<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 8-K/A-2
(Amendment No. 2)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 11, 1998
US ONCOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 0-26190 84-1213501
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1300, Houston, Texas 77060
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (281) 873-2674
<PAGE>
The undersigned registrant, US Oncology, Inc. (the "Company"), is filing
this amendment to its Current Report on Form 8-K, dated December 11, 1998, to
provide the Supplemental Consolidated Financial Statements described in Item 5
hereof and to amend Item 7 of said report.
Item 5. Other Events.
The following Supplemental Consolidated Financial Statements of the
registrant as of December 31, 1998 and 1997 and for each of the three years
ended December 31, 1998 are being filed as a part of this report and appear on
the pages of this report set forth below:
Page
----
Report of Independent Accountants....................................... 3
Supplemental Consolidated Balance Sheet................................. 4
Supplemental Consolidated Statement of Operations and Comprehensive
Income................................................................. 5
Supplemental Consolidated Statement of Stockholders' Equity............. 6
Supplemental Consolidated Statement of Cash Flows....................... 7
Notes to Supplemental Consolidated Financial Statements................. 8
Financial statement schedules have been omitted because they are not applicable
or the required information is shown in the supplemental consolidated financial
statements or notes thereto.
Item 7 of this report is hereby amended to read in its entirety as follows:
Item 7. Financial Statements and Exhibits.
(a) The following financial statements of Physician Reliance Network, Inc.
("PRN") are incorporated herein by reference to the Annual Report on Form
10-K, as amended, of Physician Reliance Network, Inc. for the year ended
December 31, 1998:
Report of Independent Public Accountants dated February 19, 1999
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1997, and 1998
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997, and 1998
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1997, and 1998
Notes to Consolidated Financial Statements
The Financial Statements of PRN for the period through March 31, 1999, as
required by Item 7(a) of Form 8-K are deemed to be "substantially the same" as
the financial statements for the period through December 31, 1998 since
operating results have not been omitted for more than one interim quarter.
(b) For the pro forma financial statements for the period through December 31,
1998, see the Company's Registration Statement on Form S-4 (Commission File No.
333-78181). The pro forma financial statements for the period through March 31,
1999, as required by Item 7(b) of Form 8-K are deemed to be "substantially the
same" as the pro forma financial statements for the period through December 31,
1998 since operating results have not been omitted for more than one interim
quarter. See also Item 5 of this Report.
(c) Exhibits.
Exhibit 2.1 Agreement and Plan of Merger dated as of December 11, 1998 among
American Oncology Resources, Inc., Physician Reliance Network, Inc., and
Diagnostic Acquisition, Inc. (Schedules and Exhibits omitted).*
Exhibit 2.2 Company Stock Option Agreement dated as of December 11, 1998 between
American Oncology Resources, Inc., and Physician Reliance Network, Inc.*
Exhibit 2.3 Parent Stock Option Agreement dated as of December 11, 1998 between
American Oncology Resources, Inc., and Physician Reliance Network, Inc.*
Exhibit 3.1 Amended and Restated Certificate of Incorporation of the Company.*
Exhibit 3.2 Amended and Restated By-Laws of the Company.*
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP
Exhibit 23.2 Consent of Arthur Andersen LLP
Exhibit 27 Restated Financial Data Schedule
Exhibit 99.1 Joint Press Release dated December 14, 1998.*
Exhibit 99.2 Press Release dated June 15, 1999. *
_______________________
*Previously Filed
2
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of US Oncology, Inc.
We have audited the supplemental consolidated balance sheet of US Oncology,
Inc. (the Company) and its subsidiaries as of December 31, 1998 and 1997 and the
related supplemental consolidated statements of operations and comprehensive
income, changes in stockholders' equity and of cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Physician Reliance Network, Inc. which statements
reflect total assets constituting 45 percent at December 31, 1998 and 1997 and
revenues constituting 45 percent, 49 percent and 53 percent for the years ending
December 31, 1998, 1997 and 1996, respectively of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Physician Reliance Network, Inc., is based solely on the report of the other
auditors at December 31, 1998 and for the three years then ended.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The supplemental financial statements give retroactive effect to the merger of
US Oncology, Inc. and Physician Reliance Network, Inc. on June 15, 1999, which
has been accounted for as a pooling of interest as described in Note 1 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method of financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation; however, they will become the historical
consolidated financial statements of US Oncology, Inc. and its subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of US Oncology, Inc. and its subsidiaries at
December 31, 1998 and 1997 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles applicable
after financial statements are issued for a period which includes the date of
consummation of the business combination.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 2, 1999, except for paragraph 2 of Note 1, which is as of June 15, 1999.
3
<PAGE>
US ONCOLOGY, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................................................. $ 13,691 $ 7,772
Accounts receivable.................................................................. 243,390 179,198
Prepaids and other current assets.................................................... 42,581 24,828
Due from affiliated physicians groups................................................ 22,354 23,216
Income tax receivable................................................................ 8,807
---------- --------
Total current assets.............................................................. 322,016 243,821
Property and equipment, net............................................................. 220,944 191,047
Management service agreements, net of accumulated amortization of $36,899 and $20,548... 467,214 431,068
Other assets............................................................................ 23,354 17,494
---------- --------
$1,033,528 $883,430
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable........................................................ $ 14,011
Current maturities of long-term indebtedness.................................... $ 22,426 17,311
Accounts payable................................................................ 80,729 63,250
Due to affiliated physician groups.............................................. 6,606 5,197
Income taxes payable............................................................ 4,066
Other accrued liabilities....................................................... 29,927 22,831
---------- --------
Total current liabilities.................................................. 143,754 122,600
Deferred income taxes.................................................................. 23,537 16,909
Long-term indebtedness................................................................. 234,474 189,377
---------- --------
Total liabilities.......................................................... 401,765 328,886
---------- --------
Minority interest...................................................................... 1,965 246
Stockholders' equity:
Preferred stock, $.01 par value, 1,500 shares authorized, none issued and
outstanding
Series A Preferred Stock, $.01 par value, 500 shares authorized and reserved,
none issued and outstanding
Common Stock, $.01 par value, 250,000 shares authorized, 81,205 and
75,781 shares issued and 80,830 and 75,781 shares outstanding................ 812 758
Additional paid-in capital...................................................... 404,749 378,953
Common stock to be issued, approximately, 16,947 and 19,208 shares.............. 89,142 94,642
Treasury stock 375 and 0 shares................................................. (3,696)
Accumulated other comprehensive income (loss)................................... 269 (696)
Retained earnings............................................................... 138,522 80,641
---------- --------
Total stockholders' equity................................................. 629,798 554,298
---------- --------
Commitments and contingencies (Notes 3, 6, 9, 10, and 11)..............................
