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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-26190
US ONCOLOGY, INC.
(Exact name of registrant as specified in its charter)
_____________________________________
Delaware 84-1213501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16825 Northchase Drive, Suite 1300, Houston, Texas 77060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 873-2674
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Series A Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 17, 2000 was $396,389,644 (based upon the closing sales
price of the Common Stock on The Nasdaq Stock Market on March 17, 2000 of $4.625
per share). For purposes of this calculation, shares held by non-affiliates
exclude only those shares beneficially owned by executive officers, directors
and stockholders beneficially owning 10% or more of the outstanding Common
Stock.
There were 89,831,290 shares of the Registrant's Common Stock outstanding on
March 17, 2000. In addition, as of March 17, 2000, the Registrant had agreed to
deliver 10,867,525 shares of its Common Stock on certain future dates for no
additional consideration.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement issued in connection with the
Registrant's 2000 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
US Oncology, Inc. (together with its subsidiaries, "US Oncology" or
the "Company") is a cancer management company. The Company provides
comprehensive management services under long-term agreements to oncology
practices comprised of over 800 physicians in 26 states. The physicians
affiliated with US Oncology provide all aspects of care related to the diagnosis
and outpatient treatment of cancer, including medical oncology, radiation
oncology, gynecologic oncology, stem cell transplantation, diagnostic radiology
and clinical research. The Company was incorporated in October 1992 under the
laws of the State of Delaware. The Company's principal executive offices are
located at 16825 Northchase Drive, Suite 1300, Houston, Texas, and its telephone
number is (281) 873-2674.
On June 15, 1999, a wholly owned subsidiary of the Company merged with
and into Physician Reliance Network, Inc. ("PRN"), a cancer management company.
As a result of the merger, PRN became a wholly owned subsidiary of US Oncology,
and each holder of PRN common stock received 0.94 shares of the Company's common
stock for each PRN share held. The transaction was accounted for under the
pooling of interests method of accounting and treated as a tax-free exchange.
The Company's financial statements included in this report have been
retroactively restated to combine the accounts of US Oncology (formerly known as
American Oncology Resources, Inc. ("AOR")) and PRN for all periods presented
using their historical basis.
Management Services
The Company is a cancer management company, and its primary business
is providing comprehensive management services to oncology practices, including
the following:
STRATEGIC SERVICES. At each affiliated practice, an operating board
comprised of equal representation from the Company and affiliated physicians is
created to develop and adopt a strategic plan designed to improve the
performance of the practice by (i) outlining physician recruiting goals, (ii)
identifying services and equipment to be added, (iii) identifying desirable
payor relationships and other oncology groups that are possible affiliation
candidates and (iv) facilitating communication with other affiliated physician
groups in the US Oncology network.
FINANCIAL SERVICES. The Company provides comprehensive financial
analysis to each affiliated physician group in connection with managed care
contracting and billing, collection, reimbursement, tax and accounting services.
The Company also implements its cash management system. In addition, the
Company and each affiliated physician group jointly develop a comprehensive
budget that involves the adoption of financial controls and cost containment
measures.
MANAGEMENT INFORMATION SYSTEMS. The Company implements its management
information system to facilitate and organize the exchange of clinical and
operational information among the Company's affiliated physicians. The Company
believes that an integrated information system will enable the Company and its
affiliated physicians to identify effective protocols and manage the costs of
cancer care in future years.
ADMINISTRATIVE SERVICES. The Company manages the facilities used by
the affiliated physicians and, in coordination with the physicians, determines
the number and location of practice sites. The Company provides support for
practice management, billing functions and patient record keeping. The Company
also provides comprehensive purchasing services for drugs, supplies, equipment,
insurance and other practice requirements.
COMPLIANCE PROGRAM. The Company and, more particularly, its
affiliated physician groups are intensely regulated at the federal, state and
local level. To help each affiliated physician group comply with increasingly
complex laws and regulations applicable to oncology practices, the Company has
implemented a comprehensive compliance program.
PERSONNEL MANAGEMENT. The Company employs and manages substantially
all nonmedical personnel of most physician groups, including the executive
director, controller and other administrative personnel. The Company evaluates
these employees, makes staffing recommendations, provides and manages employee
benefits and implements personnel policies and procedures. The Company also
provides similar administrative services to each physician group's employees.
CLINICAL RESEARCH SERVICES. Through its clinical research network,
the Company facilitates and organizes clinical research conducted by its
affiliated physician groups and markets the groups' ability to perform and
manage clinical trials to pharmaceutical and biotechnology companies. Clinical
research conducted by the oncology groups focuses on (i) improving
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cancer survival rates, (ii) enhancing the cancer patient's quality of life,
(iii) reducing the costs of cancer care and (iv) developing new approaches to
cancer diagnosis, treatment and post-treatment monitoring. The Company assists
in a number of aspects in the conduct of clinical trials, including protocol
development, data coordination, institutional review board coordination and
contract review and negotiation.
CLINICAL INITIATIVES AND STANDARDS. The Company organizes clinical
conferences for its affiliated physicians to discuss and identify clinical care,
research and educational strategies for the Company's network of affiliated
physicians. The Company also assists its affiliated physicians in developing
clinical practice guidelines for the different types of cancer and in operating
in accordance with the standards of care required for accreditation by managed
care accreditation bodies. The Company is also implementing a clinical
information system with the goal of facilitating the exchange of information
among affiliated physicians. The Company expects the system will enable the
physicians to share clinical data and treatment patterns and will allow ready
access to current protocols and information regarding cancer therapies and
research developments.
Operations of Oncology Groups
Since the Company's incorporation in October 1992, the Company has
grown rapidly from managing a single practice comprised of six physicians in one
state to managing oncology practices comprised of over 800 physicians in 26
states.
The Company estimates that most of the affiliated physician groups are
among the largest group practices providing cancer care in their markets. The
physician members of these groups have staff privileges at most private
hospitals in their markets and have long-standing relationships with
governmental and private payors.
The oncologists are employed by the affiliated physician groups, not
the Company, and maintain control over all aspects of the provision of medical
care to their patients. The Company does not provide medical care to patients
or employ any of the non-physician personnel of its affiliated physician groups
who provide medical care. However, under the terms of the management agreements
with the affiliated physician groups, the Company is responsible for the
compensation and benefits of the groups' non-physician medical personnel, and
the financial statements of the Company reflect the costs of such compensation
and benefits.
The affiliated physician groups offer a wide array of services to
cancer patients in outpatient settings, including professional medical services,
chemotherapy infusion and radiation oncology services, stem cell
transplantation, clinical laboratory services, diagnostic radiology services,
pharmacy services and patient education. The groups employ a range of personnel
to provide these services, such as medical assistants, nurses (including
oncology certified nurses), radiation therapy technicians, physicists and
laboratory and pharmacy technicians. The practice sites are generally located
in close proximity to other health care providers and typically are equipped to
provide the outpatient services necessary to treat and care for cancer patients
and their families.
Affiliation Structure
The Company's structure enables its affiliated physicians to retain their
autonomy through ownership and participation in their local professional
corporation or other entity, thereby maintaining local authority and control
over medical practice decisions. The Company believes that this local
governance structure is critical to its success.
In connection with affiliating with a physician group, the Company
enters into a management agreement with the group and purchases the group's
nonmedical assets. In consideration of these arrangements, the Company
typically pays cash and subordinated promissory notes and agrees to deliver
shares of its Common Stock at specified future dates (typically on the second
through fifth anniversaries of the closing date). In addition, in most of the
Company's physician group affiliations, each affiliated physician enters into an
employment or noncompetition agreement with the physician group. The Company
believes that the delivery of shares on a delayed basis, the Company's
affiliation structure and the compensation formulas defined in the management
agreements all serve to align the long-term interests of the affiliated
physician groups with those of the Company.
The management service agreements with the affiliated physician groups
generally have contractual terms of 40 years. These agreements cannot be
terminated by the physician groups without cause. As consideration for the
Company's management services, each management agreement provides for payment to
the Company of a management fee. In all of the Company's management agreements,
the Company's management fee includes reimbursement for all practice costs
(other than amounts retained by the physicians). The Company is also paid an
additional management fee. Some of the Company's
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management agreements provide that this additional fee is a percentage of the
practice's earnings before income taxes. In others, the additional fee is
comprised of a fixed fee, plus a percentage fee (in most states) plus, if
certain financial and performance criteria are met, a performance fee.
Competition
The business of providing health care services generally, and of
managing and providing oncology services specifically, is competitive. The
Company's profitability depends on the continued success of its affiliated
physician groups. These physician groups face competition from several sources,
including sole practitioners, single and multi-specialty groups, hospitals and
managed care organizations.
Regulation
General. The health care industry is highly regulated, and there can
be no assurance that the regulatory environment in which the Company and its
affiliated physician groups operate will not change significantly and adversely
in the future. In general, regulation and scrutiny of health care providers and
companies are increasing.
There are currently several federal and state initiatives to amend
regulations relating to the provision of health care services, the legal
structure under which those services are provided, access to health care,
disclosure of health care information, costs of health care and the manner in
which health care providers are reimbursed for their services. It is not
possible to predict whether any such initiatives will be enacted or, if enacted,
what their form, effective dates or impact on the Company will be. The execution
of a management agreement with a physician group currently does not require any
regulatory approval on the part of the Company or the physician group. However,
in connection with the expansion of existing operations and the entry into new
markets, the Company and its affiliated physician groups may become subject to
additional regulation.
The Company's affiliated physician groups are intensely regulated at
the federal, state and local levels. Although these regulations often do not
directly apply to the Company, to the extent an affiliated physician group is
found to have violated any of these regulations and, as a result, suffers a
decrease in its revenues or an increase in costs, the Company's results of
operations might be materially and adversely affected.
Licensing and Certificate of Need Requirements. Every state imposes
licensing requirements on individual physicians and on facilities and services
operated or provided by physicians. Many states require regulatory approval,
including certificates of need, before (a) establishing certain types of health
care facilities, (b) offering certain services or (c) expending monies in excess
of statutory thresholds for health care equipment, facilities or programs.
Fee-Splitting; Corporate Practice of Medicine. The laws of many
states prohibit physicians from splitting professional fees with non-physicians
and prohibit non-physician entities, such as the Company, from practicing
medicine and from employing physicians to practice medicine. The laws in most
states regarding the corporate practice of medicine have been subjected to
relatively limited judicial and regulatory interpretation. The Company believes
its current and planned activities do not constitute fee-splitting or the
practice of medicine as contemplated by these statutes and interpretations.
