical agents used by oncologists, without any adjustment in
reimbursement for services and other costs related to chemotherapy. Although
such a change has been postponed indefinitely, the General Accounting Office,
CMS and Congress continue to discuss reforming Medicare reimbursement for
pharmaceuticals. In addition, there has been significant press coverage related
to the way in which pharmaceuticals are reimbursed by governmental programs,
which would influence this discussion.
It is not possible to assess the likely outcome of any change in
reimbursement for oncology services, particularly reimbursement of
pharmaceuticals, whether through federal agency initiatives or through the
calculation of AWP from information supplied by pharmaceutical companies. Any
significant reduction in reimbursement for pharmaceuticals without a
corresponding increase in rates of reimbursement for other practice services
related to infusion of drugs would significantly harm us. It is possible that
changes in reimbursement that are ultimately adopted or implemented could have a
material adverse effect on our operations, financial condition and liquidity.
Continued efforts by commercial payors to reduce reimbursement levels or change
the manner in which pharmaceuticals are reimbursed could adversely affect us.
Commercial payors continue to seek to negotiate levels of reimbursement
for cancer care services, with a particular focus on reimbursement for
pharmaceuticals. Successful reductions in reimbursement could harm us. In
addition, several payors are trying to implement "brown bagging" or similar
programs under which cancer patients or their oncologists would be required to
obtain pharmaceuticals from a third party. That third party, rather than the
oncologist, would then be reimbursed. We have been, and continue to be
successful in resisting such programs. As in the case of AWP reform, we continue
to promote the idea that any reduction in pharmaceutical reimbursement must be
accompanied by an adjustment in reimbursement for other practice costs. However,
in the event that we do not continue to be successful in resisting these
initiatives, our practices' and our results of operations could be adversely
affected. In addition, any such program to remove control of pharmaceuticals
from oncologists could pose additional risks to our affiliated physicians and
their patients.
Continued review of pharmaceutical companies and their pricing and marketing
practices could result in lowered reimbursement for pharmaceuticals.
Continued review of pharmaceutical companies by government payors could
result in lowered reimbursement for pharmaceuticals, which could harm us. Many
government payors, including Medicare and Medicaid, and other payors reimburse
oncologists for drugs at the drug's average wholesale price (or AWP) or at a
percentage off AWP. Various federal and state government agencies have been
investigating whether the reported AWP of many drugs, including several used by
oncologists, is an appropriate or accurate measure of the market price of the
drugs. There are also several whistleblower and other lawsuits pending against
various drug manufacturers that have been reported in the business press. These
government investigations and lawsuits involve allegations that manufacturers
reported artificially inflated AWP prices of various drugs to the private
companies responsible for reporting AWP. These lawsuits and investigations have
resulted and could continue to result in settlements which include corporate
integrity agreements with the government, in which pharmaceutical companies
agree to provide average selling prices of their drugs to the government.
Furthermore, possibly in response to such scrutiny as well as significant
adverse coverage in the press, some pharmaceutical manufacturers could alter AWP
and pricing to reduce the margin between reported AWP and the sales price of
some oncology drugs. Any such change could have an adverse effect on
oncologists, which in turn could adversely affect us. Finally, as a group
purchasing organization that is a significant purchaser of pharmaceutical agents
paid for by government programs, we and our network of affiliated practices
could become involved in these investigations or lawsuits, or may become a
target of such pharmaceutical-related scrutiny. Any of these events could have a
material adverse effect on us.
We derive a substantial portion of our revenue and profitability from the
utilization of pharmaceuticals manufactured and sold by a limited number of
vendors.
We derive a substantial portion of our revenue and profitability from
the utilization of pharmaceuticals manufactured and sold by a limited number of
manufacturers. During 2002, approximately 40% of net operating revenue was
derived from pharmaceuticals sold exclusively by five vendors. Our agreements
with these vendors are typically for one to two years and cancelable by either
party without cause on 30 days' prior notice. Further, several of the agreements
provide
13
favorable pricing that is adjusted quarterly for required volume levels.
Any termination or adverse adjustment to these relationships could have a
material adverse effect on a significant portion of our business, financial
condition and results of operations.
If our affiliated practices terminate their agreements with us, we could be
seriously harmed.
Our practices may attempt to terminate their agreements with us. If any
of our larger practices were to succeed in such a termination, other than in
connection with a transition to the service line structure, we could be
seriously harmed. From time to time, we have disputes with physicians and
practices which could result in harmful changes to our relationship with them or
a termination of a service agreement if adversely determined. We are also aware
that some practices affiliated with other health care companies have attempted
to end or restructure their affiliations, although they do not have a
contractual right to do so, by arguing that their affiliations violate some
aspect of health care law. If some of our network physicians or affiliated
practices were able to successfully make such arguments and terminate their
affiliation with us, there could be a materially adverse effect on us.
If a significant number of physicians leave our affiliated practices, we could
be seriously harmed.
Our affiliated practices usually enter into employment or
non-competition agreements with their physicians that provide some assurance to
both the practice and to us with respect to continuing revenues. We and our
affiliated practices try to maintain such contracts. However, if a significant
number of physicians terminate their relationships with our affiliated
practices, we could be seriously harmed.