---------- --------
$1,033,528 $883,430
========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
US ONCOLOGY, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Revenue................................. $836,596 $625,413 $432,749
-------- -------- --------
Operating expenses:
Pharmaceuticals and supplies.......... 357,766 250,425 155,743
Practice compensation and benefits.... 172,298 143,210 104,174
Other practice costs.................. 107,671 87,232 57,414
General and administrative............ 38,325 31,809 22,508
Write-off of accounts receivable...... 37,841
Depreciation and amortization......... 48,463 35,194 25,237
-------- -------- --------
724,523 585,711 365,076
-------- -------- --------
Income from operations.................. 112,073 39,702 67,673
Other income (expense):
Interest income....................... 222 348 1,062
Interest expense...................... (16,130) (12,822) (6,246)
-------- -------- --------
Income before income taxes.............. 96,165 27,228 62,489
Income taxes............................ 36,184 11,593 24,343
-------- -------- --------
Net income.............................. 59,981 15,635 38,146
-------- -------- --------
Other comprehensive income (loss), net
of tax................................. 965 (696)
-------- --------
Comprehensive income.................... $ 60,946 $ 14,939 $ 38,146
======== ======== ========
Net income per share - basic............ $0.61 $0.17 $0.43
======== ======== ========
Shares used in per share calculations - 97,647 93,168 88,072
basic.................................. ======== ======== ========
Net income per share - diluted.......... $0.60 $0.16 $0.41
======== ======== ========
Shares used in per share calculations - 99,995 97,198 92,136
diluted................................ ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
US ONCOLOGY, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Common Treasury Other
-------------- Paid-In Stock to Stock Comprehensive Retained Subscription
Shares Par Capital Be Issued Cost Income Earnings Receivable Total
------ --- --------- --------- -------- ------------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996... 66,683 $667 $255,151 $ 52,832 $ 28,463 $ (200) $336,913
Medical practice transactions
value of shares to be issued 37,062 37,062
Purchase of Treasury Stock... $(9,414) (9,414)
Delivery of Common Stock
to be issued from Treasury.. (555) (105) 884 (224)
Issuance of Common Stock..... 5,567 56 108,143 (1,602) 106,597
Exercise of options to
purchase Common Stock....... 892 9 1,116 1,125
Tax benefit from exercise of
non-qualified stock options. 6,001 6,001
Payment of common stock
subscribed.................. 200 200
Net income................... 38,146 38,146
------ ---- -------- -------- ------- ----- -------- ----- --------
Balance at December 31, 1996. 73,142 732 369,856 88,187 (8,530) 66,385 516,630
Medical practice transactions
value of shares to be issued 24,619 24,619
Purchase of Treasury Stock.. (6,418) (6,418)
Delivery of Common Stock
to be issued from Treasury.. (7,981) (5,540) 14,900 (1,379)
Issuance of Common Stock..... 2,228 22 13,794 (12,624) 1,192
Exercise of options to
purchase Common Stock....... 411 4 1,242 48 1,294
Tax benefit from exercise of
non-qualified stock options. 2,042 2,042
Valuation adjustment
Investment in common stock.. $(696) (696)
Net income................... 15,635 15,635
------ ---- -------- -------- ------- ----- -------- ----- --------
Balance at December 31, 1997. 75,781 758 378,953 94,642 (696) 80,641 554,298
Medical practice transactions
value of shares to be issued 8,732 8,732
Purchase of Treasury Stock... (12,431) (12,431)
Delivery of Common Stock
to be issued from Treasury.. (4,147) (2,488) 8,735 (2,100)
Issuance of Common Stock..... 4,480 44 21,898 (11,744) 10,198
Exercise of options to
purchase Common Stock....... 944 10 2,515 2,525
Tax benefit from exercise of
non-qualified stock options. 5,530 5,530
Valuation adjustment
Investment in common stock.. 965 965
Net income................... 59,981 59,981
------ ---- -------- -------- ------- ----- -------- ----- --------
Balance at December 31, 1998. 81,205 $812 $404,749 $ 89,142 $(3,696) $ 269 $138,522 $ $629,798
====== ==== ======== ======== ======= ===== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
US ONCOLOGY, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------
1998 1997 1996
------- ------ -------
Cash flows from operating activities:
Net income............................ $ 59,981 $ 15,635 $ 38,146
Noncash adjustments:
Depreciation and amortization...... 48,463 35,194 25,237
Deferred income taxes.............. 5,805 7,985 3,188
Writedown of accounts receivable
and certain assets................ 37,841
Undistributed earnings of
investments....................... (540) (437)
Gain on sale of investment in
ambulatory surgery center......... (511)
Amortization of deferred revenues.. (3,523) (1,716)
Imputed interest on medical
practice transactions............. 248 122
Cash provided (used), net of effects
of medical practice transactions,
by changes in:
Accounts receivable................ (61,539) (58,852) (69,162)
Prepaids and other current assets.. (13,021) (9,712) (1,241)
Other assets....................... 908 4,690 1,683
Accounts payable................... 15,420 25,044 14,519
Due from/to affiliated physician
groups............................ 2,660 (10,511) (5,898)
Income taxes receivable/payable.... 17,866 (6,314) 758
Other accrued liabilities.......... 7,219 3,332 2,892
-------- -------- --------
Net cash provided by operating
activities...................... 79,699 41,916 10,244
Cash flows from investing activities:
Acquisition of property and equipment. (58,646) (49,199) (68,176)
Net payments in medical practice
transactions......................... (32,229) (42,821) (67,352)
Sales of short-term investments....... 44,967
Investments........................... (1,944) (4,058)
Proceeds from sale of investment in
ambulatory surgery center............ 1,950
Other................................. (1,409) (2,142) (5,750)
-------- -------- --------
Net cash used by investing
activities...................... (94,228) (96,270) (96,311)
Cash flows from financing activities:
Proceeds from Credit Facility......... 66,000 174,000 59,000
Repayment of Credit Facility.......... (8,000) (99,000) (20,000)
Repayment of other indebtedness....... (29,344) (19,247) (55,510)
Debt financing costs.................. (333) (1,277)
Proceeds from exercise of stock
options.............................. 2,525 1,294 1,125
Issuance of Common Stock.............. 1,698 722 102,796
Purchase of Treasury Stock............ (12,431) (6,418) (9,414)
Proceed from subscription receivable.. 200
Other................................. (6,966)
-------- -------- --------
Net cash provided by financing
activities...................... 20,448 51,018 69,954
-------- -------- --------
Increase (decrease) in cash and
equivalents............................ 5,919 (3,336) (16,113)
Cash and equivalents:
Beginning of period................... 7,772 11,108 27,221
-------- -------- --------
End of period......................... $ 13,691 $ 7,772 $ 11,108
======== ======== ========
Interest paid........................... $ 14,022 $ 11,142 $ 5,296
Taxes paid.............................. 15,540 9,331 13,922
Noncash transactions:
Tax benefit from exercise of
non-qualified stock options.......... 5,530 2,042 6,001
Value of Common Stock to be issued in
medical practice transactions........ 8,732 24,619 37,062
Delivery of Common Stock in medical
practice transactions................ 20,479 27,424 2,486
Debt issued in medical practice
transactions......................... 13,500 49,169 37,332
Debt assumed in medical practice
transactions......................... 277 4,554 684
Conversion of subordinated notes
payable to Common Stock.............. 8,500
Assets acquired under capital lease... 2,268 921
The accompanying notes are an integral part of this statement.
7
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
US Oncology, Inc., formerly American Oncology Resources, Inc. (AOR) a
Delaware corporation (Company), is a cancer management company. The Company
provides comprehensive management services under long-term agreements to
oncology practices comprised of 708 physicians in 24 states at December 31,
1998. These practices provide a comprehensive range of medical services to
cancer patients, integrating the multiple specialties of cancer care, including
medical and gynecological oncology, hematology, radiation oncology, diagnostic
radiology and stem cell transplantation.
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the merger with Physicians Reliance
Network, Inc. (PRN) on June 15, 1999. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in historical financial statements that do not
include the date of consummation. These supplemental consolidated financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.
The following is a summary of the Company's significant accounting
policies:
Principles of consolidation
The supplemental consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany transactions
and balances have been eliminated.
On November 20, 1997, the Emerging Issues Task Force issued EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 requires the evaluation of all management
contracts for purposes of determining the need for consolidation of affiliated
physician practices based on certain control characteristics. The Company has
determined that none of the existing management contracts meet EITF 97-2
requirements for consolidation. As the Company has historically not
consolidated its affiliated physician practices, the adoption of EITF 97-2 has
no impact on the Company's financial statements.
Use of estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, as well as disclosures of contingent assets and
liabilities. Because of inherent uncertainties in this process, actual future
results could differ from those expected at the reporting date.
Management fee revenue
Approximately 54% of the Company's 1998 management fee revenue has been
derived from management agreements that provide for payment to the Company of a
management fee, which typically includes all practice costs (other than amounts
retained by physicians), a fixed fee, a percentage fee (in most states) and, if
certain financial and performance criteria are satisfied, a performance fee.
The amount of the fixed fee is related to the size of the affiliation
transaction and, as a result, varies significantly among the management service
agreements. The percentage fee, where permitted by applicable law, is generally
seven percent of the affiliated physician group's net revenue. Performance fees
are paid after payment of all practice expenses, physician compensation and the
other management fees and, where permitted by state law, are approximately 50%
of the residual profitability of the physician group. Management fees are not
subject to adjustment with the exception that the fixed fee may be adjusted from
time to time after the fifth year of the management agreement to reflect
inflationary trends. These management service agreements permit the affiliated
physician group to retain a specified amount (typically 23% of the group's net
revenues) for physician salaries, and payment of such salaries is given priority
over payment of the management fee. The affiliated physician group is also
entitled to retain all profits of the practice after payment of the
8
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
management fee to the Company. The Company recognizes the management fees as
revenue when the fees are earned and are deemed realizable based upon the
contractually-agreed amount of such fees, after taking into consideration the
payment priority of physician compensation.
Approximately 43% of the Company's 1998 management fee revenue has been
derived from management agreements that provide for payment to the Company of a
management fee that includes an amount equal to the direct expenses associated
with operating the affiliated physician group and an amount which is calculated
based on the service agreement for each of the affiliated physician groups. The
direct expenses include rent, depreciation, amortization, provision for
uncollectible accounts, pharmaceutical expenses, medical supply expenses,
salaries and benefits of non-physician employees who support the affiliated
physician groups. The direct expenses do not include salaries and benefits of
physicians. At December 31, 1998 the non-expense related portion of the
management fee is a percentage, ranging from 25% to 35%, of the earnings before
interest and taxes of the affiliated physician group. The earnings of an
affiliated physician group is determined by subtracting the direct expenses from
the professional revenues and research revenues earned by the affiliated
physician group.