However, there can be no assurance that future interpretations of such laws will
not require structural and organizational modification of the Company's existing
relationships with the affiliated physician groups. In addition, statutes in
some states in which the Company does not currently operate could require the
Company to modify its affiliation structure.
Medicare/Medicaid Fraud and Abuse Provisions. Federal law prohibits
the offer, payment, solicitation or receipt of any form of remuneration in
return for the referral of Medicare or state health program patients or patient
care opportunities, or in return for the purchase, lease or order of any item or
service that is covered by Medicare or a state health program. Pursuant to this
law, the federal government has pursued a policy of increased scrutiny of joint
ventures and other transactions among health care providers in an effort to
reduce potential fraud and abuse relating to government health care costs.
The Medicare and Medicaid anti-kickback amendments (the "Anti-Kickback
Amendments") provide criminal penalties for individuals or entities
participating in the Medicare or Medicaid programs who knowingly and willfully
offer, pay, solicit or receive remuneration in order to induce referrals for
items or services reimbursed under such programs. In addition to federal
criminal penalties, the Social Security Act also includes the sanction of
excluding violators from participation in the Medicare or Medicaid programs.
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A violation of the Anti-Kickback Amendments requires several elements:
(i) the offer, payment, solicitation or receipt of remuneration; (ii) the intent
to induce referrals; (iii) the ability of the parties to make or influence
referrals of patients; (iv) the provision of services that are reimbursable
under Medicare or state health programs; and (v) patient coverage under the
Medicare program or a state health program. The Company believes that it is
receiving compensation under the management agreements for management services.
The Company also believes that it is not in a position to make or influence
referrals of patients or services reimbursed under Medicare or state health
programs to its affiliated physician groups. Consequently, the Company does not
believe that the management fees payable to it should be viewed as remuneration
for referring or influencing referrals of patients or services covered by such
programs as prohibited by the Anti-Kickback Amendments.
In 1991, the Inspector General of the United States Department of
Health and Human Services first published "Safe Harbor Regulations," defining
safe harbors for certain arrangements that do not violate the Anti-Kickback
Amendments. One of the safe harbors specifically provided is a safe harbor for
personal services and management contracts. Under this safe harbor,
"remuneration" prohibited by the Anti-Kickback Amendments does not include any
payment made by a principal to an agent as compensation for services of the
agent as long as certain standards are met. To the Company's knowledge, there
have been no agency interpretations or case law decisions of management
agreements similar to the Company's that would indicate that such agreements do
not fall within a safe harbor. Further, the Company believes that since it is
not a provider of medical services, and is not in a position to refer patients
to any particular medical practice, the remuneration it receives for providing
services does not violate the Anti-Kickback Amendments.
Prohibitions on Certain Referrals. The Omnibus Budget Reconciliation
Act of 1993 ("OBRA") includes a provision that significantly expands the scope
of the Ethics in Patient Referral Act, also known as the "Stark Bill." The
Stark Bill originally prohibited a physician from referring a Medicare or
Medicaid patient to any entity for the provision of clinical laboratory services
if the physician or a family member of the physician had an ownership interest
in or compensation relationship with the entity. The revisions to the Stark
Bill prohibit a referral to an entity in which the physician or a family member
has an ownership interest or compensation relationship if the referral is for
any of a list of "designated health services." In January 1998, the Health Care
Financing Administration proposed additional regulations to the Stark Bill. It
is not yet possible to predict whether these proposed regulations will be
adopted or, if adopted, what their final form, effective dates and impact on the
Company will be.
Prohibitions on Certain Compensation Arrangements. The OBRA
legislation also prohibits physician group practices from developing
compensation or bonus arrangements that are directly related to the volume or
value of referrals by a physician in the group for designated health services.
Antitrust. The Company and its affiliated physician groups are
subject to a range of antitrust laws that prohibit anti-competitive conduct,
including price fixing, concerted refusals to deal and division of markets. The
Company believes it is in compliance with these laws, but there can be no
assurance that a review of the Company's or its affiliated physician groups'
business would not result in a determination that could adversely affect the
operations of the Company and its affiliated physician groups.
Reimbursement Requirements. In order to participate in the Medicare
and Medicaid programs, the Company's affiliated physicians must comply with
stringent reimbursement regulations, including those that require many health
care services to be conducted "incident to" a physician's supervision.
Satisfaction of all reimbursement requirements is required under the Company's
compliance program. The Company believes that its affiliated physicians are in
compliance with the reimbursement requirements; however, affiliated physicians'
failure to comply with these requirements could negatively affect the Company's
results of operations.
Enforcement Environment. In recent years, the federal government has
launched several initiatives aimed at uncovering practices that violate the
federal civil and criminal laws regarding false claims and fraudulent billing
and coding practices. Proper billing and coding of medical services is part of
the complex reimbursement requirements to which the Company's affiliated
physicians must adhere, individually and through their group practices, in order
to practice medicine and be compensated for it in accordance with applicable
law. Although the Company's compliance program requires adherence to applicable
law and promotes reimbursement education and training, because the Company
performs administrative services for its affiliated physician groups, it is
likely that governmental investigations or lawsuits regarding affiliated
physician groups' compliance with reimbursement requirements would also
encompass the activities of the Company. A determination that billing and
coding practices are false or fraudulent could have a material adverse effect on
the Company.
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The Federal False Claims Act has been the most successful vehicle for
identifying and enforcing billing, reimbursement and other regulatory
violations. In addition to the government bringing claims under the Federal
False Claims Act, qui tam, or "whistleblower", actions may be brought by private
individuals on behalf of the government. A violation under the False Claims Act
occurs each time a claim is submitted to the government or each time a false
record is used to get a claim approved, when the claim is false or fraudulent
and the defendant acted knowingly. Under the False Claims Act, defendants face
exclusion from the Medicare/Medicaid programs and monetary damages of $5,000 to
$10,000 for each false claim, as well as treble damages.
Compliance. The Company has implemented a comprehensive compliance
program designed to assist the Company and its affiliated physician groups in
complying with applicable law. In addition, the Company recognizes that health
care regulations will continue to change and, as a result, regularly monitors
developments in health care law. The Company expects to modify its agreements
and operations from time to time as the business and regulatory environment
changes. While the Company believes it will be able to structure all of its
agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will not be successfully challenged.
Executive Officers of the Registrant
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Name, Age, and Position Experience
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R. DALE ROSS, age 53 Mr. Ross has been Chairman of the Board and
Chairman of the Board of Directors and Chief Executive Officer since December 1992.
Chief Executive Officer He was self-employed from April 1990 until
joining the Company. From December 1982 until
April 1990, Mr. Ross was employed by HMSS,
Inc., a home infusion therapy company. Mr.
Ross founded HMSS, Inc. and served as its
President and Chief Executive Officer and as a
director.
LLOYD K. EVERSON, M.D., age 56 Dr. Everson has been President of the Company
President since November 1993. He received his medical
degree from Harvard Medical School and his
oncology training at Memorial Sloan Kettering
National Cancer Institute. He is board
certified in medical oncology. Dr. Everson
has published widely in the field of oncology
and is a member of numerous professional
associations. He also has served as President
of the Association of Community Cancer Centers
and as Associate Chairman for Community
Programs for the Eastern Cooperative Oncology
Group.
MARK E. AHERN, age 42 Mr. Ahern joined the Company in 1995 and has
Senior Vice President for Development been involved in various development roles
since that time. Mr. Ahern currently oversees
development activities involving new physician
affiliations and physician recruitment. Prior
to joining the Company, Mr. Ahern was Vice
President, Business Development at Caremark
Oncology Practice Management.
JOSEPH S. BAILES, M.D., age 43 Dr. Bailes joined the Company in June 1999.
Executive Vice President for Clinical Prior to that, he was President of PRN from
Services 1985 to 1999. Dr. Bailes was formerly a
physician at Texas Oncology, P.A., the
Company's largest affiliated physician group.
Dr. Bailes is Board Certified in medical
oncology. He is currently President of The
American Society of Clinical Oncology.
DAVID S. CHERNOW, age 43 Mr. Chernow joined the Company in 1993. He is
President, Physician Services Group currently President of the Physician Services
Group,
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which is responsible for coordinating
the full spectrum of operational and
development services to the US Oncology
network of affiliated physicians, including
new affiliations, cancer center development,
physician recruitment and other development
and strategic initiatives.
ATUL DHIR, M.D.; D. Phil, age 37 Dr. Dhir joined the Company in November 1999.
President, Cancer Information and As President of Cancer Information and
Research Group Research Group, he is responsible for the
Company's clinical trial activities, cancer
information services and transplant
initiatives. Prior to joining the Company,
Dr. Dhir was a Vice President at Monsanto
Corporation from 1996 to 1998; President of
Health Strategies Partners, a company he
founded that provided consulting services to
hospitals and physicians from 1994 until 1996;
and a health care consultant with McKinsey &
Company from 1989 until 1993. Dr. Dhir holds
a D. Phil. in molecular biology from Oxford
University, where he was a Rhodes Scholar.
MARC I. KERLIN, age 36 Mr. Kerlin joined the Company in 1994. As
Senior Vice President of Managed Care Senior Vice President of Managed Care,
Mr. Kerlin's primary area of responsibility is
managed care contracting.
WILLIAM F. MCKEON, age 40 Mr. McKeon joined the Company in 1997. He is
Senior Vice President for Marketing and primarily responsible for the Company's
eCommerce marketing, eCommerce and eHealth initiatives.
Prior to joining the Company, Mr. McKeon was
involved in marketing at Stanford University
Medical Center from 1991 until 1997.
R. ALLEN PITTMAN, age 52 Mr. Pittman joined the Company in 1993. As
Chief Administrative Officer chief administrative officer, he oversees the
corporate services functions of the Company,
including human resources, real estate and
general administrative services.
L. FRED POUNDS, age 52 Mr. Pounds joined the Company in January 1993
Chief Financial Officer and Treasurer as its Chief Financial Officer. On December
13, 1999, Mr. Pounds resigned as the Company's
Chief Financial Officer, effective March 31,
2000.
LEO E. SANDS, age 52 Mr. Sands joined the Company in November 1992.