Our affiliated practices may be unable to enforce non-competition provisions
with departed physicians.
Most of the employment agreements between the practices and their
physicians include a clause that prevents the physician from competing with the
practice for a period after termination of employment. We cannot predict whether
a court will enforce the non-competition covenants in the agreements. If
practices are unable to enforce the non-competition provisions of their
employment agreements, we could be seriously harmed.
Our repositioning is placing significant stress on our network and on our
relationships with physicians.
Our repositioning is placing significant stress on our network and on
our relationships with physicians. Conversions to the service line structure and
the earnings model require that the physicians devote significant time and
resources to learning about and assessing the value of our new business models.
In addition, physicians may be anxious about taking part in a new and untested
business model for us. During 2002, we have also experienced some strains in our
relationships with physicians as a result of adjustment to the earnings model,
under which physicians must become accustomed to greater accountability for
expenses, including those related to investments made under the revenue model.
To the extent we are not successful in developing new relationships and
maintaining our current relationships with physicians because of these
additional pressures, our business and results of operations could be harmed.
We may encounter difficulties in managing our network of affiliated practices.
We do not control the practice of medicine by the physicians or their
compliance with regulatory and other requirements directly applicable to
practices. At the same time, an affiliated practice may have difficulty in
effectively influencing the practices of its individual physicians. In addition,
we have only limited control over the business decisions of the practices even
under the PPM model. As a result, it is difficult to implement standardized
practices across the network, and this could have an adverse effect on cost
controls, regulatory compliance, our profitability and the strength of our
network.
We rely heavily on a single distributor for our pharmaceutical products, and our
business would be harmed by disruptions in that distributor's business or in our
relationship with that distributor.
Almost all of the pharmaceutical products provided to our affiliated
practices through us come from a single distributor, National Specialty Services
(NSS), a subsidiary of Cardinal Health. Although we believe that we obtain
benefits from this exclusive relationship and that other distributors would be
available to us if necessitated by a deterioration in the performance of NSS or
in our relationship with NSS, such a deterioration in their business or our
relationship with them could result in disruption in our business.
14
Our service fee arrangements for our net revenue model practices subject us to
disproportionate economic risk.
Under a net revenue model service agreement, the practice retains a
fixed portion of net revenue before any service fee (other than practice
operating costs) is paid to us. Under net revenue agreements, therefore, we
disproportionately bear the economic impact of increasing or declining margins.
Our costs of operations have increased, primarily due to an increase in
expensive, single-source drugs and compensation and benefits, which has resulted
in a disproportionate decline in our operating margin, even as practice
profitability continues to grow. We are seeking to convert practices to the
earnings model or the service line structure, which eliminates this
disproportionate economic risk. If we are not successful, then continuing to
provide services under the net revenue model agreements could have a material
adverse effect on us.
Governmental regulation and changes in such regulation could adversely affect
our operating results or financial condition.
The health care industry is highly regulated and there can be no
assurance that the regulatory environment in which we operate will not change
significantly and adversely in the future. State and federal governments have
increasingly undertaken efforts to control growing health care costs through
legislation, regulation and voluntary agreements with medical care providers and
pharmaceutical companies. If future government cost containment efforts limit
the profits that can be derived from new drugs, then profit margins on
pharmaceutical products could decrease and clinical research spending on
pharmaceutical products may also decrease, which could limit the business
opportunities available to us and affect our results of operations and financial
condition.
Our pharmaceutical segment is subject to the operating and security
standards of the Food and Drug Administration (the "FDA"), the United States
Drug Enforcement Administration, various state boards of pharmacy and comparable
agencies. Such standards affect the prescribing of pharmaceuticals (including
certain controlled substances), operating of pharmacies (including nuclear
pharmacies), and packaging of pharmaceuticals. Complying with those standards,
especially as they change from time to time, could be extremely costly for us
and could limit the manner in which we implement this segment.
The laws of many states prohibit unlicensed, non-physician-owned
entities or corporations (such as US Oncology) from performing medical services,
or in certain instances, prohibit physicians from splitting fees with
non-physicians, including US Oncology. We do not believe that we engage in the
unlicensed practice of medicine or the delivery of medical services in any
state, and are not licensed to practice medicine in states which permit such
licensure. In addition, many states have similar laws with respect to the
practice of pharmacy. We do not believe we practice pharmacy, except where
appropriately licensed. In many jurisdictions, however, the laws restricting the
corporate practice of medicine or pharmacy and fee-splitting have been subject
to limited judicial and regulatory interpretation and, therefore, there is no
assurance that upon review some of our activities would not be found to be in
violation of such laws. If such a claim were successfully asserted against us,
we could be subject to civil and criminal penalties, the imposition of which
could have a material adverse effect on our operations, cash flows and financial
condition.