The remaining management agreements provide for a fee that is a percentage
of revenue of the affiliated physician group or is a predetermined, fixed
amount. Each affiliated physician group is responsible for paying the salaries
and benefits of its physician employees from the amount retained by the
affiliated physician group after payment of the Company's management fee.
Cash equivalents and investments
The Company considers all highly liquid debt securities with original
maturities of three months or less to be cash equivalents.
Accounts Receivable
The Company purchases the accounts receivable generated by affiliated
physician groups from patient services rendered pursuant to the management
services agreements. The accounts receivable are purchased at their net
collectible value, after adjustment for contractual allowances and allowances
for doubtful accounts. The Company is reimbursed by the affiliated physician
groups for any purchased receivables that are deemed uncollectible following the
Company's purchase. Thus, the Company does not have an allowance for doubtful
accounts. If any purchased accounts receivable are subsequently deemed
uncollectible, then the affiliated physician group responsible for the
receivables would reduce its revenue during the period in which the
uncollectible amount is determined. Because the Company's management fee is
based in part on the affiliated physician group's revenue, the reduction in
revenue caused by the uncollectible accounts receivable would proportionally
reduce the Company's management fee. The impact of such adjustments is
typically not significant.
During 1997, PRN recorded a $37,800 writedown of accounts receivable.
This charge resulted from a continuing analysis of PRN's accounts receivable in
1997 that lead management to believe (i) that, despite changes in collection
procedures and additions to staffing levels beginning in mid-1996, a significant
amount of accounts receivable were no longer collectible and (ii) that the
estimation process of determining contractual allowances needed to be revised to
recognize an accelerating trend among payors toward lower overall reimbursement
levels. Under the management service agreements in place at that time, the
passage of time precluded the Company from including the writedown as a direct
expense. The current management service agreements, coupled with policies and
procedures currently in place, permit PRN to record accounts receivable
adjustments as direct expenses in the period recognized.
The charge recorded consisted primarily of the following estimated amounts:
accounts receivable from patient estates of $11,000, changes in the historical
collection experience from Medicare of $11,000 and changes in the historical
collection experience on other managed care payors of $14,000. Because PRN had
historical estimation processes in place in the preparation of its prior annual
and quarterly financial statements and was not aware of any contrary factors or
information that would alter the estimation process used in those periods, PRN
concluded that the charge was a change in estimate and should not be reflected
as an accounting error requiring restatement.
9
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Due from and to affiliated physicians groups
The Company has advanced to certain of its Affiliated Physician Groups,
primarily TOPA, amounts needed for working capital purposes primarily to assist
with the development of new markets to support the addition of physicians, and
to support the development of new services. Certain advances bear interest at a
market rate negotiated by the Company and the Affiliated Physician Groups, which
approximates the prime lending rate (7.75% at December 31, 1998). These advances
are unsecured and are repaid in accordance with the terms of the instrument
evidencing the advance. Amounts payable to related parties represent current
payments to Affiliated Physician Groups for services rendered under Service
Agreements.
Prepaids and other current assets
Prepaids and other current assets consist of insurance, other receivable,
investment in common stock, and inventory. The Company accounts for its
investment in common stock in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In accordance with SFAS No.
115, the Company's investment in common stock is considered available-for-sale.
Available-for-sale securities represent those securities that do not meet the
classification of held-to-maturity, are not actively traded by the Company, and
are carried at fair value. Unrealized gains and losses on these securities are
excluded from earnings and are reported as a separate component of stockholders'
equity (under the caption "Accumulated Other Comprehensive Income (Loss)"), net
of applicable taxes, until realized. Inventories consist of pharmaceuticals and
medical supplies and are carried at the lower of cost or market on a first-in,
first-out basis.
Property and equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of three to ten years for computers and software, equipment, and furniture
and fixtures, the lesser of ten years or the remaining lease term for leasehold
improvements and twenty years for buildings. Interest costs incurred during the
construction of major capital additions primarily cancer centers are
capitalized.
Management service agreements
Management service agreements consist of the costs of purchasing the rights
to manage oncology groups. Under the initial 40-year terms of the agreements,
the affiliated physician groups have agreed to provide medical services on an
exclusive basis only through facilities managed by the Company. The agreements
are noncancelable except for performance defaults. In the event an affiliated
physician group breaches the agreement, or if the Company terminates with cause,
the physician group is required to purchase all related tangible and intangible
assets, including the unamortized portion of the management service agreement,
at the then net book value. The Company amortized these costs over the 40-year
term of the related management service agreement until July 1, 1998, when the
Company changed its amortization period to 25 years on a prospective basis. The
changes had an immaterial impact on the Company's results of operations.
Under the management services agreements, the Company is the exclusive
provider of management services to its affiliated physician groups, providing
facilities, management information systems, clinical research services,
personnel management and strategic, financial and administrative services.
Specifically, the Company, among other things, (i) prepares financial statements
and operating and capital expenditure budgets, (ii) facilitates the purchase of
pharmaceuticals and other supplies, (iii) performs clerical, accounting and
computer service functions, (iv) organizes and manages clinical research trials
and (v) assists in expanding the scope of services of the affiliated physician
groups.
Each management services agreement provides for the formation of a policy
board. The policy board meets periodically, approves those items having a
significant impact on the affiliated physician group and develops the affiliated
physician group's strategic initiatives. The two most significant items
reviewed and approved by the policy board are the annual budget for the group
and the addition of facilities, services or physicians. Each management
services agreement provides a mechanism to adjust the Company's management fee
if a change in law modifies the underlying financial arrangement between the
Company and the affiliated physician group.
10
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The carrying value of the management service agreements is reviewed for
impairment when events or changes in circumstances indicate their recorded cost
may not be recoverable. If the review indicates that the undiscounted cash
flows from operations of the related management service agreement over the
remaining amortization period is expected to be less than the recorded amount of
the management service agreement, the Company's carrying value of the management
service agreement will be reduced to its estimated fair value.
Other assets
Other assets consists of costs associated with obtaining long-term
financing, excess of purchase price over the fair value of net assets acquired,
and investments in joint ventures. The long-term financing costs are capitalized
and amortized over the terms of the related debt agreements. The amounts
recorded for excess of purchase price over the fair value of net assets acquired
are being amortized on a straight-line basis over 20 years. At December 31,
1998 and 1997, accumulated amortization equaled $1,231 and $866, respectively.
The investment in joint ventures are accounted for under the equity method of
accounting.
Income taxes
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities using the enacted tax rates in effect in the years in
which the differences are expected to reverse. In estimating future tax
consequences, all expected future events are considered other than enactments of
changes in the tax law or rates.
Fair value of financial instruments
The Company's receivables, payables, prepaids and accrued liabilities are
current and on normal terms and, accordingly, are believed by management to
approximate fair value. Management also believes that subordinated notes issued
to affiliated physicians approximate fair value when current interest rates for
similar debt securities are applied. Management estimates the fair value of its
bank indebtedness approximates its book value.
Earnings per share
The Company computes earnings per share in accordance with the provisions
of Financial Accounting Standards Board (FASB) Statement No. 128, "Earnings Per
Share", which requires the Company to disclose "basic" and "diluted" Earnings
per share (EPS). The computation of basic earnings per share is based on a
weighted average number of Common Stock and Common Stock to be issued shares
outstanding during these periods. The Company includes Common Stock to be
issued in both basic and diluted EPS as there are no foreseeable circumstances,
which would relieve the Company of its obligation to issue these shares. The
computation of diluted earnings per share is based on the weighted average
number of Common Stock and Common Stock to be issued shares outstanding during
the periods as well as dilutive potential Common Stock calculated under the
treasury stock method.
11
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table summarizes the determination of shares used in per
share calculations:
Year Ended December 31,
-----------------------------
1998 1997 1996
------- ------- --------
Basic
Outstanding at end of period:
Common Stock....................... 80,830 75,781 72,144
Common Stock to be issued.......... 16,947 19,208 19,368
------ ------ ------
97,777 94,989 91,512
Effect of weighting................... (130) (1,821) (3,440)
------ ------ ------
Shares used in per share
calculation....................... 97,647 93,168 88,072
====== ====== ======
Diluted
Outstanding at end of period:
Common Stock....................... 80,830 75,781 72,144
Common Stock to be issued.......... 16,947 19,208 19,368
------ ------ ------
97,777 94,989 91,512
Effect of weighting and assumed share
equivalents for grants of stock
options and issuances of stock at
less than the weighted-average share
price for the year................... 2,218 2,209 624
------ ------ ------
Shares used in per share
calculation....................... 99,995 97,198 92,136
====== ====== ======
Anti-dilutive stock options not
included above....................... 1,698 2,339 804
Operating segments
During 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (FAS 131), which requires reporting of summarized financial
results for the operating segments as well as establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company's sole business is providing comprehensive management services,
facilities and equipment, administrative and technical support and ancillary
services necessary for physicians to establish and maintain a fully integrated
network of outpatient cancer care. The physicians affiliated with the Company
provide all aspects of care related to the diagnosis and outpatient treatment of
cancer, including comprehensive oncology services (including primarily medical,
radiation, and gynecological services), diagnostic radiology services, retail
pharmacy services and clinical research. For the first six months of 1999 and
1998, oncology related services was the only product line that exceeded the
reporting thresholds of FAS 131. The Company, therefore, has used the
aggregation criteria of FAS 131 and reports a single segment.