Chief Compliance Officer and Secretary He is primarily responsible for the Company's
compliance program, including all aspects of
regulatory and health care compliance and
governmental relations.
PHILLIP H. WATTS, age 34 Mr. Watts joined the Company in January 1998
General Counsel as its General Counsel. He has primary
responsibility for overseeing all legal
operations of the Company. From September
1991 until December 1997, Mr. Watts was an
attorney at Mayor, Day, Caldwell & Keeton,
L.L.P., a law firm in Houston, Texas that is
the Company's primary outside legal counsel.
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Employees
As of December 31, 1999, the Company employed 3,202 people. In
addition, as of December 31, 1999, the affiliated physician groups employed
3,980 people (excluding the affiliated physicians). Under the terms of the
management agreements with the affiliated physician groups, the Company is
responsible for the practice compensation and benefits of the groups' non-
physician medical personnel. No employee of the Company or of any affiliated
group is a member of a labor union or subject to a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Service Marks
The Company has registered the service mark "US Oncology" with the
United States Patent and Trademark Office.
ITEM 2. PROPERTIES
The Company leases its corporate offices in Houston, Texas, where the
Company's headquarters are located. The Company or its affiliated physician
groups also own, lease, sublease or occupy the facilities where the affiliated
physician groups provide medical services. In connection with the development
of integrated cancer centers, the Company has acquired land valued at
approximately $18.1 million. The Company anticipates that, as its affiliated
group practices grow, expanded facilities will be required.
In addition to conventional physician office space, in several markets
the Company has developed comprehensive cancer centers that are generally free-
standing facilities in which a full range of outpatient cancer treatment
services is offered in one facility. At December 31, 1999, the Company operated
60 cancer centers and had ten cancer centers under development. Of the 60
cancer centers operated by the Company, 35 are leased by the Company and 25 are
owned, ranging in size from 3,300 Sq. Ft. to 15,700 Sq. Ft.
ITEM 3. LEGAL PROCEEDINGS
The provision of medical services by the Company's affiliated
physicians entails an inherent risk of professional liability claims. The
Company does not control the practice of medicine by physicians or the
compliance with regulatory and other requirements directly applicable to
physicians and physician groups. Because the Company's affiliated physician
groups purchase and resell pharmaceutical products, they face the risk of
product liability claims. The Company maintains insurance coverage that it
believes to be adequate both as to risks and amounts. In addition, pursuant to
the management services agreements with the affiliated physician groups, the
affiliated practices and the Company are required to maintain comprehensive
professional liability insurance. Successful malpractice claims asserted
against the Company or one of the affiliated physician groups could, however,
have a material adverse effect on the Company.
The Company has been informed that the Company and an affiliated
physician group are the subject of allegations that their billing practices may
violate the Federal False Claims Act. The allegations are the result of two qui
tam complaints filed under seal prior to the merger of PRN with a subsidiary of
US Oncology. The U.S. Department of Justice is currently investigating the
allegations in order to determine if the United States will intervene and pursue
the claims on behalf of the plaintiffs. If the United States does not intervene,
the plaintiffs may continue to pursue the claims individually. Because the
complaints are under seal, and because the Department of Justice is in the
process of investigating the claims, the Company is unable to fully assess at
this point in time the nature or magnitude of these allegations. If the
plaintiffs and/or the United States were to prevail in these claims, the
resulting judgment could have a material adverse effect on the Company. In
addition, addressing the complaints and government investigation will require
the Company to devote significant financial and other resources to the process,
regardless of the ultimate outcome of the claims. Because qui tam actions are
filed under seal, there is a possibility that the Company could be the subject
of other qui tam actions of which it is unaware.
In addition to the legal proceedings described in the prior paragraph,
the Company and its affiliated physicians are defendants in a number of lawsuits
involving employment disputes and breach of contract claims. Although the
Company believes the allegations are customary for the Company's size and scope
of operations, adverse judgments, individually or in the aggregate, could have a
material adverse effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol "USON". The high and low closing sale prices of the Common Stock, as
reported by The Nasdaq Stock Market, were as follows for the quarterly periods
indicated.
Year Ended December 31, 1998 High Low
------- -------
Fiscal Quarter Ended March 31, 1998 $17.38 $12.38
Fiscal Quarter Ended June 30, 1998 $15.75 $11.13
Fiscal Quarter Ended September 30, 1998 $13.75 $ 8.13
Fiscal Quarter Ended December 31, 1998 $15.00 $ 8.63
Year Ended December 31, 1999
Fiscal Quarter Ended March 31, 1999 $15.06 $ 7.56
Fiscal Quarter Ended June 30, 1999 $12.63 $ 6.56
Fiscal Quarter Ended September 30, 1999 $12.75 $ 9.06
Fiscal Quarter Ended December 31, 1999 $ 9.44 $ 3.94
As of March 17, 2000, there were approximately 8,750 holders of the
Common Stock. The Company has not declared or paid any cash dividends on its
Common Stock. The payment of cash dividends in the future will depend on the
Company's earnings, financial condition, capital needs and other factors deemed
pertinent by the Company's board of directors, including the limitations, if
any, on the payment of dividends under state law and then-existing credit
agreements. It is the present policy of the Company's board of directors to
retain earnings to finance the operations and expansion of the Company's
business. The Company's credit facilities currently prohibit the payment of
cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
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RECENT SALES OF UNREGISTERED SECURITIES
In connection with each affiliation transaction between the Company
and an oncology group, the Company purchases the nonmedical assets of, and
enters into a long-term management agreement with, that oncology group. In
consideration for that arrangement, the Company typically pays cash, issues
subordinated promissory notes (in general, payable on each of the second through
seventh anniversaries of the closing date at an annual interest rate of seven
percent) and unconditionally agrees to deliver shares of Common Stock at
specified future dates (in general, on each of the second through fifth
anniversaries of the closing date).
The following table describes private placements by the Company in
connection with physician transactions of its securities during 1999. Each sale
was a private placement made in connection with a physician transaction,
described in general in the preceding paragraph, to affiliated oncologists, the
overwhelming majority of whom are accredited investors. No underwriter was
involved in any such sale, and no commission or similar fee was paid with
respect thereto. Each sale was not registered under the Securities Act of 1933
in reliance on Section 4(2) of such Act and Rule 506 enacted thereunder.
<TABLE>
<CAPTION>
Number of Shares of Aggregate Principal
Date of Transaction Number of Physicians Common Stock/1/ Amount of Notes
- --------------------------- ---------------------------- ---------------------------- -----------------------------
(in dollars)
<S> <C> <C> <C>
1/99 8 819,665 6,316,000
1/99 4 283,568 2,558,000
1/99 2 47,611 233,000
1/99 1 24,426 640,000
1/99 1 18,609 186,000
1/99 1 96,366 680,000
1/99 6 156,165 3,200,000
2/99 1 12,881 217,000
3/99 1 33,381 686,000
6/99 10 402,209 2,990,000
7/99 1 20,724 322,000
8/99 4 64,642 745,000
8/99 2 18,421 400,000
9/99 2 36,186 560,000
9/99 1 34,430 540,000
10/99 1 47,059 450,000
10/99 3 93,176 1,782,000
12/99 2 74,776 730,000
12/99 3 202,020 1,500,000
12/99 1 145,471 2,632,000
</TABLE>
____________________
/1/ In connection with each affiliation transaction, the Company unconditionally
agrees to deliver shares of Common Stock at specified future dates (typically on
each of the second through fifth anniversaries of the closing date).
In November 1999, the Company issued $100 million in senior secured
notes to a group of institutional investors. The notes bear interest at 8.42%,
mature in 2006 and rank equal in right of payment with all current and future
senior indebtedness of the Company. The placement was not registered under the
Securities Act of 1933 in reliance on Section 4(2) of such Act. Banc One
Securities Corporation and First Union Securities acted as placement agents.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information of the Company set
forth below is qualified by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and notes thereto
included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue........................................... $ 1,092,941 $ 836,596 $ 625,413 $432,749 $227,964
Operating expenses:
Pharmaceuticals and supplies................... 521,087 357,766 250,425 155,743 69,173
Practice compensation and benefits............. 215,402 172,298 143,210 104,174 55,072
Other practice costs........................... 134,635 107,671 87,232 57,414 34,964
General and administrative..................... 39,490 38,325 31,809 22,508 14,918
Write-off of accounts receivable............... - - 37,841 - -
Merger, restructuring and integration costs.... 29,014 - - - -
Depreciation and amortization.................. 65,072 48,463 35,194 25,237 12,308
----------- ---------- --------- -------- --------
Income from operations............................ 88,241 112,073 39,702 67,673 41,529
Interest income (expense), net.................... (22,288) (15,908) (12,474) (5,184) (2,355)
Other income, net................................. 14,431/1/ - - - 1,600/2/
------------ ---------- --------- -------- --------
Income before taxes............................... 80,384 96,165 27,228 62,489 40,774
Income taxes...................................... 32,229 36,184 11,593 24,343 15,042
----------- ---------- --------- -------- --------
Net income........................................ $ 48,155 $ 59,981 $ 15,635 $ 38,146 $ 25,732
=========== ========== ========== ======== ========
Net income per share - basic...................... $ .48 $ .61 $ .17 $ .43 $ .35
Shares used in per share computation - basic...... 100,183 97,647 93,168 88,072 73,593
Net income per share - diluted.................... $ .47 $ .60 $ .16 $ .41 $ .33
Shares used in per share computations - diluted... 101,635 99,995 97,198 92,136 77,869
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ---------- ------------ -------- --------
(in thousands)
BALANCE SHEET DATA:
Working capital................................. $ 280,793 $ 178,262 $ 121,221 $121,741 $112,350
Management service agreements, net.............. 537,130 467,214 431,068 326,417 193,710
Total assets.................................... 1,298,477 1,033,528 883,430 694,741 476,992
Long-term debt/3/............................... 360,191 234,474 189,377 96,368 78,668
Stockholders' equity............................ 707,164 629,798 554,298 516,630 336,914
- ------------------
</TABLE>
/1/ Unrealized gain on investment in common stock.
/2/ Consists of gain from life insurance proceeds of $2,090 less lease
termination costs of $490.
/3/ Excludes current maturities of long-term debt.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
US Oncology, Inc. provides comprehensive management services under
long-term agreements to oncology practices that provide a broad range of medical
services to cancer patients, integrating the specialties of medical and
gynecologic oncology, hematology, radiation oncology, diagnostic radiology and
stem cell transplantation. The Company has grown rapidly since inception and
now manages over 800 affiliated physicians in 26 states.