In general, regulation and scrutiny of health care providers and
related companies are increasing. Federal and state investigations and
enforcement actions continue to focus on the health care industry, scrutinizing
a wide range of items such as joint venture arrangements, referral and billing
practices, product discount arrangements, home health care services,
dissemination of confidential patient information, clinical drug research trials
and gifts for patients. In addition, we may be adversely affected by aspects of
some other health care proposals, including cutbacks in Medicare and Medicaid
programs, containment of health care costs on an interim basis by means that
could include a freeze on rates paid to health care providers, greater
flexibility to the states in the administration of Medicaid, and developments in
federal and state health information requirements, including the standardization
of electronic transmission of some administrative and financial information.
Because of the complexity and uncertainty of the regulations that
govern companies and individuals in the health care sector, we expend
significant resources in our comprehensive compliance program. In addition, the
government is empowered to investigate all business activities of health care
companies, including lawful ones, and exerts considerable leverage in such
investigations as a result of the significant penalties that may apply in the
event of any violation of health care law. Furthermore, government programs
often are administered and enforced by multiple agencies and entities that may
themselves have differing interpretations of health care regulations, and
enforcement authorities have taken the position that complying with specific
instructions of such entities may not, by itself, be determinative of the
lawfulness of any actions. Because of these factors and the high cost of
defending or addressing any investigation or allegation regarding health care
law violations, we must from time to time forego business opportunities that we
believe to be lawful, if there is a possibility
15
that such activities could be perceived or later interpreted as inappropriate or
unlawful or could invite government investigation.
Loss of revenues or a decrease in income of our affiliated practices could
adversely affect our results of operations.
Our revenue currently depends on revenue generated by affiliated
practices. Loss of revenue by the practices could seriously harm us. It is
possible that our affiliated practices will not be able to maintain successful
medical practices. In addition, under our current service agreements and under
proposed agreements under the cancer center services line, the fees payable to
us depend upon the profitability of the practices. Even under those service
agreements where the service fee is based on the revenues of the practices, and
not on their earnings, a priority of payments provision mandates that we will be
paid last. Any failure by the practices to contain costs effectively will
adversely impact our results of operations in those areas. Because we do not
control the manner in which our practices conduct their medical practice
(including drug utilization), our ability to control costs related to the
provision of medical care is limited. Furthermore, the affiliated practices face
competition from several sources, including solo practitioners, single- and
multi-specialty practices, hospitals and managed care organizations. Although we
are offering our affiliated practices the option of converting to the service
line structure, which would eliminate our direct risk related to practice
profitability with respect to medical oncology, we have limited ability to
discontinue or alter our service arrangements with practices, even where
continuing to manage such practices under existing arrangements is economically
detrimental to us.
Our business could be adversely affected if relations with any of our
significant pharmaceutical suppliers are terminated or modified.
Our ability to purchase pharmaceuticals, or to expand the scope of
pharmaceuticals purchased, from a particular supplier at prices below those
generally offered to oncologists is largely dependent upon such supplier's
assessment of the value of our network. To the extent that our transition to the
service line structure causes pharmaceutical suppliers to perceive our network
as less valuable, our relationships and pricing with such suppliers could be
harmed. Our inability to purchase pharmaceuticals from any of our significant
suppliers at prices below those generally available to oncologists could have a
material adverse effect on our business, results of operations and financial
condition because many suppliers own exclusive patent rights and are the sole
manufacturers of certain pharmaceuticals. If we were unable to purchase patented
products from any such supplier on favorable terms or at all, we could be
required to purchase such products from other distributors on less favorable
terms, and our profit margin on such products could be decreased or eliminated.
Our development of new cancer centers could be delayed or result in serious
liabilities, and the centers may not be profitable.
The development of integrated cancer centers is subject to a number of
risks, including obtaining regulatory approval, delays that often accompany
construction of facilities and environmental liabilities that arise from
operating cancer centers. Any failure or delay in successfully building and
operating integrated cancer centers or in avoiding liabilities from operations
could seriously harm us. New cancer centers may incur significant operating
losses during their initial operations, which could materially and adversely
affect our operating results, cash flows and financial condition. In addition,
in some cases our cancer centers may not be profitable enough for us to recover
the cost of our investment in the cancer center. In certain situations, we may
be required to recognize losses in connection with closing or selling cancer
centers, either because of underperformance or other market developments.
We rely on the ability of our affiliated practices to grow and expand.
We rely on the ability of our affiliated practices to grow and expand.
Our affiliated practices may encounter difficulties attracting additional
physicians and expanding their operations. The failure of practices to expand
their patient base and increase revenues could harm us.
We operate in a highly competitive industry.
We may have existing competitors, as well as a number of potential new
competitors, that have greater name recognition and significantly greater
financial, technical and marketing resources than we do. This may permit our
competitors to devote greater resources than we can to the development and
promotion of their services. These competitors may also undertake more
far-reaching marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to existing and potential employees. In addition,
implementation of our service line structure will bring us into
16
competition with numerous additional competitors, including specialty pharmacy
companies, medical facilities operators and a variety of clinical research
entities.