Comprehensive income
During 1998, the Company adopted FASB Statement No. 130, "Comprehensive
Income", which establishes standards for reporting and displaying comprehensive
income and its components. In addition to net income, comprehensive income is
comprised of "other comprehensive income" which includes all charges and credits
to equity that are not the result of transactions with owners of the Company's
Common Stock. The required disclosure is included in the accompanying
consolidated statements of income. Accumulated other comprehensive income
consists of the valuation adjustment (net of tax) relating to investments in
common stock.
12
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Accounting pronouncements for future adoption
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (FAS 133) which is effective for the
Company's financial statements as of and for the year ending December 31, 2000.
FAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and to measure those
instruments at fair value. Management expects to implement FAS 133 for the year
ended December 31, 2000 and does not expect such implementation to have a
material effect on the Company's operations.
NOTE 2 - REVENUE
Medical service revenue for services to patients by the physician groups
affiliated with the Company is recorded when services are rendered based on
established or negotiated charges reduced by contractual adjustments and
allowances for doubtful accounts. Differences between estimated contractual
adjustments and final settlements are reported in the period when final
settlements are determined. Medical service revenue of the affiliated physician
groups is reduced by amounts retained by the physician groups under the
Company's management service agreements to arrive at the Company's revenue.
The following presents the amounts included in the determination of the
Company's revenues:
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- -------- --------
Medical service revenue............... $1,073,446 $802,292 $557,144
Amounts retained by affiliated
physician groups..................... 263,115 198,789 136,334
---------- -------- --------
Management fee revenue................ 810,331 603,503 420,810
Other revenue......................... 26,265 21,910 11,939
---------- -------- --------
Revenue............................... $ 836,596 $625,413 $432,749
========== ======== ========
For the years ended December 31, 1998, 1997 and 1996, the affiliated
physician groups derived approximately 34% of their medical service revenue from
services provided under the Medicare and state Medicaid programs and 46%, 46%
and 45%, respectively from contractual, fee-for-service arrangements with
managed care programs, none of which individually aggregated more than 10% of
medical service revenue. The remaining 20%, 20% and 21%, respectively, was
derived from various non-contracted fee-for-service payors. Capitation revenues
were less than 1% of total medical service revenue in 1998, 1997 and 1996.
Changes in the payor reimbursement rates, particularly Medicare due to its
concentration, or affiliated physician groups' payor mix can materially and
adversely affect the Company's revenues.
The Company's accounts receivable are a function of medical service revenue
of the affiliated physician group rather than the Company's revenue.
Receivables from the Medicare and state Medicaid programs are considered to have
minimal credit risk, and no other payor comprised more than 10% of accounts
receivable at December 31, 1998.
The Company's most significant and only management service agreement to
provide more than 10% of revenues is with Texas Oncology Physicians Association
(TOPA). TOPA accounted for approximately 32%, 37%, and 46% of the Company's
total revenues for the years ended December 31, 1998, 1997, and 1996,
respectively. Set forth below is selected, unaudited financial and statistical
information concerning TOPA.
13
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Medical service revenues............. $338,113 $291,395 $249,888
-------- -------- --------
Management fee paid to the company
Reimbursement of expense.......... 218,083 183,863 158,892
Earnings component................ 42,010 37,636 31,848
-------- -------- --------
Total management fee................. 260,093 221,499 190,740
-------- -------- --------
Amounts retained by TOPA............. $ 78,020 $ 69,896 $ 59,148
======== ======== ========
Physicians employed by TOPA.......... 197 221 212
Cancer centers provided to TOPA...... 24 21 17
The Company's operating margin for the Texas Oncology Physicians
Association (TOPA) service agreement was 16.1%, 17.0%, and 16.7% for the years
ended December 31, 1998, 1997 and 1996, respectively. Operating margin is
computed by dividing the earnings component of the management fee by the total
management fee. The decrease in operating margin in 1998 is due to the
development and utilization of new expensive pharmaceutical agents that have
lower margins than those previously used. The Company believes that these
trends will continue in the future.
The number of physicians employed by TOPA decreased in 1998 because a group
of 34 radiologists withdrew from TOPA and entered into a new service agreement
with the Company. The Company, TOPA and Reformed Radiology determined that it
was in the best interests of all parties to have a separate practice focusing on
radiology. The Company is not aware of any negative operating or financial
trends related to TOPA.
Other revenues are primarily derived from retail pharmacy operations
located in certain of the Company's cancer centers and larger physician offices
and the Company's equity interest in Ilex.
NOTE 3 - MEDICAL PRACTICE TRANSACTIONS
The consideration paid for the physician groups to enter into long-term
management service agreements and for the nonmedical assets of the physician
groups, primarily receivables and fixed assets, has been accounted for as asset
purchases. Total consideration includes the assumption by the Company of
specified liabilities, the estimated value of nonforfeitable commitments by the
Company to issue Common Stock at specified future dates for no additional
consideration, short-term and subordinated notes, cash payments and related
transaction costs as follows:
Year Ended December 31,
-----------------------------
1998 1997 1996
------- -------- --------
Cash and transaction costs.......... $32,229 $ 42,821 $ 67,352
Short-term and subordinated notes... 13,500 49,169 37,332
Common Stock to be issued........... 8,732 24,619 37,062
Liabilities assumed................. 2,687 8,252 3,794
------- -------- --------
Total costs......................... $57,148 $124,861 $145,540
======= ======== ========
Number of practice affiliations..... 21 23 25
14
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
During 1998, the Company affiliated with 21 oncology physician groups on
the effective dates indicated as follows: January 1, Northwest Medical
Specialists, P.C., of Niles, Illinois, total consideration of $12,250 including
231 shares of Common Stock to be issued with a value of $3,062; March 26, Landry
& Moss, M.D.'s, P.A. of Bradenton, Florida, total consideration of $3,645
including 61 shares of Common Stock to be issued with a value of $604; March 31,
Dayton Oncology/Hematology Consultants, P.A. of Dayton, Ohio, total
consideration of $5,560 including 116 shares of Common Stock to be issued with a
value of $1,048; May 1, Colorado Radiation Oncology, P.C. of Denver, Colorado,
total consideration of $3,321 including 112 shares of Common Stock to be issued
with a value of $1,095; August 15, Spector, Zimbler, & DeLeo, M.D.'s of
Berkshire, Massachusetts, total consideration of $2,539 including 41 shares of
Common Stock to be issued with a value of $436; September 1, Arnold Wax, M.D.,
LTD of Las Vegas, Nevada, total consideration of $4,426 including 88 shares of
Common Stock to be issued with a value of $587; and in July through December of
1998, eleven smaller transactions with physician groups in Tucson, Arizona;
Oklahoma City, Oklahoma; Kansas City, Missouri; Dunedin, Florida; Norfolk,
Virginia; Owings Mills, Maryland; Highland, Illinois; Clear Lake, Texas, and
Denver, Colorado; for total consideration of $25,407 including 370 shares of
Common Stock to be issued with a value of $1,900.