MARCH 17, DECEMBER 31,
--------- --------------------
2000 1999 1998 1997
---- ---- ---- -----
Affiliated physicians............... 821 806 719 630
States............................ 26 26 25 23
The Company enters into management agreements with, and purchases the
nonmedical assets of, oncology practices. Under the terms of the management
agreements, the Company provides comprehensive management services to its
affiliated physician groups, including operational and administrative services,
and furnishes personnel, facilities, supplies and equipment. The physician
groups, in return, agree to practice medicine exclusively in affiliation with
the Company under the management agreements. Substantially all of the Company's
revenue consists of management fees paid under the terms of the management
agreements. In all of the Company's management agreements, the Company's
management fee includes reimbursement for all practice costs (other than amounts
retained by physicians). The Company is also paid an additional management fee.
Some of the Company's management agreements provide that this additional fee is
a percentage of the practice's earnings before income taxes. In others, the
additional fee is comprised of a fixed fee, a percentage fee (in most states)
and, if certain financial and performance criteria are met, a performance fee.
For the years ended December 31, 1999, 1998 and 1997, one of the Company's
affiliated physician groups, Texas Oncology, P.A., contributed more than 10% of
the Company's revenue, contributing 25%, 32% and 37%, in 1999, 1998 and 1997,
respectively.
Medicare and Medicaid are the Company's affiliated groups' largest
payor. During 1999, 1998 and 1997, approximately 35% of the Company's revenue
was derived from Medicare and Medicaid payments. This percentage varies among
physician groups. No other single payor accounted for more than 10% of the
Company's revenues in 1999, 1998 or 1997.
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenue represented
by certain items reflected in the Company's Statement of Operations and
Comprehensive Income. The information that follows should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere herein.
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------ ----- -----
Revenue................................. 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Pharmaceuticals and supplies....... 47.7 42.8 40.0
Practice compensation and benefits. 19.7 20.6 22.9
Other practice costs............... 12.3 12.9 13.9
General and administrative......... 3.6 4.5 5.1
Write-off of accounts receivable... 6.1
Merger, restructuring and
integration costs................. 2.7
Depreciation and amortization...... 6.0 5.8 5.6
Net interest............................ 2.0 1.9 2.0
Other income............................ 1.3 __
----- ----- -----
Income before income taxes.............. 7.3 11.5 4.4
Income taxes............................ 2.9 4.3 1.9
----- ----- -----
Net income.............................. 4.4% 7.2% 2.5%
===== ===== =====
11
<PAGE>
1999 Compared to 1998
The Company affiliated with 20 and 21 physician groups in 1999 and 1998,
respectively, the results of which are included in the Company's operating
results from the dates of affiliation. Changes in results of operations year to
year were caused in part by affiliations with these oncology practices.
Overall, the Company experienced a decrease in operating margins from 1998
to 1999, with earnings before taxes, interest, depreciation and amortization,
excluding merger, restructuring and integration costs as well as other income
("EBITDA"), as a percentage of revenue, declining from 19.2% to 16.8%. A number
of factors contributed to the decrease in operating margins, including (i)
increases in the acquisition cost of pharmaceuticals, (ii) shifts in the mix of
pharmaceuticals to lower margin products, (iii) increases in practice personnel
costs due to numerous network-wide initiatives (such as information system
conversions) and (iv) higher occupancy costs due to expansion into new cancer
centers and additional sites of service.
Revenue. Revenue increased from $836.6 million in 1998 to $1,092.9 million
in 1999, an increase of $256.3 million or 30.6%. Revenue for markets under
management in 1998 and 1999 increased $204.5 million or 25.7% over the same
period from the prior year, as calculated by comparing 1998 revenue and 1999
revenue for all practices within a metropolitan service area in which the
Company had operations in both periods. This growth was the result of increased
use of anticancer pharmaceuticals, expansion of services, increases in patient
volume, recruitment of or affiliation with additional physicians and, to a
lesser extent, increases in charges for certain physician services. The
remaining $51.8 million increase in total revenues was attributable to
affiliations with oncology practices in new markets.
Pharmaceuticals and Supplies. Pharmaceuticals and supplies, which include
drugs, medications and other supplies used by affiliated physician groups,
increased from $357.8 million for 1998 to $521.1 million for 1999, an increase
of $163.3 million, or 45.6%. This increase was principally attributable to the
same factors that caused revenue to increase. As a percentage of revenue,
pharmaceutical and supply costs increased from 42.8% for 1998 to 47.7% for 1999.
This increase was primarily due to a shift in the revenue mix to a higher
percentage of drug revenue relative to total revenue. In addition, the
affiliated practices experienced an increase in the use of lower margin drugs,
as well as increases in the acquisition cost of pharmaceuticals. The Company
employs an aggressive contracting strategy for negotiating discounts on
pharmaceuticals. However, the effectiveness of this strategy has been offset by
the loss of one pharmaceutical purchasing agreement in 1999 as well as the
inability to obtain discounted pricing on a number of the most frequently
prescribed anticancer agents.
Practice Compensation and Benefits. Practice compensation and benefits,
which include the salaries, wages and benefits of the affiliated physician
groups' employees (excluding affiliated physicians) and the Company's employees
located at the affiliated physician practice sites and business offices,
increased from $172.3 million in 1998 to $215.4 million in 1999, an increase of
$43.1 million or 25.0%. This increase was principally attributable to the same
factors that caused revenue to increase. As a percentage of revenue, practice
compensation and benefits decreased from 20.6% for 1998 to 19.7% for 1999,
primarily as a result of increases in pharmaceutical revenue which did not
require proportional increases in the number of personnel.
Other Practice Costs. Other practice costs, which consist of rent,
utilities, repairs and maintenance, insurance and other direct practice costs,
increased from $107.7 million in 1998 to $134.6 million in 1999, an increase of
$26.9 million or 25.0%. This increase was principally attributable to the same
factors that caused revenue to increase as well as new cancer center
development. As a percentage of revenue, other practice costs decreased from
12.9% for 1998 to 12.3% for 1999.
General and Administrative. General corporate expenses increased from
$38.3 million in 1998 to $39.5 million in 1999, an increase of $1.2 million or
3.1%. As a percentage of revenue, general and administrative expenses decreased
from 4.5% for 1998 to 3.6% for 1999, primarily as a result of economies of scale
attributable to the Merger with PRN and the limited increase in general and
administrative costs needed to support pharmaceutical revenue growth.
Merger, Restructuring and Integration. In connection with the Merger
between AOR and PRN, the Company incurred total costs of $29.0 million to
consummate the Merger, restructure operating activities and integrate the two
organizations. These costs were expensed during 1999. Costs directly related
to the consummation of the Merger totaled $14.6 million. Restructuring costs
relating to severance and relocation of employees and asset impairments totaled
$7.2 million. Incremental costs incurred to assist in integrating the AOR's and
PRN's operations totaled $7.2 million.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $48.5 million in 1998 to $65.1 million in 1999, an increase of
$16.6 million or 34.2%. As a percentage of revenue, depreciation and
amortization
12
<PAGE>
expenses increased from 5.8% for 1998 to 6.0% for 1999. This increase is
primarily attributable to decreasing the amortization period for management
services agreements from 40 years to 25 years effective July 1, 1998, as well as
amortization relating to new physician groups affiliations and investments in
new cancer centers and management information systems during 1999.
Interest. Net interest expense increased from $15.9 million in 1998 to
$22.3 million in 1999, an increase of $6.4 million or 40.3%. The increase was
the result of higher levels of debt, principally incurred to finance
transactions with 20 oncology groups during 1999, as well as construction of 20
cancer centers. As a percentage of revenue, net interest expense was 1.9% and
2.0% in 1998 and 1999, respectively. Indebtedness to physicians increased from
approximately $81.5 million at December 31, 1998 to approximately $98.9 million
at December 31, 1999.
Other Income. Other income increased from zero in 1998 to $14.4 million in
1999. Other income in 1999 represents the recognition of an unrealized gain on
the shares of common stock of ILEX Oncology, Inc. owned by the Company. The
gain was recognized as a result of the Company's reclassification of the ILEX
stock as a trading security. The stock was sold during the first quarter of
2000.
Income Taxes. Income tax expense decreased from the prior year as a result
of the Company's decreased profitability. For 1999, the Company recognized a
tax provision of $32.2 million resulting in an effective rate of 40.1% as
compared to 37.6% for 1998. The increase in the effective tax rate was due to
certain nondeductible professional fees and other costs in connection with the
completion of the Merger
Net Income. Net income decreased from $60.0 million in 1998 to $48.2
million in 1999, a decrease of $11.8 million or 19.7%. As a percentage of
revenue, net income declined from 7.2% to 4.4%, principally as a result of
Merger, restructuring and integration costs incurred in 1999 of $29.0 million.
1998 COMPARED TO 1997
The Company affiliated with 21 and 23 physician groups in 1998 and 1997,
respectively, the results of which are included in the Company's operating
results from the dates of affiliation. Changes in results of operations year to
year were caused in part by affiliations with these oncology practices.
Overall, the Company experienced an increase in operating margins
(excluding one-time write-off of accounts receivable) from 1997 to 1998, with
earnings before taxes, interest, depreciation and amortization ("EBITDA"), as a
percentage of revenue, improving from 18.1% to 19.2%. This increase was
primarily attributable to the non-recurrence in 1998 of certain litigation, loan
and consulting expenses from 1997.
Revenue. Revenue increased from $625.4 million in 1997 to $836.6 million
in 1998, an increase of $211.2 million or 33.8%. This growth was the result of
expansion of services, increases in patient volume, recruitment of or
affiliation with additional physicians and, to a lesser extent, increases in
charges for certain physician services.
Pharmaceuticals and Supplies. Pharmaceuticals and supplies increased from
$250.4 million for 1997 to $357.8 million for 1998, an increase of $107.4
million, or 42.9%. This increase was principally attributable to the same
factors that caused revenue to increase. As a percentage of revenue,
pharmaceutical and supply costs increased from 40.0% for 1997 to 42.8% for 1998.
This increase was primarily due to a shift in the revenue mix to a higher
percentage of drug revenue, the introduction of a number of new chemotherapy
agents and, to a lesser extent, lower reimbursement from payors.