We also expect our competitors to develop strategic relationships with
providers, pharmaceutical companies and payors, which could result in increased
competition. The introduction of new and enhanced services, acquisitions,
industry consolidation and the development of strategic relationships by our
competitors could cause price competition, a decline in sales or a loss of
market acceptance of our services, or make our services less attractive. In
addition, in developing cancer centers, we compete with a number of tax-exempt
non-profit organizations that can finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions unavailable to us.
With respect to research activities, the contract research organization
industry is fragmented, with several hundred small limited-service providers and
several large full-service contract research organizations with global
operations. We compete against large contract research organizations that may
have access to more financial resources than we do.
We expect that industry forces will have an impact on us and our
competitors. In recent years, the health care industry has undergone significant
changes driven by various efforts to reduce costs, including national health
care reform, trends toward managed care, limits in Medicare coverage and
reimbursement levels, consolidation of health care services companies and
collective purchasing arrangements by office-based health care practitioners.
The changes in our industry have caused greater competition among us and similar
businesses. Our inability to predict accurately, or react competitively to,
changes in the health care industry could adversely affect our operating
results. We cannot assure you that we will be able to compete successfully
against current or future competitors or that competitive pressures will not
have a material adverse effect on our business, financial condition and results
of operations.
Our success depends on our ability to attract and retain highly qualified
technical staff and other key personnel, and we may not be able to hire enough
qualified personnel to meet our hiring needs.
Our ability to offer and maintain high quality service is dependent
upon our ability to attract and maintain arrangements with qualified
professional and technical staff, and with executives on our management team.
There is a high level of competition for such skilled personnel among other
health care providers, research and academic institutions, government entities
and other organizations, and there is a nationwide shortage in many specialties,
including oncology nursing and technical radiation staff. We cannot assure you
that our contractual arrangements with such staff can be maintained on terms
advantageous to us. In addition, if one or more members of our management team
become unable or unwilling to continue in their present positions, we could also
be harmed.
Our failure to remain technologically competitive could adversely affect our
business.
Rapid technological advancements have been made in the radiation
oncology and diagnostic imaging industry. Although we believe that our equipment
and software can generally be upgraded as necessary, the development of new
technologies or refinements of existing technologies might make existing
equipment technologically obsolete. If such obsolescence were to occur, then we
may be compelled to incur significant costs to replace or modify the equipment,
which could have a material adverse effect on our financial condition, results
of operations and cash flow. In addition, some of our cancer centers compete
against local centers which may contain more advanced imaging or radiation
therapy equipment or provide additional technologies. Our performance is
dependent upon physician and patient confidence in the superiority of our
technology and equipment over those of our competitors.
Advances in other cancer treatment methods, such as chemotherapy,
surgery and immunotherapy, or in cancer prevention techniques, could reduce
demand or eliminate the need for the radiation therapy services provided at the
cancer centers we operate. The development and commercialization of new
radiation therapy technologies could have a material adverse effect on our
business, operating results and financial condition.
We may be unable to satisfy our additional financial needs.
Continuing to expand our lines of business in accordance with our
business growth plan and expected capital needs will require substantial capital
resources. Operation of the cancer centers will require recurring capital
expenditures for renovation, expansion and the purchase of costly medical
equipment and technology. Thus, we may wish to 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, has recently been quite limited and may continue to be difficult to
17
obtain. Consequently, we may be unable to obtain sufficient financing on terms
satisfactory to us or at all. If additional funds are raised through the
incurrence of debt, then we may become subject to restrictions on our operations
and finances.
Our working capital could be impacted by delays in reimbursement for services.
The health care industry is characterized by delays that can be as much
as three to six months between when services are provided and when the
reimbursement or payment for these services is received. Under our existing
service agreements and the new cancer center service line, our working capital
is dependent on such collections. Although we currently experience more timely
collections, these potential delays make working capital management, including
prompt and diligent billing and collection, an important factor in our results
of operations and liquidity in those areas. We cannot assure you that trends in
the industry will not further extend the collection period and negatively impact
our working capital.
Our affiliated practice may be unsuccessful in obtaining favorable contracts
with third-party payors, which could result in lower operating margins.
We advise on and facilitate negotiation of payor contracts on behalf of
our network physicians under the PPM model and will also be responsible for such
contracting activities for radiation oncologists and diagnostic radiologists
under the cancer center services line. Commercial payors, such as managed care
organizations and traditional indemnity insurers, are increasingly requesting
fee structures and other arrangements that require health care providers to
assume all or a portion of the financial risk of providing care. The lowering of
reimbursement rates, increasing review of bills for services and negotiating for
reduced contract rates could have a material adverse effect on our results of
operations and liquidity with respect to our existing service agreements and
cancer center operations under the service line structure.
Loss of revenue by our affiliated practices caused by the cost containment
efforts of third-party payors could harm us.
Physician practices typically bill third-party payors for the health
care services provided to their patients. Third-party payors such as private
insurance plans and commercial managed care plans negotiate the prices charged
for medical services and supplies in order to lower the cost of the health care
services and products they pay for, thus increasing their own profits.