During 1997, the Company affiliated with 23 oncology physician groups on
the effective dates indicated as follows: March 28, Northwest Cancer Center
P.C., Puget Sound Cancer Center, P.C., and Washington Cancer Centers, P.C. of
Edmonds, Washington, total consideration of $11,500 including subordinated
convertible notes with a value of $8,500; January 10, Williamsburg Hematology
and Oncology of Virginia, total consideration of $4,566 including 94 shares of
Common Stock to be issued with a value of $588; March 14, Virginia Oncology
Associates, P.C., of Norfolk, Virginia, total consideration of $21,085 including
514 shares of Common Stock to be issued with a value of $3,239; April 1, Central
Indiana Radiation Oncology, P.S.C. of Indiana, total consideration of $4,622
including 253 shares of Common Stock to be issued with a value of $1,393; March
24, Texas Radiation Oncology Group, L.L.P. of Austin, Texas, total consideration
of $12,065 including 343 shares of Common Stock to be issued with a value of
$1,754; November 1, Hematology Associates of South Texas, P.A., total
consideration of $6,082 including 155 shares of Common Stock to be issued with a
value of $1,366; November 1, Clinical Hematology Oncology Associates, P.C. of
Arizona, total consideration of $9,855 including 398 shares of Common Stock to
be issued with a value of $3,767; November 17, Florida Community Cancer Centers,
P.A. of Tampa, Florida, total consideration of $34,846 including 1,117 shares of
Common Stock to be issued with a value of $8,964; and in January through
September of 1997, fifteen smaller transactions with physician groups in Tulsa,
Oklahoma; Las Vegas, Nevada; Portland, Oregon; Fairfax, Virginia; Vancouver,
Washington; Kissimmee, Florida; Little Rock, Arkansas; Westminster, Maryland;
and Franklin, Pennsylvania; for total consideration of $20,240 which includes
516 shares of Common Stock to be issued with a value of $3,548.
During 1996, the Company affiliated with 25 oncology physician groups on
the effective dates indicated as follows: July 1, Minnesota Oncology
Hematology, P.A. of St. Paul, Minnesota, total consideration of $20,146
including 299 shares of Common Stock to be issued with a value of $7,000;
December 9, Medical Oncology Hematology Associates of Chicago, Illinois, total
consideration of $17,747 including 866 shares of Common Stock to be issued with
a value of $6,000; March 1, Cancer Center of Kansas, P.A. of Wichita, Kansas,
total consideration of $12,547 including 164 shares of Common Stock to be issued
with a value of $1,926; March 1, Coram Physician Services of Fairfax, Virginia,
total consideration of $15,518 including 116 shares of Common Stock to be issued
with a value of $1,375; May 1, San Antonio Tumor and Blood Clinic, P.A. and Drs.
Cohen, Gordon and Lopez, P.A. of San Antonio, Texas, total consideration of
$12,479 including 210 shares of Common Stock to be issued with a value of
$1,980; September 1, Central Texas Diagnostic Center, P.A. of Austin, Texas,
total consideration of $18,836 including 771 shares of Common Stock to be issued
with a value of $4,157; November 1, Hematology-Oncology Associates, P.A. of
Jacksonville, Florida, total consideration of $8,012 including 259 shares of
Common Stock to be issued with a value of $1,113; June 1, Capital District
Oncology P.C. of Albany, New York, total consideration of $6,000 including 826
shares of Common Stock to be issued with a value of $4,500 and in January
through November of 1996, seventeen smaller transactions with physician groups
in Durham, North Carolina; Denver, Colorado; Portland, Oregon; Tucson, Arizona;
San Antonio, Texas; Independence, Missouri; Schenectady, New York; Towson,
Maryland; Columbia, Maryland; Dallas, Texas; Flagstaff, Arizona; and Orange
Park, St. Augustine and Ocala, Florida; for total consideration of $34,255 which
includes 1,174 shares of Common Stock to be issued with a value of $9,011.
15
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
In connection with three medical practice transactions occurring in 1997,
the Company issued subordinated promissory notes contingently obligating the
Company to pay up to $1,300. Payment under the promissory notes is contingent
on the Company receiving a defined level of management fees during the first two
years following the applicable medical practice transaction which substantially
exceeds the level of management fees expected by the Company during its
negotiations with the practice. Once the payment is fixed, the subordinated
promissory notes are paid in five annual installments, commencing on the third
anniversary of the medical practice transaction. As of December 31, 1998, the
Company has recorded $334, of the $1,300. (See Note 6 -"Subordinated Notes"
herein.) The remainder of such liability, if any, will be recorded in the
period in which the outcome of the contingency becomes probable. Any payment
made will be allocated to the affiliated long-term management services agreement
and will be amortized over the remaining life of that asset.
NOTE 4 - RESEARCH CONTRACTS
On June 30, 1997, one of the Company's subsidiaries, PRN Research, Inc.,
entered into a comprehensive clinical development alliance with Ilex, a drug
development company focused exclusively on cancer. Under the terms of the
agreement, the Company will refer all contract research business to Ilex. As
part of the agreements, Ilex issued to the Company 314 shares and 312 shares of
Ilex common stock in 1998 and 1997, respectively. In addition, Ilex will issue
314 shares of Ilex common stock to the Company in each of 1999 and 2000. Ilex
will also issue up to 1,256 additional shares of Ilex common stock through 2000
contingent upon the performance of Ilex's contract clinical research business
and other conditions. The Ilex agreement expires in 2007. As of December 31,
1998, a valuation allowance credit of $437 was recorded as a result of an
increase in the market value of Ilex common stock. In accordance with the
provisions of SFAS No. 115, the valuation allowance is shown as a reduction to
stockholders' equity, net of applicable income taxes of $168.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
---------------------
1998 1997
--------- --------
Land............................................... $ 17,946 $ 17,469
Computers and software............................. 21,891 11,617
Equipment, furniture and fixtures.................. 175,399 141,941
Buildings and leasehold improvements............... 88,085 78,769
Construction in progress........................... 6,081 472
-------- --------
309,402 250,268
Less - accumulated depreciation and amortization... (88,458) (59,221)
-------- --------
$220,944 $191,047
======== ========
16
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 6 - INDEBTEDNESS
Short-term notes payable
Short-term notes payable bear interest at 7% and have original maturities
of less than one year. The notes are payable to physicians with whom the
Company entered into long-term management service agreements and relate to
medical practice transactions. Short-term notes payable amounted to $14,011 at
December 31, 1997. These notes were paid in 1998.
Long-term indebtedness
The Company's long-term indebtedness consists of the following:
December 31,
-------------------
1998 1997
-------- --------
Subordinated notes.................... $ 80,611 $ 80,710
Convertible notes..................... 900 9,400
Credit Facility A..................... 104,000 66,000
Credit Facility B..................... 52,000 32,000
Notes payable......................... 15,623 16,022
Capital lease obligations and other... 3,766 2,556
-------- --------
256,900 206,688
Less - current maturities............. 22,426 17,311
-------- --------
$234,474 $189,377
======== ========
Subordinated notes
The subordinated notes are issued in substantially the same form in
different series and are payable to the physicians with whom the Company entered
into management service agreements. Substantially all of the notes outstanding
at December 31, 1998 and 1997 bear interest at 7%, are due in installments
through 2005 and are subordinated to senior bank and certain other debt. If the
Company fails to make payments under any of the notes, the respective physician
group can terminate the related management service agreement for cause.
Convertible notes
In April 1997, the Company issued $8,500 of convertible promissory notes as
partial consideration for physicians groups to enter into a Service Agreement.
The notes bear interest at the prime rate plus 1%. During 1998 these promissory
notes were converted into approximately 1,500 shares of the Company's Common
Stock. In July 1997, the Company issued $900 of convertible promissory notes as
partial consideration for a physician group to enter into a Service Agreement.
The notes bear interest at 6% and are convertible at the option of the holder of
the notes into 66 shares of the Company's Common Stock in 2002.
Credit Facility A
The Company has a loan agreement and revolving credit/term facility (Credit
Facility A) with First Union National Bank (First Union) individually and as
Agent for twelve additional lenders (Lenders), which was amended as of December
29, 1997 to improve certain terms and covenants. Under the terms of the
agreement, the amount available for borrowing is $150,000 through October 31,
2002. Proceeds of loans may be used to finance medical practice transactions,
provide working capital or for other general corporate uses. At December 31,
1998, the Company had an outstanding balance of $104,000 under Credit Facility
A. The Company has classified this facility as long-term due to its ability and
intent to maintain the borrowings past 1999.
17
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Borrowings under Credit Facility A are secured by capital stock of the
Company's subsidiaries and all material contracts, including management service
agreements. At the Company's option, funds may be borrowed at the Base interest
rate or the London Interbank Offered Rate (LIBOR) up to LIBOR plus an amount
determined under a defined formula. The Base rate is selected by First Union
and is defined as its prime rate or Federal Funds Rate plus 1/2%. Interest on
amounts outstanding under Base rate loans is due quarterly while interest on
LIBOR related loans is due at the end of each applicable interest period or
quarterly, if earlier. As of December 31, 1998, the weighted average interest
rate on all outstanding draws was 5.8%.
The Company is subject to restrictive covenants under Credit Facility A,
including the maintenance of certain financial ratios. The agreement also
limits certain activities such as incurrence of additional indebtedness, sales
of assets, investments, capital expenditures, mergers and consolidations and the
payment of dividends. Under certain circumstances, additional medical practice
transactions may require First Union and the Lenders' consent. The proposed
merger with PRN (Note 1) requires consent of the Lenders under Credit Facility
A. The Company is actively negotiating with potential lenders to arrange for a
new expanded Credit Facility and believes that such negotiations will provide
for a five year agreement with terms equivalent to current market conditions.