Practice Compensation and Benefits. Practice compensation and benefits
increased from $143.2 million in 1997 to $172.3 million in 1998, an increase of
$29.1 million or 20.3%. This increase was principally attributable to the same
factors that caused revenue to increase. As a percentage of revenue, practice
compensation and benefits decreased from 22.9% for 1997 to 20.6% for 1998,
primarily as a result of economies of scale.
Other Practice Costs. Other practice costs increased from $87.2 million in
1997 to $107.7 million in 1998, an increase of $20.5 million or 23.5%. This
increase was principally attributable to the same factors that caused revenue to
increase. As a percentage of revenue, other practice costs decreased from 13.9%
for 1997 to 12.9% for 1998, primarily as a result of economies of scale.
General and Administrative. General corporate expenses increased from
$31.8 million in 1997 to $38.3 million in 1998, an increase of $6.5 million or
20.4%. This increase was primarily attributable to the addition of personnel
and greater
13
<PAGE>
support costs associated with the Company's growth since 1997. As a percentage
of revenue, general and administrative expenses decreased from 5.1% for 1997 to
4.5% for 1998, primarily as a result of economies of scale, as well as the non-
recurrence in 1998 of certain litigation, loan refinancing and consulting costs
from 1997.
Depreciation and Amortization. Depreciation and amortization expenses
increased from $35.2 million in 1997 to $48.5 million in 1998, an increase of
$13.3 million or 37.8%. This increase was primarily attributable to the
amortization expenses relating to new physician group affiliations, as well as
investments in new cancer centers and management information systems during
1997. As a percentage of revenue, depreciation and amortization increased from
5.6% for 1997 to 5.8% for 1998. This increase is primarily attributable to
decreasing the amortization period for management services agreements from 40
years to 25 years effective July 1, 1998, as well as amortization relating to
new physician groups affiliations and investments in new cancer centers and
management information systems during 1998.
Interest. Net interest expense increased from $12.5 million in 1997 to
$15.9 million in 1998, an increase of $3.4 million or 27.2%. The increase was
the result of higher levels of debt, principally incurred to finance
transactions with 21 oncology groups during 1998. As a percentage of revenue,
net interest expense decreased from 2.0% in 1997 to 1.9% in 1998.
Income Taxes. Income tax expense increased from the prior year as a result
of the Company's increased profitability. For 1998, the Company recognized a
tax provision of $36.2 million resulting in an effective rate of 37.6% as
compared to a rate of 42.6% for 1997. The decrease in the effective rate is due
primarily to a change in the Company's composition of revenue by state since
1996.
Net Income. Net income increased from $15.6 million in 1997 to $60.0
million in 1998, an increase of $44.4 million or 284.6%. As a percentage of
revenue, net income improved from 2.5% to 7.2%. This improvement is due
primarily to the non-recurrence in 1998 of certain receivable write-offs from
1997. (See Notes to Consolidated Financial Statements - Note 1 - Organization
and Summary of Significant Accounting Policies - Accounts Receivable.)
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The following statements are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995: (i)
certain statements, including possible or assumed future results of operations
of US Oncology, contained in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and including any
statements contained herein regarding the prospects for any of the Company's
services; (ii) any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends" or similar expressions; and
(iii) other statements contained herein regarding matters that are not
historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed below under "Risk
Factors." US Oncology stockholders are cautioned not to place undue reliance on
such statements, which speak only as of the date thereof.
The cautionary statements contained or referred to herein should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by US Oncology or persons acting on its behalf.
US Oncology does not undertake any obligation to release any revisions to or to
update publicly any forward-looking statements to reflect events or
circumstances after the date thereof or to reflect the occurrence of
unanticipated events.
There are continued risks relating to the merger with PRN
Effective June 15, 1999, a wholly-owned subsidiary of the Company merged
with PRN (the "Merger"). The Merger could result in synergies and operating
efficiencies. To date, most of the potential benefits have not been, and may
never be, achieved. Whether we ultimately realize these benefits will depend on
a number of factors, many of which are beyond our control. To attain the
benefits of the Merger, we will have to continue to integrate the operations of
AOR and PRN. In particular, we must continue to integrate our management and
other personnel, our information systems and our financial, accounting and other
operational procedures. This process has required us and will continue to
require us to bring together nationwide operations and different corporate and
physician cultures, at significant expense and with management disruption. As
management and other key personnel continue to focus on integration efforts,
management will continue to be distracted from implementing and executing other
strategic and operational objectives. In addition, because of different
cultures of affiliated physician groups, these groups may elect not to implement
the strategic and operational objectives recommended by the Company.
14
<PAGE>
Loss of revenues or a decrease in income of our affiliated physician groups
would impact the Company's results of operations
US Oncology's revenue depends on revenue generated by affiliated physician
groups. Loss of revenue by the affiliated physician groups could seriously harm
the Company. It is possible that our affiliated physician groups will not be
able to maintain successful medical practices. In addition, the management fees
payable to the Company depend upon the profitability of the affiliated physician
groups. (Even under those management agreements where the management fee is
based on the revenues, and not net income, of the affiliated physician groups,
those agreements contain a priority of payments, with US Oncology being paid
last, thereby incentivizing the Company to contain costs.) Any failure by the
physician groups to effectively contain costs will adversely impact the
Company's results of operations. Because the Company does not control the
manner in which its affiliated physician groups conduct their medical practice
(including drug utilization), the Company's ability to control costs related to
the provision of medical care is limited.
If our operations are deemed by regulators not to comply with applicable
regulations, or if restrictive new regulations are passed, we may be seriously
harmed
There can be no assurance that a review of our business or our affiliated
physician groups by courts or by regulatory authorities would not result in
determinations that could seriously harm our operations. Further, the health
care regulatory environment could change and restrict our existing operations or
potential for expansion. The health care industry is highly regulated. We
believe our businesses and the practices of our affiliated physician groups
operate in material compliance with these regulations. However, the
relationships between us and our affiliated physician groups are unique. Many
aspects of these relationships have not been subject to judicial or regulatory
interpretation. There are currently several federal and state initiatives
designed to amend regulations relating to health care. However, we cannot
predict whether any such initiatives will be enacted as legislation or, if
enacted, what their form, effective dates or impact on us will be.
We face the risk of qui tam litigation relating to regulations governing billing
for medical services.
The Company is currently aware of two qui tam lawsuits in which a
subsidiary of the Company and an affiliated physician group are named as
defendants. Because qui tam lawsuits are typically filed under seal, the
Company could be named in other such suits of which it is not aware. In
addition, as the federal government intensifies its focus on billing,
reimbursement and other healthcare regulatory violations, private individuals
are also bringing more qui tam lawsuits, because of the potential of financial
rewards for such individuals. This trend increases the risk that the Company
may become subject to additional qui tam lawsuits.
If our physician groups terminated their management agreements, we would be
seriously harmed
Our affiliated physician groups may attempt to terminate their management
agreements. If any of our larger groups were to succeed in such a termination,
we could be seriously harmed. We are aware that some physician groups have
attempted to end or restructure their affiliations with other practice
management companies when they do not have a contractual right to do so. Such
groups argue that their affiliations violate some aspect of health care law. For
example, some physician groups affiliated with other physician practice
management companies have claimed that the management fee arrangements violate
federal or state prohibitions on splitting fees with physicians. If our
affiliated physicians or practices were able to successfully make such an
argument, the effect on our affiliations could harm us.
If a significant number of physicians leaves our affiliated practices, the
Company could be seriously harmed
Our affiliated practices usually enter into employment or noncompetition
agreements with their physicians. We and our affiliated practices try to
maintain such contracts. However, if a significant number of physicians
terminate their relationships with our affiliated practices, the Company could
be seriously harmed.
Our affiliated practices may be unable to enforce noncompetition provisions with
departed physicians
Most of the employment agreements between the affiliated practices and
their physicians include a clause that prevents the physician from competing
with the practice for a period after termination of employment. We cannot
predict whether a court will enforce the noncompetition covenants of the
affiliated practices. If practices are unable to enforce the noncompetition
provisions of their employment agreements, the Company could be seriously
harmed.
15
<PAGE>
We may have additional financing needs
Our expansion, cancer center development and management plans require
substantial capital resources. Operations of the affiliated physician groups
require recurring capital expenditures for renovation, expansion, and the
purchase of costly medical equipment and technology. It is likely that our
capital needs in the next several years will exceed the capital generated from
our operations. Thus, we may incur additional debt or issue additional debt or
equity securities from time to time. This may include the issuance of common
stock or notes in connection with physician affiliations. Capital available for
health care companies, whether raised through the issuance of debt or equity
securities, is quite limited. As a result, we may be unable to obtain
sufficient financing on terms satisfactory to us or at all. In particular, the
Company currently is a party to a $100 million 364-day revolving credit
facility which matures in June 2000 and is renewable at the option of the
lenders under that facility. Although we intend to renew this facility, there
can be no assurance that we will be able to do so on terms satisfactory to us or
at all.
Loss of revenue by affiliated physician groups caused by the cost containment
efforts of third-party payors, including the government, could seriously harm us
Loss of revenue by affiliated physician groups caused by the cost
containment efforts of third-party payors could seriously harm us. Physician
groups typically bill various third-party payors, such as governmental programs
like Medicare and Medicaid, private insurance plans and managed care plans, for
the health care services provided to their patients. These third-party payors
negotiate the prices charged for medical services and supplies to lower the cost
of health care services and products paid for by them. Third-party payors also
try to influence legislation to lower costs. Third-party payors can also deny
reimbursement for medical services and supplies if they determine that a
treatment was not appropriate. Our affiliated practices also derive a
significant portion of their revenues from governmental programs. Reimbursement
by governmental programs generally is not subject to negotiation and is
established by governmental regulation.
If the reimbursement rate for pharmaceuticals is reduced, we would be seriously
harmed
The Company's profitability depends heavily on the reimbursement rate for
pharmaceuticals. Recently, several new chemotherapy agents have been introduced
that have lower profit margins to the Company than other agents. If this trend
continues, the Company's results of operations could be harmed. Payors are also
intensely negotiating the reimbursement rate for pharmaceuticals. Recently, the
executive branch of the federal government proposed to significantly reduce the
reimbursement rate for chemotherapy agents covered by the federal government.
If the proposal is enacted, the Company's results of operations would be
seriously harmed.