Third-party payors also try to influence legislation to lower costs. Third-party
payors can also deny reimbursement for medical services and supplies by stating
that they believe a treatment was not appropriate, and these reimbursement
denials are difficult to appeal or reverse. Our affiliated practices also derive
a significant portion of their revenues from governmental programs.
Reimbursement by governmental programs generally is not subject to negotiation
and is established by governmental regulation. There is a risk that other payors
could reduce rates of reimbursement to match any reduction by governmental
payors. Our management fees under the PPM model, as well as our operating fees
for cancer center operations under the service line structure, are dependent on
the financial performance of the practices and would be adversely affected by a
reduction in reimbursement. In addition, to the extent oncologists, as our
customers, are impacted adversely by reduced reimbursement levels, our business
could be harmed generally.
We face the risk of qui tam litigation relating to regulations governing billing
for medical services.
We are currently aware of qui tam lawsuits in which we and/or our
subsidiaries or affiliated practices are named as defendants. Because qui tam
lawsuits are filed under seal, we could be named in other such suits of which we
are not aware. In addition, as the federal government intensifies its focus on
billing, reimbursement and other health care regulatory areas, private
individuals are also bringing more qui tam lawsuits because of the potential
financial rewards for such individuals. For the past several years, the number
of qui tam suits filed against health care companies and the aggregate amount of
recoveries under such suits have increased significantly. This trend increases
the risk that we may become subject to additional qui tam lawsuits.
Although we believe that our operations comply with law and intend to
vigorously defend ourselves against allegations of wrongdoing, the costs of
addressing such suits, as well as the amount of any recovery in the event of a
finding of wrongdoing on our part, could be significant. The existence of qui
tam litigation involving us may also strain our relationships with
pharmaceutical suppliers or our network physicians, particularly those
physicians or practices named in such suits. Furthermore, our involvement in
those qui tam lawsuits, and the uncertainty such suits create, may adversely
affect our ability to raise capital.
18
Our services could give rise to liability from clinical trial participants and
the parties with whom we contract.
In connection with clinical research programs, we provide several
services that are involved in bringing new drugs to market, which is time
consuming and expensive. Such clinical research involves the testing of new
drugs on human volunteers. The provision of medical services entails an inherent
risk of professional malpractice and other similar claims. If we do not perform
our services to contractual or regulatory standards, the clinical trial process
and the participants in such trials could be adversely affected. Clinical
research involves the inherent risk of liability for personal injury or death to
patients resulting from, among other things, unforeseen adverse side effects or
improper administration of the new drugs by physicians. In certain cases, these
patients are already seriously ill and are at risk of further illness or death.
These events would create a risk of liability to us from either the
pharmaceutical companies with which we contract or the study participants.
We also contract with physicians to serve as investigators in
conducting clinical trials. Third parties could possibly claim that we should be
held liable for losses arising from any professional malpractice of the
investigators with whom we contract or in the event of personal injury to or
death of persons for the medical care rendered by third-party investigators, and
we would vigorously defend any such claims. Nonetheless it is possible that we
could be held liable for such types of losses.
We could be subject to malpractice claims and other harmful lawsuits not covered
by insurance.
We could also be implicated in claims related to medical services
provided by our network physicians. We cannot assure you that claims, suits or
complaints relating to services delivered by a network physician will not be
assessed against us in the future. In addition, because network physicians
prescribe and dispense pharmaceuticals and we will maintain pharmacy operations,
we and our network physicians could be subject to product liability claims.
Although we have maintained malpractice insurance in the past, since we
are not a provider of medical services and as a result of rising costs, we no
longer maintain coverage for medical malpractice. There can be no assurance that
any claim asserted against us for professional liability will not be successful.
The availability and cost of professional liability insurance varies widely from
state to state and is affected by various factors, many of which are beyond our
control. Therefore, successful malpractice, regulatory or product liability
claims asserted against us that are not fully covered by insurance could have a
material adverse effect on our operating results. During February 2002, PHICO
Insurance Company, which had been our and some of our affiliated practices'
former primary malpractice insurer, was placed in liquidation. Although state
guaranty associations provide some coverage for insured claims in the event of
insurer insolvency, if we or our affiliated practices are unable to receive
sufficient coverage as a result of the insolvency, we could be harmed.
Proposed and final confidentiality laws and regulations may create a risk of
liability, increase the cost of our business or limit our service offerings.
The confidentiality of patient-specific information and the
circumstances under which such records may be released for inclusion in our
databases or used in other aspects of our business are subject to substantial
governmental regulation. Legislation governing the possession, use and
dissemination of medical information and other personal health information has
been proposed or adopted at both the federal and state levels. Such regulations
may require us to implement new security measures, which may require substantial
expenditures or limit our ability to offer some of our products or services,
thereby negatively impacting the business opportunities available to us. A risk
of civil or criminal liability exists if we are found to be responsible for any
violation of applicable laws, regulations or duties relating to the use, privacy
or security of health information.