Credit Facility B
The Company has a loan agreement and revolving credit/term facility (Credit
Facility B), which was amended as of June 11, 1997 to improve certain terms and
covenants. Under the terms of the agreement, the amount available for borrowing
under the Revolver increased from $90,000 to $140,000 and reduced the interest
rate charged on borrowings. Proceeds of loans may be used to finance medical
practice transactions, provide working capital or for other general corporate
uses. At December 31, 1998, the Company had an outstanding balance of $ 52,000
under Credit Facility B. The Company has classified this facility as long-term
due to its ability and intent to maintain the borrowings past 1999.
The Revolver matures June 11, 2002. The Revolver contains covenants that,
among other things, require the Company to maintain certain financial ratios and
imposes restrictions on the Company's ability to incur future indebtedness, pay
dividends, sell assets, or redeem or repurchase Company securities. At December
31, 1998, the Company was in compliance with the Revolver covenants and had
$88,000 available under the Revolver for borrowing. The Revolver is secured by
the capital stock of two of the Company's wholly owned subsidiaries.
Notes payable
The notes payable bear interest at rates ranging from 5.3% to 10% and
mature between 1999 to 2005. The notes are payable to physicians with whom the
Company entered into long-term management service agreements and relate to
medical practice transactions. The notes payable are unsecured.
Derivatives
As of August 31, 1998, the Company entered into an interest rate swap
agreement with a financial institution to reduce the impact of changes in
interest rates on borrowings under Credit Facility A. The agreement effectively
fixed the interest rate on variable rate debt at a rate of 5.93% per annum for
notional principal amount of $80,000 through August 30, 1999. The notional
amount of the swap agreement is used to measure the principal amount upon which
fixed rate interest is to be paid or received and does not represent the amount
of exposure to credit loss. The Company is exposed to credit losses from the
counterparty's nonperformance but does not anticipate any losses because the
agreement is with a major financial institution. At December 31, 1998, the fair
market value of the interest rate swap was immaterial. The use of this swap
agreement had an insignificant impact on interest expense for the year ended
December 31, 1998.
18
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Capital lease obligations and other
Leases for medical and office equipment are capitalized using effective
interest rates between 6.5% and 11.5%. At December 31, 1998 and 1997, the gross
amount of assets recorded under the capital leases was $5,500 and $3,200,
respectively, and the related accumulated amortization was $2,300 and $1,900,
respectively. Amortization expense is included with depreciation in the
accompanying consolidated statement of operations. Total future capital lease
payments are $3,400. Other indebtedness consists principally of installment
notes and bank debt, with varying interest rates, assumed in medical practice
transactions.
Maturities
Future principle maturities of long-term indebtedness, including capital
lease obligations, is $22,392 in 1999, $21,128 in 2000, $19,444 in 2001,
$174,300 in 2002, $11,524 in 2003 and $8,112 thereafter.
NOTE 7 - INCOME TAXES
The Company's income tax provision consists of the following:
Year Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
Federal:
Current.... $27,767 $ 1,447 $18,656
Deferred... 5,195 7,318 2,790
State:
Current.... 2,612 2,161 2,499
Deferred... 610 667 398
------- ------- -------
$36,184 $11,593 $24,343
======= ======= =======
The difference between the effective income tax rate and the amount that
would be determined by applying the statutory U.S. income tax rate before income
taxes is as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------ ------
Provision for income taxes at U.S.
statutory rates...................... 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit.............................. 3.0 8.1 2.7
Other................................. (0.4) (0.5) 1.3
---- ---- ----
37.6% 42.6% 39.0%
==== ==== ====
19
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Deferred income taxes are comprised of the following:
December 31,
-----------------
1998 1997
------- -------
Deferred tax assets:
Deferred rent................... $ - $ 101
Accrued expenses................ 849 678
Other........................... 421 610
------- -------
$ 1,270 $ 1,389
======= =======
Deferred tax liabilities:
Management service agreements... $13,556 $ 9,896
Depreciation.................... 11,164 7,705
Prepaid expenses................ 87 697
------- -------
$24,807 $18,298
======= =======
At December 31, 1998, income taxes payable includes a tax liability of
approximately $5,000. The liability has been established related to the
Company's tax position and the possible disallowance of certain deductions taken
in connection with the Company's management services agreements. The impact of
disallowance would be immaterial to the Company's financial condition and
results of operations.
NOTE 8 - PROFIT SHARING PLAN
Employees of the Company participate in either the AOR 401(k) plan or the
PRN 401(k) and profit sharing and savings plan. Employees of the AOR plan are
eligible to participate after 6 months of employment and reaching the age of 21.
Employees of the PRN plan are eligible to participate at the time of employment
if they have reached the age of 20 and 1/2 years. Employees vest in the
employer contribution portion of their account, if any, at the rate of 20% for
each year that they meet the Plan's service requirements.
The AOR plan allows for a discretionary employer contribution to the plan.
For the three years ended December 31, 1998, no employer contributions were
made.
The PRN plan allows for an employer match of contributions made by plan
participants. For the years ended December 31, 1997 and 1996, the Company
elected to match 50% of employee contributions, the total match not to exceed 6%
of the participant's salary subject to the salary ceiling rules imposed by the
Internal Revenue Service. In 1998 the Company elected to match 50% of employee
contributions, the total match not to exceed 3% of the participant's salary
subject to the salary ceiling rules imposed by the Internal Revenue Service. The
Company's contribution amounted to $1,563, $1,835, and $744 for the years ended
December 31, 1998, 1997, and 1996, respectively.
NOTE 9 - STOCKHOLDERS' EQUITY
Effective May 16, 1997, the Board of Directors of the Company adopted a
shareholders' rights plan and in connection therewith, declared a dividend of
one Series A Preferred Share Purchase Right for each outstanding share of Common
Stock. For a more detailed description of the shareholders rights plan, refer
to the Company's Form 8-A filed with the Securities and Exchange Commission on
June 2, 1997.
Effective May 8, 1997, the Company's stockholders approved an increase in
the number of shares of Common Stock authorized to be issued to 80,000 shares.
In conjunction with the merger of the Company and PRN, the Company's
Stockholders approved an increase in the number of shares of common stock
authorized to 250,000 shares.
20
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
On August 13, 1996, the Board of Directors of the Company authorized the
purchase of up to 3,000 shares of the Company's Common Stock in public or
private transactions. In 1998, 1997, and 1996, the Company purchased 1,232;
657; and 1,110 shares at aggregate costs of $12,400, $6,400 and $9,400,
respectively. Shares repurchased are used to satisfy commitments for the
delivery of the Company's Common Stock from medical practice transactions.
As part of entering into long-term management services agreements with
physician practices as described in Note 3, the Company has made nonforfeitable
commitments to issue shares of Common Stock at specified future dates for no
further consideration. Holders of the rights to receive such shares have no
dispositive, voting or cash dividend rights with respect to such shares until
the shares have been delivered. Common Stock to be issued is shown as a
separate component in stockholders' equity. The amounts, upon issuance of the
shares, are reclassified to other equity accounts as appropriate.
The shares of Common Stock to be issued at specified future dates were
valued at the transaction date at a discount from the quoted market price of a
delivered share after considering all relevant factors, including normal
discounts for marketability due to the time delay in delivery of the shares.
The discount for shares of Common Stock to be issued at specified future dates
is 10% for shares to be delivered prior to the fifth anniversary of the
transaction and is 20% for shares to be delivered thereafter. The Common Stock
in the transactions is to be delivered under the terms of the respective
agreements for periods up to seven years after the initial transaction date.
The recorded value represents management's best estimate of the fair value of
the shares of Common Stock to be delivered in the future as of the transaction
date.
For transactions completed through December 31, 1998, the scheduled
issuance of the shares of Common Stock that the Company is committed to deliver
over the passage of time are approximately 6,642 in 1999, 5,044 in 2000, 1,977
in 2001, 2,245 in 2002, 831 in 2003 and 207 thereafter.
NOTE 10 - STOCK OPTIONS
The Company's 1993 Key Employee Stock Option Plan, as amended, provides
that employees may be granted options to purchase Common Stock. Total shares
available for grant are limited to 12% of the outstanding common shares plus
the shares to be issued to physician groups at specified future dates.
Individual option vesting and related terms are determined by the Compensation
Committee of the Board of Directors. However, the stock option plan provides
that the options granted may be incentive options at an exercise price no less
than fair value at the grant date or 85% of fair value in the case of
nonqualified options. Option terms may not exceed ten years. Individual option
grants vest ratably over time, generally five years. Effective November 7,
1996, the Board of Directors exchanged 626 options with exercise prices of
$18.10 to $24.18 for new options with an exercise price of $8.79, which
approximated fair value on the date of exchange.