We and our affiliated practices may become subject to harmful lawsuits
Successful malpractice or products liability claims asserted against the
physician groups or us could seriously harm us. We and our affiliated physician
groups are at risk of malpractice and other lawsuits because they provide health
care services to the public. In addition, managed care providers and physician
practice management companies are increasingly subject to liability claims
arising from physician compensation arrangements and other activities designed
to control costs by reducing services. A successful claim on this basis against
us or an affiliated physician group could harm us. Lawsuits, if successful,
could result in damage awards in excess of the limits of our insurance coverage.
Insurance against losses related to claims of this type is expensive and the
cost varies widely from state to state. In addition, our affiliated physicians
prescribe and dispense pharmaceuticals and, therefore, could be subject to
products liability claims. We and our affiliated physician groups maintain
liability insurance in amounts and coverages we consider appropriate.
We may not be able to successfully affiliate with new physician groups or
integrate the operations of new affiliations
US Oncology has grown by affiliating with new physician groups and
expanding the operations of existing affiliated physician groups. We intend to
continue to pursue this growth strategy. Identifying appropriate physician
groups and negotiating affiliations with them can be costly. We may not be able
to affiliate with additional physician groups on desirable terms. We may
encounter difficulties integrating and expanding the operations of additional
physician groups. Our failure to successfully integrate newly affiliated
physician groups could harm us.
Our development of new cancer centers could be delayed or result in serious
liabilities, and the centers may not be profitable
16
<PAGE>
Another growth strategy of US Oncology is to develop integrated cancer
centers. The development of integrated cancer centers is subject to a number of
risks, including obtaining regulatory approval, delays that often accompany
construction of facilities and environmental liabilities that attach to
operating cancer centers. Any failure or delay in successfully building and
operating integrated cancer centers or in avoiding liabilities from operations
could seriously harm the Company. In addition, in order for cancer centers to
be operated profitably, our affiliated physician groups must consolidate their
operations within the facilities. If our affiliated physician groups elect not
to close other offices to consolidate operations within a cancer center, our
real estate and occupancy costs would increase, which would harm our operations.
Managed care and capitation can adversely impact our business
A loss in revenues, or a failure to contain costs, by our affiliated
practices under managed care and capitated arrangements, or by payors with which
our affiliated practices have such arrangements, could cause our revenues to be
substantially diminished. Under capitation arrangements, health care providers
do not receive a fee for each medical service provided but instead receive an
aggregate fee for treating a defined population of patients. As a result, health
care providers bear the risk that the costs of providing medical services to the
determined population will exceed the payments received. The ability of the
providers to effectively manage the per patient costs affects profitability.
Although the majority of the revenues of our affiliated practices come from non-
capitated services, capitated arrangements might become a bigger part of our
business in the future.
We could become subject to costly insurance regulations
The Company and its affiliated physician groups may enter into capitation
contracts or other "risk-sharing" arrangements with managed care organizations.
The Company and our affiliated groups would assume risk in connection with
providing healthcare services under these arrangements. If we or our affiliated
groups are considered to be in the business of insurance as a result of entering
into these capitation or other arrangements, we and our affiliated groups could
become subject to a variety of regulatory and licensing requirements applicable
to insurance companies that could harm the Company.
Our business, and the business of our affiliated practices, could be harmed by
competition with other businesses
Our business, and the business of our affiliated practices, could be harmed
by competition with other businesses. The business of providing health care
related services and facilities is competitive. Our revenues depend on the
continued success of our affiliated physician groups. The physician groups face
competition from several sources, including sole practitioners, single- and
multi-specialty groups, hospitals and managed care organizations.
Our success depends on our key personnel, and we may not be able to hire enough
qualified personnel to meet our hiring needs
We will be harmed if we cannot hire and retain suitable executives and
other personnel. The Merger and related integration efforts have placed, and
will continue to place, significant strain on management and key personnel,
which may make it more difficult to retain and attract such personnel. We
believe that our success will depend on continued employment of our management
team and other key personnel. If one or more members of our management team
become unable or unwilling to continue in their present positions, we could be
harmed.
The amortization period for our intangible assets may be reduced, which would
reduce our earnings
In connection with our affiliations with physician practices, US Oncology
records an intangible amount for the price paid for assets less the value of the
tangible assets acquired. US Oncology has amortized, and we will continue to
amortize, these intangible assets. This results in periodic non-cash charges to
our earnings. During 1998, US Oncology shortened the amortization period of its
intangible assets to 25 years. However, if the amortization period is
successfully challenged by regulatory authorities or there is a change in
accounting treatment for such intangibles, we would likely be required to reduce
further the number of years that the intangibles are amortized against our
earnings. This would increase the amount of amortization expense charged against
earnings each year. This increased charge, while non-cash in nature, could
significantly reduce our earnings and seriously harm our business. We expect
these non-cash amortization charges to increase in the future as we continue our
affiliation strategy. In the event that we determine that the value of the
intangible assets related to any specific affiliation is impaired, we could be
required to reduce the value of that asset, which would result in a charge to
earnings.
17
<PAGE>
Our stock price may fluctuate significantly, which may make it difficult to
resell your shares when you want to at prices you find attractive
The market price of US Oncology common stock has been highly volatile. This
volatility may adversely affect the price of our common stock in the future. You
may not be able to resell your shares of common stock following periods of
volatility because of the market's adverse reaction to this volatility. We
anticipate that this volatility, which frequently affects the stock of health
care service companies, will continue. Factors that could cause such volatility
include:
. Our quarterly operating results,
. Deviations in results of operations from estimates of securities analysts
(which estimates the Company neither endorses nor accepts the
responsibility for),
. General economic conditions or economic conditions specific to the health
care services industry,
. Regulatory or reimbursement changes and
. Other developments affecting competitors or us.
On occasion the equity markets, and in particular the markets for physician
management company stocks, have experienced significant price and volume
fluctuations. These fluctuations have affected the market price for many
companies' securities even though the fluctuations are often unrelated to the
companies' operating performance.
Our shareholder rights plan and anti-takeover provisions of the certificate of
incorporation, bylaws and Delaware law could adversely impact a potential
acquisition by third parties
Our shareholder rights plan and anti-takeover provisions of the certificate
of incorporation, bylaws and Delaware law could adversely impact a potential
acquisition by third parties. The Company has a staggered board of directors,
with three classes each serving a staggered three-year term. This classification
has the effect of generally requiring at least two annual stockholder meetings,
instead of one, to replace a majority of the members of the board of directors.
The Company's certificate of incorporation also provides that stockholders may
act only at a duly called meeting and that stockholders' meetings may not be
called by stockholders. These provisions could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. These
provisions are intended to increase the likelihood of continuity and stability
in our board of directors and in the policies formulated by them and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company, reduce our vulnerability to an
unsolicited acquisition proposal and discourage certain tactics that may be used
in proxy fights. However, these provisions could have the effect of discouraging
others from making tender offers for our shares, and, as a consequence, they
inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in the management of the Company.
In addition, other provisions of the Company's certificate of incorporation
and certain provisions of Delaware law may make it difficult to change control
of the Company and to replace incumbent management. For example, the Company's
certificate of incorporation permits the board of directors, without stockholder
approval, to issue additional shares of common stock or to establish one or more
classes or series of preferred stock with characteristics determined by the
board. US Oncology has also adopted a shareholder rights plan, which would
significantly inhibit the ability of another entity to acquire control of the
Company through a tender offer or otherwise without the approval of the
Company's board of directors. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of common
stock.
We have not paid dividends and do not expect to in the future, which means that
the value of our shares cannot be realized except through sale
US Oncology has never declared or paid cash dividends. We currently expect
to retain earnings for our business and do not anticipate paying dividends on
our common stock at any time in the foreseeable future. Because we do not
anticipate paying dividends, it is likely that the only opportunity to realize
the value of our common stock will be through a sale of those shares. The
decision whether to pay dividends on common stock will be made by the board of
directors from time to time in the exercise of its business judgment. The
Company is currently precluded from paying dividends by the terms of its credit
facilities.
18
<PAGE>
We cannot be sure that the year 2000 problem will not affect our business
Thus far, we have had no significant problems related to year 2000 issues
associated with the computer systems, software, other property and equipment we
use. However, we cannot guarantee that the year 2000 problem will not adversely
affect our business, operating results or financial condition at some point in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Implications."
19
<PAGE>
SUMMARY OF OPERATIONS BY QUARTER
The following table represents unaudited quarterly results for 1999 and
1998. The Company believes that all necessary adjustments have been included in
the amounts stated below to present fairly the quarterly results when read in
conjunction with the Consolidated Financial Statements and that all adjustments
are of a normal recurring nature. Results of operations for any particular
quarter are not necessarily indicative of operations for a full year or
predictive of future periods.
<TABLE>
<CAPTION>
1999 QUARTER ENDED 1998 QUARTER ENDED
------------------------------------------ -----------------------------------------
DEC 31 SEP 30 JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31
-------- -------- --------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................... $299,526 $277,789 $266,412 $249,214 $227,299 $216,916 $204,744 $187,637
Income from operations......... 20,836 26,991 9,338 31,076 29,459 27,898 28,681 26,035
Other income................... 14,431
Net income..................... 17,871 14,983 (1,214) 16,515 15,843 15,045 15,504 13,589
Net income per share-basic..... .18 .15 (.01) .17 .16 .15 .16 .14
Net income per share-diluted... .18 .15 (.01) .16 .16 .15 .15 .14
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to enter into management services
agreements with, and to purchase the nonmedical assets of, oncology medical
practices. During 1999, the Company paid total consideration of $95.4 million in
connection with affiliations with 20 physician groups, including cash and
transaction costs of $43.5 million. During 1998, the Company paid total
consideration of $54.5 million in connection with affiliations with 21 physician
groups, including cash and transaction costs of $32.2 million.
To fund its growth and development, the Company has satisfied its
transaction and working capital needs through debt and equity financings and
borrowings under a $275 million syndicated revolving credit facility ("Credit
Facility") with First Union National Bank ("First Union"), as agent for the
various lenders. The Credit Facility is comprised of two parts: a $175 million
revolving credit facility which matures in 2004 and a $100 million 364-revolving
credit facility which matures in June 2000 and is renewable at the option of the
Lenders under that facility. The Company presently intends to seek renewal of
the 364-day facility. In addition, in connection with the Credit Facility the
Company has available a $75 million leasing facility used by the Company in
connection with developing its integrated cancer centers. In November 1999, the
Company sold an aggregate of $100 million of Senior Secured Notes to a group of
institutional investors. The notes are secured by the same collateral as the
Credit Facility and rank equally in right of payment with the Credit Facility.