On December 28, 2000, the Secretary of the Department of Health and
Human Services issued the final rule on Standards for Privacy of Individually
Identifiable Health Information to implement the privacy requirements for the
Health Insurance Portability and Accountability Act of 1996. These regulations
generally impose standards for covered entities transmitting or maintaining
protected data in an electronic, paper or oral form with respect to the rights
of individuals who are the subject of protected health information. They also
establish limitations on and procedures for the exercise of those individuals'
rights and the uses and disclosures of protected health information. Such
regulations could inhibit third-party processors in using, transmitting or
disclosing health data (even if the data has been de-identified) for purposes
other than facilitating payment or performing other clearinghouse functions,
which would restrict our ability to obtain and use data in our services. In
addition, these regulations could require us to establish uniform specifications
for obtaining de-identified data so that de-identified data obtained from
different sources could be aggregated. While the impact of developments in
19
legislation, regulations or the demands of third-party processors is difficult
to predict, each could materially adversely affect our business.
If we cannot effectively market and implement the service line structure, it
would materially and adversely affect our business and results of operations.
Because the service line structure is an untested business model, we
cannot assure you that it will attain broad market acceptance or that we will be
able to effectively market it to, and implement it for, new practices outside of
our existing network on terms acceptable to us or at all. We will incur
significant costs to attract and negotiate such arrangements and to develop our
infrastructure in advance of revenues being produced by such arrangements.
Delays or failures to effectively market the service lines to new practices and
implement service line operations with them could harm us. In addition,
non-competition covenants in our existing service agreements with practices may
limit our ability to offer the service line structure to other practices within
markets that we already serve.
The nature of our receivables will change with respect to the oncology
pharmaceutical services business line.
Currently, our accounts receivable consist principally of payments that
we bill and collect from third party payors on behalf of our affiliated
practices. Under the oncology pharmaceutical services business line, we will
instead bill and collect payments from the practices. We have no experience in
billing and collecting from affiliated practices. The practices will have
responsibility for billing and collecting from third party payors with respect
to the drugs. If we are not successful in billing and collecting from affiliated
practices or if such practices are not successful in managing their billing and
collections from third-party payors, we may have decreased cash flow from
pharmaceutical sales.
Under the service line structure, our agreements with affiliated practices will
have shorter terms than our existing agreements, and we will have less input
with respect to the business operations of the practices.
Currently, we provide management services to practices under long-term
agreements that generally have 40-year terms and that are not terminable except
under specified circumstances. These agreements allow us to be the exclusive
provider of management services, including each of the services contemplated
under the service line structure, to each of the practices. In addition, under
those agreements, the practices are required to bind their physicians to
specified employment terms and restrictive covenants. Under the service line
structure, our agreements with affiliated practices will have shorter terms, and
certain agreements are easily terminable with minimal notice or in the event of
certain performance deficiencies based on market standards. A number of the
other input mechanisms that we currently have with respect to affiliated
practices do not exist under our oncology pharmaceutical services business line.
This loss of input may increase the extent to which affiliated practices may
change their internal composition to our detriment and may result in
arrangements that are easier for individual physicians and practices to exit,
exposing us to increased competition from other firms, especially in the
pharmacy services sector. Departure of a significant number of physicians or
practices from participation in our service line structure could harm us.
Under the service line structure, we will significantly increase our ownership
and operation of licensed pharmacies, which will subject us to various new state
and federal regulations.
Our pharmaceutical segment is subject to the laws and regulations of
the FDA, United States Drug Enforcement Administration, various state boards of
pharmacy and comparable agencies. Such laws, regulations and regulatory
interpretations affect the prescribing of pharmaceuticals, purchasing, storing
and dispensing of controlled substances, operating of pharmacies (including
nuclear pharmacies), and packaging of pharmaceuticals. Violations of any of
these laws and regulations could result in various penalties, including
suspension or revocation of our licenses or registrations or monetary fees. As a
health care provider, we will, under the service line structure, subject our
affiliated physicians to the federal "Stark Self-Referral Laws," which prohibit
a referral to an entity in which the physician or the physician's family member
has an ownership interest or compensation relationship if the referral is for
any of a list of "designated health services." Further, while the PPM model
currently subjects us to scrutiny under the federal Medicare and Medicaid
anti-kickback law, that provides criminal penalties for individuals or entities
participating in the Medicare or Medicaid programs that knowingly and willfully
offer, pay, solicit or receive remuneration in order to induce referrals for
items or services reimbursed under such programs, the law will apply to the
service line structure in additional ways as a result of our becoming a pharmacy
provider. Complying with those standards, especially as they change from time to
time, could be extremely costly for us and could limit the manner in which we
implement the service line structure.
20
Pharmacies and pharmacists must obtain state licenses to operate and
dispense drugs. Pharmacies must also obtain licenses in some states to operate
and provide goods and services to residents of those states. Our entities that
provide nursing for our patients and our nurses must obtain licenses in certain
states to conduct our business. If we are unable to maintain our licenses or if
states place burdensome restrictions or limitations on non-resident pharmacies
or nurses, this could limit or affect our ability to operate in some states
which could adversely impact our business and results of operations.
Our stock price may fluctuate significantly, which may make it difficult to
resell your shares when you want to at prices you find attractive.