Under the terms of the Company's Chief Executive Officer Stock Option Plan
and Agreement and the Everson Stock Option Plan and Agreement, two executives
were granted 3,694 non-qualified options to purchase Common Stock with an
exercise price effectively equal to the fair market value at the date of grant.
The options vested on the date of the Company's initial public offering and
expire between 2000 and 2003. The Company's ability to grant further options
under these plans ceased on the date of the Company's initial public stock
offering. At December 31, 1998, 1,818 Common Stock options with a weighted-
average exercise price of $3.72 per share were outstanding and exercisable under
the terms of these plans.
The Company's 1993 Non-Employee Director Stock Option Plan provides that up
to 600 options to purchase Common Stock can be granted. The options vest in 6
months or ratably over 4 years, have a term of 10 years and exercise prices
effectively equal to the fair market value at the date of grant. As of December
31, 1998, 79 options were outstanding, all of which were vested and exercisable.
The Company's 1993 Affiliate Stock Option Plan, as amended, provides that
options to purchase up to 2,000 shares of Common Stock can be granted. Options
under the plan have a term of 10 years. All individual option grants vest
ratably over the vesting periods of 3 to 5 years. Effective November 7, 1996,
the Board of Directors exchanged 61,500 options with exercise prices of $18.10
to $24.18 for new options with an exercise price of $8.79 which approximated
fair value on the date
21
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
of grant. Of the outstanding options to purchase shares of Common Stock granted
under this plan, 774 were granted to physician employees of the affiliated
physician groups and 46 were granted to other employees of the affiliated
physician groups. In 1998 and 1997, the fair value of the options granted
to non-employees was $8.48 and 8.21 per share, respectively. Compensation
expense will be recognized over the respective vesting periods. Expense of $606
and $270 was recognized in 1998 and 1997, respectively.
All of the Company's Common Stock options vest automatically upon a change
in control of the Company, as defined in such stock option plans.
In November 1993, PRN established a stock option plan for employees
("Employee Option Plan") whereby PRN may issue to officers and key employee's
options to purchase up to 4,700 shares of PRN's common stock.
Substantially all of the options that were issued in 1994 vested in May
1996 and expire in May 1999. Substantially all subsequent issuances of options
vest over periods between three and five years beginning one year from the date
of grant and expire in ten years, except in the case of a "change in control" as
defined in the Employee Option Plan when all options become immediately vested.
Prior to PRN's initial public offering the Board of Directors considered, among
other things, available operating results of PRN, comparable public companies'
price/earnings ratios, the illiquidity of the underlying security, and prior
transactions in the common stock in establishing the fair market value of the
common stock at the dates of grant.
On November 13, 1996, PRN's Compensation Committee of the Board of
Directors repriced all options outstanding under the Employee Option Plan
granted after the date of PRN's initial public offering, other than options held
by the Chief Executive Officer and President and the Executive Vice President-
Medical Director. Options issued at that date under the Employee Option Plan
totaled 1,000 shares and had exercise prices ranging between $9.71 and $27.79
per share. The option exercise prices were amended to be equal to the fair
market value of the common stock at the close of business on November 13, 1996,
or $6.98 per share.
In April 1994, PRN established a stock option plan for outside directors
(the "Director Option Plan") whereby PRN may issue to outside directors options
to purchase up to 599 shares of PRN's common stock. On September 22, 1994, PRN
granted options to purchase an aggregate of 108 shares of common stock to three
outside directors, at an exercise price of $4.59 per share. In May 1995, PRN
granted options to purchase 5 shares of common stock to one outside director at
an exercise price of $9.98 per share.
In May 1996, PRN granted options to purchase an aggregate of 19 shares of
common stock to four outside directors at an exercise price of $23.73 per share.
In May 1997, PRN granted options to purchase an aggregate of 14 shares of common
stock to three outside directors at an exercise price of $8.78 per share. In May
1998, PRN granted options to purchase an aggregate of 85 shares of common stock
to five outside directors at an exercise price of $13.30 per share. Options
issued under the Director Option Plan vest and are exercisable one year from the
date of grant.
PRN also granted in April 1994 options ("1994 Director Options") to
purchase an aggregate of 71 shares of common stock to three directors at an
exercise price of $2.50 per share, which options vested one year following the
date of grant. These options were not granted pursuant to the Director Option
Plan.
22
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The following summarizes the activity for all option plans:
Shares Weighted
Represented Average
by Options Exercise Price
----------- --------------
Balance, January 1, 1996..... 7,044 $ 5.88
Granted...................... 2,291 12.24
Exercised.................... (1,021) 1.90
Canceled..................... (2,052) 17.71
------
Balance, December 31, 1996... 6,262 4.97
Granted...................... 3,312 11.84
Exercised.................... (613) 3.37
Canceled..................... (414) 7.39
------
Balance, December 31, 1997... 8,547 7.54
Granted...................... 2,351 12.87
Exercised.................... (1,264) 4.08
Canceled..................... (574) 9.53
------
Balance, December 31, 1998... 9,060 $ 9.28
======
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Price at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- ----------------- ---------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1 to 3 1,157 2.8 $ 2.65 1,117 $ 2.65
4 to 9 3,391 6.0 6.48 1,987 5.38
10 to 14 3,429 9.0 12.12 388 11.30
15 to 24 1,083 8.7 16.18 208 17.51
----- -----
1 to 24 9,060 7.0 9.28 3,700 5.86
===== =====
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for fixed
options granted to Company employees. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period. The Company's pro forma information for 1998, 1997 and
1996 are as follows and includes compensation expense of $606, $270 and $106,
respectively (in thousands, except per share amounts):
23
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
(unaudited)
Pro forma net income....................... $45,290 $12,107 $43,319
Pro forma net income per share - basic..... $ 0.46 $ 0.13 $ 0.49
Pro forma net income per share - diluted... $ 0.45 $ 0.12 $ 0.47
Options granted in 1998, 1997 and 1996 had weighted-average fair values of
$8.46, $9.11 and $6.04 per share, respectively. The fair value of each Common
Stock option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants from all plans in 1998, 1997 and 1996:
1998 1997 1996
----- ----- -----
Expected life (years)............ 5 5 5
Risk-free interest rate.......... 4.9% 5.2% 5.1%
Expected volatility (post IPO)... 76% 81% 87%
Expected dividend yield.......... 0% 0% 0%
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In December 1997, the Company entered into a $75,000 master operating lease
related to integrated cancer centers. Under the agreement, the lessor purchases
and has title to the properties, pays for the construction costs and thereafter
leases the facilities under operating leases to the Company. The initial term
of the lease is for five years and can be renewed in one year increments if
approved by the lessor. The Company provides the lessor with substantial
residual value guarantees at the end of each facility lease and has purchase
options at original cost on each property. Advances under the master lease
agreement at December 31, 1998 were $32,300.
The Company leases office space, integrated cancer centers and certain
equipment under noncancelable operating lease agreements. Total future minimum
lease payments, including escalation provisions and leases with entities
affiliated with physician groups, are $29,455 in 1999, $25,764 in 2000, $22,887
in 2001, $18,871 in 2002, $17,402 in 2003, and $46,964 thereafter. Rental
expense under noncancelable operating leases was $34,863 in 1998, $27,883 in
1997 and $19,817 in 1996.
The Company enters into commitments with various construction companies and
equipment vendors in connection with the development of cancer centers. As of
December 31, 1998, the Company's commitments were approximately $7,300.
The Company and its affiliated physician groups maintain insurance with
respect to medical malpractice risks on a claims-made basis in amounts believed
to be customary and adequate. Management is not aware of any outstanding claims
or unasserted claims probable of assertion against it or its affiliated
physician groups which would have a material impact on the Company's financial
position or results of operations.
In March 1996, Methodist Hospitals of Dallas ("Methodist") filed a lawsuit
in the District Court of Dallas County, Texas against the Company and TOPA
asserting various claims, including claims of monopolization, conspiracy to
monopolize, attempted monopolization, unfair competition, and tortious
interference with actual and prospective contractual relationships. In May 1998,
the Company, TOPA, and Methodist settled this lawsuit. Under the terms of the
settlement, Methodist released the Company and TOPA from any liability, and the
lawsuit, including all claims related thereto, was dismissed with prejudice. As
part of the settlement, the PRN and TOPA agreed to limit the expansion of
certain facilities and the number of physicians in Dallas County. The Company
believes that such limitations will not materially adversely affect the
Company's results of operations or growth plans.