The notes bear interest at 8.42% per annum with a final maturity in 2006 and an
average life of five years.
During 1999, the Company borrowed $118.0 million, net, under the Credit
Facility and Senior Secured Notes to fund medical practice transactions and the
development of integrated cancer centers. Borrowings under the Credit Facility
bear interest at a rate equal to a rate based on prime rate or the London
Interbank Offered Rate, based on a defined formula. The Credit Facility
contains affirmative and negative covenants, including the maintenance of
certain ratios, restriction on sales, leases or other dispositions of
properties, restrictions on other indebtedness and on the payment of dividends.
The Company's management services agreements and the capital stock of the
Company's subsidiaries are pledged as security under the Credit Facility. The
Company is currently in compliance with the Credit Facility covenants, with
additional capacity under the Credit Facility of $101.0 million at December 31,
1999.
In connection with the merger of AOR and PRN, the combined company incurred
substantial costs. The Company incurred costs directly related to its efforts
to consummate the merger ("merger costs"), costs related to restructuring
certain duplicative operating costs ("restructuring costs") and costs related to
its efforts to integrate the operations of the two companies ("integration
costs"). These costs totaled $29.0 million and have been summarized in the
accompanying consolidated statement of operations and comprehensive income as
Merger, restructuring and integration costs in the year ended December 31, 1999.
The Company's merger costs totaled $14.6 million and include professional
fees and expenses incurred in connection with the due diligence, negotiation and
solicitation of shareholder approval for the transaction, as well as incremental
travel costs and contractual change of control payments of approximately $5.0
million to the executive management of PRN.
20
<PAGE>
The Company's management made decisions to restructure its operations to
reduce overlapping personnel and duplicative facilities. The costs of personnel
reductions include severance pay for terminated employees and payments
attributable to stay bonuses paid before December 31, 1999 for employees
providing transition assistance services. The Company also determined that
certain furniture, fixtures, leasehold improvements, computer equipment and
software were impaired as a result of personnel terminations, facility closings
and decisions to harmonize certain information systems. The Company's
restructuring costs recognized in the year ended December 31, 1999 totaled $7.2
million.
The Company also incurred specifically identified costs related to its
efforts to integrate the two companies totaling $7.2 million during the year
ended December 31, 1999. These integration costs include costs for a physician
conference to address combined Company operating strategies, employee
orientation meetings, consulting fees related to integration activities and
adoption of common employee benefit programs. These costs have been recognized
as incurred and do not include costs related to inefficiencies incurred as the
Company has attempted to integrate the operating activities of AOR and PRN.
The Company has relied primarily on management fees received from its
affiliated physician groups to fund its operations. While the obligation of the
affiliated practice groups to pay these fees is unsecured, to the extent
permitted by law, the Company is entitled to purchase the accounts receivable of
the practice for an amount that is net of such management fee. Since the
Company typically effects these purchases frequently, the amounts due to the
Company from its affiliated physician groups and to such groups from the Company
are each short-term obligations.
Cash provided by operating activities was $31.5 million in 1999, a decrease
of $48.2 million, or 60.4%, from 1998. The decrease was due to merger related
costs of $26.6 million and the timing of receivables collection and the
settlement of such amounts with affiliated physician groups. Cash used in
investing activities was $133.5 million in 1999, compared to $94.2 million in
1998. This increase was attributable to a higher level of medical practice
transactions in 1999 as well as cancer center development. Cash provided by
financing activities was $99.7 million in 1999 compared to $20.4 million in
1998. This increase was due to a lower level of medical practice transactions
in 1998 offset by increased repayments of other indebtedness and purchases of
the Company's common stock. Repurchased shares of the Company's common stock
are used primarily to fulfill commitments for delivery of the Company's common
stock under medical practice transactions.
At December 31, 1999, the Company had working capital of $280.8 million,
including cash and equivalents of $11.4 million. The Company had $195.4 million
of current liabilities, including $26.7 million of long-term indebtedness
maturing before December 31, 2000. The Company's accounts receivable and
accounts payable have increased significantly during the past several years with
the growth of its business. The Company has not experienced, however, any
significant change in the quality of its accounts receivable and, as a result,
its increasing working capital has resulted in greater liquidity.
In March 2000, the Company sold its equity investment in ILEX Oncology,
Inc. in a private sale transaction and realized proceeds of $54.8 million, or
$39.1 million net of tax. These proceeds were used to reduce outstanding
borrowings under the Credit Facility. Also in March 2000, the Company's Board
of Directors authorized the purchase by the Company of up to 10 million shares
of the Company's Common Stock.
The Company currently expects that its principal use of funds in the near
future will be in connection with future transactions with oncology groups, the
purchase of medical equipment, investment in information systems and the
acquisition or lease of real estate for the development of integrated cancer
centers. It is likely that our capital needs in the next several years will
exceed the capital generated from our operations. Thus, we may incur additional
debt or issue additional debt or equity securities from time to time. This may
include the issuance of common stock or notes in connection with physician
affiliations. Capital available for health care companies, whether raised
through the issuance of debt or equity securities, is quite limited. As a
result, we may be unable to obtain sufficient financing on terms satisfactory to
us or at all. In particular, although the Company intends to renew its $100
million 364-day revolving credit facility that matures in June 2000, there can
be no assurance that we will be able to do so on terms satisfactory to us or at
all.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems, software programs, and embedded
data chips are programmed using a 2-digit date field and are therefore unable to
distinguish dates beyond the 20th century. A failure to identify and correct any
mission-critical internal or third party year 2000 processing problem could have
a material adverse operational or financial consequence to us. We established a
Year 2000 Project Team that, together with external consultants, developed a
process for addressing the year 2000 issue including performing an inventory, an
assessment, remediation procedures (to the extent necessary) and testing
procedures of all mission-critical information systems and equipment and
machinery that contain
21
<PAGE>
embedded technology, as well as obtaining assurances from all mission-critical
third parties as to their own year 2000 preparedness.
As of the date of this report, we have not experienced any significant year
2000 problems with our own mission-critical systems or any mission-critical
third parties. Although we have not experienced any significant year 2000
problems to date, we plan to continue to monitor the situation. We cannot be
sure the year 2000 issue has been adequately addressed or that problems arising
from the year 2000 issue will not cause a material adverse effect on our
operating results or financial condition. We believe, however, that our most
reasonably likely worst-case scenario would relate to problems with the systems
of third parties rather than with our internal systems. Although we have
developed contingency plans for third party failures, we cannot guarantee that
the contingency plans will adequately address all circumstances that may disrupt
operations or that such planning will prevent circumstances that may cause a
material adverse effect on our operating results or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks. Among these risks is the market risk
associated with interest rate movements on outstanding debt. The Company
regularly assesses these risks and has established policies and business
practices to protect against the adverse effects of these and other potential
exposures.
The Company's borrowings under its credit facilities and subordinated notes
due to affiliated physicians contain an element of market risk from changes in
interest rates. The Company managed this risk, in part, through the use of
interest rate swaps until August 1999. The Company does not enter into interest
rate swaps or hold other derivative financial instruments for speculative
purposes.
For purposes of specific risk analysis, the Company uses sensitivity
analysis to determine the impact that market risk exposures may have on the
Company. The financial instruments included in the sensitivity analysis consist
of all of the Company's cash and equivalents, long-term and short-term debt and
all derivative financial instruments.
To perform sensitivity analysis, the Company assesses the risk of loss in
fair values from the impact of hypothetical changes in interest rates on market
sensitive instruments. The market values for interest rate risk is computed
based on the present value of future cash flows as impacted by the changes in
the rates attributable to the market risk being measured. The discount rates
used for the present value computations were selected based on market interest
rates in effect at December 31, 1999. The market values that result from these
computations are compared with the market values of these financial instruments
at December 31, 1999. The differences in this comparison are the hypothetical
gains or losses associated with each type of risk. A one percent increase or
decrease in the levels of interest rates on variable rate debt with all other
variables held constant would not result in a material change to the Company's
results of operations or financial position or the fair value of its financial
instruments.
22
<PAGE>
US ONCOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements as of December 31, 1999 and 1998 and for each
of the three years ended December 31, 1999:
Page
----
Report of Independent Accountants........................................ 24
Consolidated Balance Sheet............................................... 26
Consolidated Statement of Operations and Comprehensive Income............ 27
Consolidated Statement of Stockholders' Equity........................... 28
Consolidated Statement of Cash Flows..................................... 29
Notes to Consolidated Financial Statements............................... 30
Financial statement schedules have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of US Oncology, Inc.
We have audited the consolidated balance sheet of US Oncology, Inc. and its
subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations and comprehensive income, of stockholders' equity and
of cash flows for each of the three years in the period ended December 31, 1999.
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 total revenues of 48 and 47 percent for the years ended
December 31, 1998 and 1997, 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.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit 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 audit and the report of
the other auditors provide reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of US Oncology, Inc. and
it subsidiaries at December 31, 1999, and 1998 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 21, 2000
24
<PAGE>
[ARTHUR ANDERSEN LOGO APPEARS HERE]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Physician Reliance Network, Inc.:
We have audited the consolidated balance sheets of Physician Reliance Network,
Inc. (a Texas corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
included in the restated consolidated financial statements of US Oncology, Inc.
and are not separately presented in the 1999 Form 10-K of US Oncology, Inc.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on theses financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physician Reliance Network,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 19, 1999
<PAGE>
US ONCOLOGY, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents............................................. $ 11,381 $ 13,691
Investment in common stock....................................... 27,258 6,975
Accounts receivable.............................................. 331,361 243,390
Prepaids and other current assets................................ 42,655 20,924
Inventories...................................................... 24,692 14,682
Due from affiliated physicians groups............................ 38,894 22,354
---------- ----------
Total current assets.......................................... 476,241 322,016
Property and equipment, net......................................... 254,289 220,944
Management service agreements, net of accumulated amortization of
$59,845 and $36,899.............................................. 537,130 467,214
Other assets........................................................ 30,817 23,354
---------- ----------
$1,298,477 $1,033,528
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term indebtedness..................... $ 26,693 $ 22,426
Accounts payable................................................. 107,937 80,729
Due to affiliated physician groups............................... 2,584 6,606
Accrued compensation costs....................................... 6,252 10,118
Income taxes payable............................................. 9,322 4,066
Other accrued liabilities........................................ 42,660 19,809
---------- ----------
Total current liabilities..................................... 195,448 143,754
Deferred income taxes............................................... 33,224 23,537
Long-term indebtedness.............................................. 360,191 234,474
---------- ----------
Total liabilities............................................ 588,863 401,765
Minority interest................................................... 2,450 1,965
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,
87,253 and 81,205 shares issued and 87,253 and 80,830
shares outstanding............................................. 873 812
Additional paid-in capital....................................... 428,533 404,749
Common Stock to be issued, approximately 13,982 and 16,947 shares. 91,330 89,142
Treasury Stock, 0 and 375 shares................................. (3,696)
Accumulated other comprehensive income........................... 269
Retained earnings................................................ 186,428 138,522
---------- ----------
Total stockholders' equity................................... 707,164 629,798
---------- ----------
Commitments and contingencies.......................................