The market price of our common stock has been highly volatile. This
volatility may adversely affect the price of our common stock in the future. You
may not be able to resell your shares of common stock following periods of
volatility because of the market's adverse reaction to this volatility. We
anticipate that this volatility, which frequently affects the stock of health
care service companies, will continue. Factors that could cause such volatility
include:
. our quarterly operating results,
. deviations in results of operations from estimates of securities analysts
(which estimates we neither endorse nor accept the responsibility for),
. general economic conditions or economic conditions specific to the health
care services industry,
. regulatory or reimbursement changes and
. other developments affecting us, our competitors, vendors such as
pharmaceutical companies or others in the health care industry.
On occasion, the equity markets have experienced significant price and
volume fluctuations. These fluctuations have affected the market price for many
companies' securities even though the fluctuations are often unrelated to the
companies' operating performance.
We have not paid dividends and do not expect to in the future, which means that
the value of our shares cannot be realized except through sale.
We have never declared or paid cash dividends. We currently expect to
retain earnings for our business and do not anticipate paying dividends on our
common stock at any time in the foreseeable future. Because we do not anticipate
paying dividends, it is likely that the only opportunity to realize the value of
our common stock will be through a sale of those shares. The decision whether to
pay dividends on common stock will be made by the board of directors from time
to time in the exercise of its business judgment. We are currently precluded
from paying dividends by the terms of our credit facilities.
Our shareholder rights plan and anti-takeover provisions of the certificate of
incorporation, bylaws and Delaware law could adversely impact a potential
acquisition by third parties.
Our shareholder rights plan and anti-takeover provisions of the certificate
of incorporation, bylaws and Delaware law could adversely impact a potential
acquisition by a third party. We have a staggered board of directors, with three
classes each serving a staggered three-year term. This classification has the
effect of generally requiring at least two annual stockholder meetings, instead
of one, to replace a majority of the members of the board of directors. Our
certificate of incorporation also provides that stockholders may act only at a
duly called meeting and that stockholders' meetings may not be called by
stockholders. Furthermore, our certificate of incorporation permits the board of
directors, without stockholder approval, to issue additional shares of common
stock or to establish one or more classes or series of preferred stock with
characteristics determined by the board. We have also adopted a shareholder
rights plan, which would significantly inhibit the ability of another entity to
acquire control of US Oncology through a tender offer or otherwise without the
approval of our board of directors. These provisions could discourage potential
acquisition proposals and could delay or prevent a change in control. These
provisions are intended to increase the likelihood of continuity and stability
in our board of directors and in the policies formulated by it and to discourage
certain types of transactions that may involve an actual or threatened change of
control, reduce our vulnerability to an unsolicited acquisition proposal and
discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares, and, as a consequence, they inhibit fluctuations in the
market price of our shares that could result from actual or rumored takeover
attempts. In addition, these provisions could limit the price that certain
investors might be willing
21
to pay in the future for shares of common stock. Such provisions also may have
the effect of preventing changes in our management.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2002.
22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on The Nasdaq Stock Market under the symbol
"USON." The high and low closing sale prices of the common stock, as reported by
The Nasdaq Stock Market, were as follows for the quarterly periods indicated.
Year Ended December 31, 2001 High Low
----------------------------------------- --------- --------
Fiscal Quarter Ended March 31, 2001 $ 10.94 $ 6.27
Fiscal Quarter Ended June 30, 2001 $ 9.24 $ 7.47
Fiscal Quarter Ended September 30, 2001 $ 8.97 $ 6.55
Fiscal Quarter Ended December 31, 2001 $ 8.04 $ 3.95
Year Ended December 31, 2002 High Low
----------------------------------------- --------- --------
Fiscal Quarter Ended March 31, 2002 $ 9.53 $ 7.45
Fiscal Quarter Ended June 30, 2002 $ 10.00 $ 8.33
Fiscal Quarter Ended September 30, 2002 $ 8.97 $ 6.57
Fiscal Quarter Ended December 31, 2002 $ 9.14 $ 7.79
As of March 13, 2003, there were approximately 14,681 holders of the
common stock. We have not declared or paid any cash dividends on our common
stock. The payment of cash dividends in the future will depend on our earnings,
financial condition, capital needs and other factors deemed pertinent by our
board of directors, including the limitations, if any, on the payment of
dividends under state law and then-existing credit agreements. It is the present
policy of our board of directors to retain earnings to finance the operations
and expansion of business. Our revolving credit facility currently prohibits the
payment of cash dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
23
Item 6. Selected Financial Data
The selected consolidated financial information set forth below is
qualified by reference to, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this report.