24
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
In September 1996 and October 1996, PRN was named as defendant in various
lawsuits representing a class of all persons who purchased and still owned
shares of PRN's common stock from the period of January 2, 1996 through October
28, 1996. In general, these lawsuits asserted that PRN failed to disclose that
it had engaged in certain improper accounting practices, that the relationship
between PRN and certain of the affiliated physician groups violated federal and
state law, and that certain of the affiliated physician groups have charged the
Medicare program amounts in excess of the cost of delivering certain services.
In December 1997, PRN reached an agreement to settle these lawsuits for $1,975.
In January and February 1998, these cases were dismissed with prejudice, and all
members of the settlement class became barred from prosecuting, pursuing, or
litigating any claims asserted in these cases.
Beginning January 1, 1997, the Company has guaranteed that the amounts
retained by physicians will be at least $5,195 under the terms of the management
service agreement with the Company's Minnesota physician group provided that
certain targets are met. Under this agreement, the Company reduced its
management fee in 1998 from the Minnesota physician group by $714, and recorded
management fee revenue from the Minnesota physician group of $21,665. Without
the reduction in its management fee, the Company would have recorded revenue
from the Minnesota physician group of $22,379. The guaranty provisions of the
service agreement expire in 2001.
NOTE 12 - RELATED PARTIES
The Company receives a contractual management fee for providing management
services to its affiliated physician groups. The Company also advances to its
affiliated physician groups amounts needed for the purchase of pharmaceuticals
and medical supplies necessary in the treatment of cancer. The advances are
reflected on the Company's balance sheet as due from/to affiliated physician
groups and are reimbursed to the Company as part of the management fee payable
under in its management service agreements with its affiliated physician groups.
The Company leases a portion of its medical office space and equipment, at
rates that the Company believes approximate fair market value based upon an
analysis of comparable office space in the geographic areas from entities
affiliated with certain of the stockholders of physician groups affiliated with
the Company. Payments under these leases were $3,700 in 1998, $2,600 in 1997,
and $2,300 in 1996 and total future commitments are $16,700.
The subordinated notes are payable to persons or entities that are also
stockholders or holders of rights to receive Common Stock at specified future
dates. Total interest expense to these parties was $5,800 in 1998, $5,200 in
1997, and $3,900 in 1996.
A director and a stockholder is of counsel and previously was a partner of
a law firm utilized by the Company. The Company incurred $558, $584, and $651
for legal services provided by the firm in 1998, 1997 and 1996, respectively.
Four of the Company's directors are practicing physicians with physician
groups affiliated with the Company. In 1998, the physician groups in which
these directors participate generated total medical service revenues of $94,467
of which $21,620 was retained by the groups and $72,847 was included in the
Company's revenue. In 1997 and 1996, three of the Company's directors were
practicing physicians with physician groups affiliated with the Company. In
1997, the three physician groups generated total medical service revenues of
$40,378 of which $8,484 was retained by the groups and $31,894 was included in
the Company's revenue. In 1996, the three physician groups generated total
medical service revenues of $37,725 of which $8,218 was retained by the groups
and $29,507 was included in the Company's revenue.
The Company and TOPA are parties to a management service agreement pursuant
to which the Company provides TOPA with facilities, equipment, non-physician
personnel, and administrative, management, and non-medical advisory services, as
well as services relating to the purchasing and administering of supplies. The
management fee under the Texas service agreement is equal to 35% of the earnings
(professional and research revenues earned by the affiliated physician group
less direct expenses) of that practice before interest and taxes ("Earnings")
plus direct expenses of the related practice locations. Direct expenses include
rent, depreciation, amortization, provision for uncollectible accounts, salaries
and benefits
25
<PAGE>
US ONCOLOGY, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
of non-physician employees, medical supply expense and pharmaceuticals. In 1998,
TOPA paid the Company an aggregate of approximately $260,100 pursuant to the
TOPA management service agreement. Dr. Jones, a director of the Company, and Dr.
Bailes, an Executive Vice President and a director of the Company, are employed
by TOPA. TOPA beneficially owns approximately 17.4% of the Company's outstanding
common stock. At December 31, 1998, TOPA was indebted to the Company in the
aggregate amount of approximately $11,400. This indebtedness was incurred when
the Company advanced working capital to TOPA for various uses, including the
development of new markets and physician salaries and bonuses. This indebtedness
bears interest at a rate negotiated by the Company and TOPA that approximates
the prime lending rate (7.75% at December 31, 1998). Effective November 1, 1998,
the Company and TOPA entered into a Second Amended and Restated Service
Agreement. The significant changes in the service agreement effected by the
Second Amended and Restated Service Agreement are (i) TOPA no longer
participates in the earnings of PRN Research, Inc.; (ii) TOPA no longer
participates in the earnings of the Company's imaging centers; (iii) the term of
the service agreement was extended for three years; and (iv) the provisions of
the covenant not to compete that TOPA enters into with physicians were
strengthened. In consideration for entering into the amended agreement, the
Company paid TOPA $1,500 and is obligated to pay TOPA $7,500 later in 1999.
Because of the expected economic benefits to be received by the Company, the
Company recorded the payments to TOPA as an increase in the value of the service
agreement with TOPA and an offset of TOPA's indebtedness to the Company.
The Company leases facilities from affiliates of Baylor University Medical
Center ("BUMC"). Additionally, affiliates of BUMC provide the Company various
services, including telecommunications and maintenance services, Mr. Powell, a
director of the Company, is president and chief executive officer of BUMC. In
1998, payments by the Company to BUMC totaled an aggregate of approximately
$3,900 for these services.
The Company and Minnesota Oncology Hematology, P.A. ("MOHPA") entered into
a management service agreement effective July 1, 1996. Dr. Schwartz, a director
of PRN, is president and medical director of MOHPA. Pursuant to the service
agreement with MOHPA, the Company provides MOHPA with offices, facilities,
equipment, non-physician personnel, and administrative, management, and non-
medical advisory services, as well as services relating to the purchasing and
administering of supplies. During 1998, MOHPA paid the Company an aggregate of
approximately $21,665 pursuant to its management service agreement.
As part of the consideration for MOHPA entering into the management service
agreement, the Company is required to make quarterly payments of $464 to MOHPA
through July 1, 2000. During 1998, the Company paid MOHPA an aggregate of $1,856
pursuant to such quarterly payments. In addition, the Company is required to
issue a prescribed number of shares of the Company's common stock to MOHPA on
July 1 of each year through July 1, 2001. During 1998, the Company issued
107,000 shares of common stock to MOHPA pursuant to such yearly issuances.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
US ONCOLOGY, INC.
Dated: August 16, 1999 By: /s/ L. FRED POUNDS
------------------------------------------
L. Fred Pounds
Chief Financial Officer, Vice President of
Finance and Treasurer
27
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No.'s 333-778, 333-780, 333-782, 333-784, 333-786,
333-30057, 333-80977 and 333-81069) of US Oncology, Inc., formerly known as
American Oncology Resources, Inc. of our report dated March 2, 1999, except for
paragraph 2 of Note 1 which is as of June 15, 1999, appearing on page 3 of this
Form 8-K/A.
/S/ PRICEWATERHOUSECOOPERS LLP
- ----------------------------------
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
August 13, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 8-K and in the Registration Statements
on Form S-8 (Reg. Nos. 333-778, 333-780, 333-782, 333-786, 333-30057, 333-80977
and 333-81069) which incorporate this Form 8-K by reference of our reports
dated February 19, 1999, included in Physician Reliance Network, Inc's Form
10-KA for the year ended December 31, 1998. It should be noted that we have not
audited any financial statements of Physician Reliance Network, Inc. subsequent
to December 31, 1998 or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 13,691 7,772
<SECURITIES> 6,975 2,301
<RECEIVABLES> 243,390 179,198
<ALLOWANCES> 0 0
<INVENTORY> 14,682 8,078
<CURRENT-ASSETS> 322,016 243,821
<PP&E> 309,402 250,268
<DEPRECIATION> 88,458 59,221
<TOTAL-ASSETS> 1,033,528 883,430
<CURRENT-LIABILITIES> 143,754 122,600
<BONDS> 234,474 189,377
0 0
0 0
<COMMON> 812 758
<OTHER-SE> 628,986 553,540
<TOTAL-LIABILITY-AND-EQUITY> 1,033,528 883,430
<SALES> 0 0
<TOTAL-REVENUES> 836,596 625,413
<CGS> 0 0
<TOTAL-COSTS> 724,523 585,711
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,908 12,474
<INCOME-PRETAX> 96,165 27,228
<INCOME-TAX> 36,184 11,593
<INCOME-CONTINUING> 59,981 15,635
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 59,981 15,635
<EPS-BASIC> 0.61 0.17
<EPS-DILUTED> 0.60 0.16
</TABLE>