Year Ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
----------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenue .......................................................... $1,651,316 $1,515,895 $1,333,071 $1,099,262 $ 836,596
Operating expenses:
Pharmaceuticals and supplies ................................ 866,378 780,072 651,214 521,087 357,766
Field compensation and benefits ............................. 340,302 322,473 277,962 215,402 172,298
Other field costs ........................................... 192,145 179,479 161,510 134,635 107,671
General and administrative .................................. 63,229 58,859 63,640 45,811 38,325
Bad debt expense ............................................ - - 10,198 - -
Impairment, restructuring and other charges, net ............ 150,060 5,868 201,846 29,014 -
Depreciation and amortization ............................... 71,859 71,929 75,148 65,072 48,463
--------- --------- --------- --------- --------
1,683,973 1,418,680 1,441,518 1,011,021 724,523
Income (loss) from operations .................................... (32,657) 97,215 (108,447) 88,241 112,073
Interest expense ................................................. (23,706) (22,511) (26,809) (22,288) (15,908)
Gain on investment in common stock
(unrealized in 1999) .......................................... - - 27,566 14,431 -
--------- ---------- --------- --------- --------
Income (loss) before income taxes and extraordinary loss ......... (56,363) 74,704 (107,690) 80,384 96,165
Income tax benefit (provision) ................................... 18,886 (28,388) 35,047 (32,229) (36,184)
--------- ---------- --------- --------- --------
Net income (loss) before extraordinary loss ...................... (37,477) 46,316 (72,643) 48,155 59,981
Extraordinary loss on early extinguishment of debt, net
of income taxes of $5,181 ........................................ (8,452) - - - -
--------- --------- --------- --------- --------
Net income (loss) ................................................ $ (45,929) $ 46,316 $ (72,643) $ 48,155 $ 59,981
========= ========= ========= ========= ========
Net income (loss) before extraordinary loss per share - basic .... $ (0.38) $ 0.46 $ (0.72) $ 0.48 $ 0.61
Extraordinary loss per share - basic ............................. (0.09) - - - -
--------- --------- -------- --------- --------
Net income (loss) per share - basic .............................. $ (0.47) $ 0.46 $ (0.72) $ 0.48 $ 0.61
========= ========= ======== ========= ========
Shares used in per share computation - basic ..................... 97,658 100,063 100,589 100,183 97,647
========= ========= ======== ========= ========
Net income (loss) before extraordinary loss per share -
diluted ........................................................ $ (0.38) $ 0.46 $ (0.72) $ 0.47 $ 0.60
Extraordinary loss per share - diluted ........................... (0.09) - - - -
--------- --------- --------- --------- --------
Net income (loss) per share - diluted ............................ $ (0.47 $ 0.46 $ (0.72) $ 0.47 $ 0.60
========= ========= ========= ========= ========
Shares used in per share computations - diluted .................. 97,658 100,319 100,589 101,635 99,995
========= ========= ========= ========= ========
24
December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- --------- --------- --------- ---------
Balance Sheet Data: (in thousands)
Working capital ........................................ $ 204,554 $ 101,881 $ 194,484 $ 280,793 $ 178,262
Service agreements, net ................................ 252,720 379,249 398,397 537,130 467,214
Total assets ........................................... 1,184,941 1,097,740 1,197,467 1,298,477 1,033,528
Long-term debt, excluding current maturities ........... 272,042 128,826 300,213 360,191 234,474
Stockholders' equity ................................... 578,540 676,768 624,338 707,164 629,798
Non-GAAP Data:
EBITDA ................................................. $ 189,262 $ 175,012 $ 178,745 $ 182,327 $ 160,536
Field EBITDA ........................................... 729,836 663,493 636,851 542,691 461,976
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion should be read in conjunction with the financial
statements, related notes and other financial information appearing elsewhere in
this report. In addition, see "Forward-Looking Statements and Risk Factors,"
earlier in this report.
General
We provide comprehensive services to our network of affiliated practices,
made up of more than 875 affiliated physicians in over 440 sites, with the
mission of expanding access to and improving the quality of cancer care in local
communities. The services we offer include:
. Oncology Pharmaceutical Services. We purchase and manage specialty
oncology pharmaceuticals for our affiliated practices. Annually, we
are responsible for purchasing, delivering and managing more than $800
million of pharmaceuticals through a network of more than 400
admixture sites, 39 licensed pharmacies, 116 pharmacists and 219
pharmacy technicians.
. Cancer Center Services. We develop and manage comprehensive,
community-based cancer centers, which integrate all aspects of
outpatient cancer care, from laboratory and radiology diagnostic
capabilities to chemotherapy and radiation therapy. As of March 13,
2003, we have developed and operate 77 integrated community-based
cancer centers and manage over one million square feet of medical
office space. We also have installed and manage 17 Positron Emission
Tomography (PET).
. Cancer Research Services. We facilitate a broad range of cancer
research and development activities through our network. We contract
with pharmaceutical and biotechnology firms to provide a comprehensive
range of services relating to clinical trials. We currently supervise
102 clinical trials, supported by our network of approximately 500
participating physicians in more than 170 research locations. During
2002, we enrolled over 3,200 new patients in research studies.
. Other Practice Management Services. Under our physician practice
management arrangements, we act as the exclusive manager and
administrator of all day-to-day non-medical business functions
connected with our affiliated practices. As such, we are responsible
for billing and collecting for medical oncology services, physician
recruiting, data management, accounting, systems, and capital
allocation to facilitate growth in practice operations.
We provide these services through two business models: the physician
practice management model, under which we provide all of the above services
under a single contract with one fee based on overall p