---------- ----------
$1,298,477 $1,033,528
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE>
US ONCOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Revenue................................. $1,092,941 $836,596 $625,413
Operating expenses:
Pharmaceuticals and supplies.......... 521,087 357,766 250,425
Practice compensation and benefits.... 215,402 172,298 143,210
Other practice costs.................. 134,635 107,671 87,232
General and administrative............ 39,490 38,325 31,809
Write-off of accounts receivable...... 37,841
Merger, restructuring and integration
costs................................ 29,014
Depreciation and amortization......... 65,072 48,463 35,194
---------- -------- --------
1,004,700 724,523 585,711
---------- -------- --------
Income from operations.................. 88,241 112,073 39,702
Other income (expense):
Interest, net......................... (22,288) (15,908) (12,474)
Unrealized gain on investment in
common stock......................... 14,431
---------- -------- --------
Income before income taxes.............. 80,384 96,165 27,228
Income taxes............................ 32,229 36,184 11,593
---------- -------- --------
Net income.............................. 48,155 59,981 15,635
Other comprehensive income (loss), net
of tax................................. (269) 965 (696)
---------- -------- --------
Comprehensive income.................... $ 47,886 $ 60,946 $ 14,939
========== ======== ========
Net income per share - basic............ $ 0.48 $ 0.61 $ 0.17
========== ======== ========
Shares used in per share calculations -
basic.................................. 100,183 97,647 93,168
========== ======== ========
Net income per share - diluted.......... $ 0.47 $ 0.60 $ 0.16
========== ======== ========
Shares used in per share calculations -
diluted................................ 101,635 99,995 97,198
========== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
27
<PAGE>
US ONCOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Common Treasury Other
------------------ Paid-In Stock to Stock Comprehensive Retained
Shares Par Value Capital Be Issued Cost Income Earnings Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... 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
Medical practice transactions
value of shares to be issued.. 24,637 24,637
Delivery of Common Stock
to be issued from Treasury.... (1,810) (1,637) 3,696 (249)
Issuance of Common Stock....... 5,696 57 20,755 (20,812)
Exercise of options to purchase
Common Stock.................. 352 4 4,665 4,669
Tax benefit from exercise of
non-qualified stock options... 174 174
Valuation adjustment -
Investment in common stock.... (269) (269)
Net income..................... 48,155 48,155
------- ------ -------- -------- -------- ---------- -------- --------
Balance at December 31, 1999... 87,253 $ 873 $428,533 $ 91,330 $ $ $186,428 $707,164
======= ====== ======== ======== ======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE>
US ONCOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 48,155 $ 59,981 $ 15,635
Noncash adjustments:
Depreciation and amortization....... 65,072 48,463 35,194
Unrealized gain on investment in
common stock...................... (14,431)
Merger transaction costs............ 14,587
Merger related asset impairments.... 2,300
Deferred income taxes............... 9,687 5,805 7,985
Writedown of accounts receivable
and certain assets................ 37,841
Earnings on joint ventures.......... (634) (540) (437)
Gain on sale of investment in
ambulatory surgery center.......... (511)
Revenue from investment
in common stock.................... (6,019) (3,523) (1,716)
Imputed interest on medical practice
transactions....................... 248
Cash provided (used), net of
effects of medical practice
transactions, by changes in:
Accounts receivable................. (80,940) (61,539) (58,852)
Prepaids and other current assets... (34,958) (13,021) (9,712)
Other assets........................ 1,052 908 4,690
Accounts payable.................... 23,032 15,420 25,044
Due from/to affiliated
physician groups................... (18,682) 2,660 (10,511)
Income taxes receivable/payable..... 5,591 17,866 (6,314)
Other accrued liabilities........... 17,728 7,219 3,332
--------- -------- --------
Net cash provided by
operating activities.......... 31,540 79,699 41,916
--------- -------- --------
Cash flows from investing activities:
Acquisition of property
and equipment......................... (74,320) (58,646) (49,199)
Net payments in medical
practice transactions................. (43,513) (32,229) (42,821)
Merger transaction costs............... (14,587)
Investments............................ (3,000) (1,944) (4,058)
Proceeds from sale of investment in
ambulatory surgery center............ 1,950
Other.................................. 1,905 (1,409) (2,142)
--------- -------- --------
Net cash used by
investing activities.......... (133,515) (94,228) (96,270)
--------- -------- --------
Cash flows from financing activities:
Proceeds from Credit Facility.......... 170,000 66,000 174,000
Proceeds from Senior Secured Notes..... 100,000
Repayment of Credit Facility........... (152,000) (8,000) (99,000)
Repayment of other indebtedness........ (20,394) (29,344) (19,247)
Debt financing costs................... (2,610) (333)
Proceeds from exercise of stock
options............................... 4,669 2,525 1,294
Issuance of Common Stock............... 1,698 722
Purchase of Treasury Stock............. (12,431) (6,418)
--------- -------- --------
Net cash provided by
financing activities............ 99,665 20,448 51,018
--------- -------- --------
Increase (decrease) in cash and
equivalents............................. (2,310) 5,919 (3,336)
Cash and equivalents:
Beginning of period.................... 13,691 7,772 11,108
--------- -------- --------
End of period.......................... $ 11,381 $ 13,691 $ 7,772
========= ======== ========
Interest paid............................ $ 24,192 $ 14,022 $ 11,142
Taxes paid............................... 17,331 15,540 9,331
Noncash investing and financing
transactions:
Value of Common Stock to be issued in
medical practice transactions........ $ 24,637 $ 8,732 $ 24,619
Delivery of Common Stock in medical
practice transactions................. 24,508 20,479 27,424
Debt issued in medical practice
transactions.......................... 27,292 13,500 49,169
Debt assumed in medical practice
transactions.......................... 86 277 4,554
Debt issued in investment transaction.. 5,000
Conversion of subordinated notes
payable to Common Stock............... 8,500
Assets acquired under capital lease.... 2,268 921
Tax benefit from exercise of
non-qualified stock options........... 174 5,530 2,042
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
US Oncology, Inc., a Delaware corporation (Company) (formerly American
Oncology Resources, Inc. (AOR)), is a cancer management company. The Company
provides comprehensive management services under long-term agreements to
oncology practices comprised of over 800 physicians in 26 states at December 31,
1999. These practices provide a comprehensive range of medical services to
cancer patients, integrating the multiple specialties of cancer care, including
medical and gynecologic oncology, hematology, radiation oncology, diagnostic
radiology and stem cell transplantation.
The consolidated financial statements of the Company have been prepared to
give retroactive effect to the Merger with Physician Reliance Network, Inc.
(PRN) on June 15, 1999. This transaction was accounted for as a pooling of
interests, and, accordingly, the historical financial statements give effect to
the combination of the historical balances and amounts of AOR and PRN for all
periods presented. As a result of the Merger, PRN became a wholly owned
subsidiary of the Company, and each holder of PRN stock received 0.94 shares of
the Company's Common Stock for each PRN share held.
The following is a summary of the Company's significant accounting
policies:
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions and balances
have been eliminated. Certain amounts, including amounts attributable to PRN
prior to the Merger, have been reclassified to conform with the current period
financial statement presentation.
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 had
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 1999 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 the 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 management
fee to the Company. The Company recognizes the management fees as revenue when
the
30
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
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 41% of the Company's 1999 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, 1999 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 or of earnings 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
To the extent permitted by applicable law, 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. However, laws and regulations
governing Medicare and Medicaid programs are complex and subject to
interpretation, which along with other third party payor actions, could impact
the collection of accounts receivable in the future.
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 led 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 the Company 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
31
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
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.
Due from and to affiliated physicians groups
The Company has advanced to certain of its affiliated physician groups,
primarily Texas Oncology, P.A., 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 (8.5% at December
31, 1999). 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 prepayments, insurance and
other receivables.
Inventories
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-five 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. 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.
32
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares 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 consist of costs associated with obtaining debt financing, the
excess of purchase price over the fair value of net assets acquired, and
investments in joint ventures. The debt financing costs are capitalized and
amortized over the terms of the related debt agreements using the straight line
method, which approximates the interest method. 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, 1999 and 1998,
accumulated amortization equaled $2,415 and $1,231, respectively. The
investments in joint ventures for which the Company does not have control are
accounted for under the equity method of accounting. For 1999, 1998 and 1997,
operational activity relating to the joint ventures was not material to the
operations of the Company.
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.
33
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
The following table summarizes the determination of shares used in per share
calculations:
Year Ended December 31,
----------------------------
1999 1998 1997
-------- ------- -------
Basic
Outstanding at end of period:
Common Stock....................... 87,253 80,830 75,781
Common Stock to be issued.......... 13,982 16,947 19,208
------- ------ ------
101,235 97,777 94,989
Effect of weighting................... (1,052) (130) (1,821)
------- ------ ------
Shares used in per share 100,183 97,647 93,168
calculation....................... ======= ====== ======
Diluted
Outstanding at end of period:
Common Stock....................... 87,253 80,830 75,781
Common Stock to be issued.......... 13,982 16,947 19,208
------- ------ ------
101,235 97,777 94,989
Effect of weighting and assumed share
equivalents for grants of
stock options....................... 400 2,218 2,209
------- ------ ------
Shares used in per share 101,635 99,995 97,198
calculation....................... ======= ====== ======
Anti-dilutive stock options not
included above....................... 6,903 1,698 2,339
Operating segments
During 1998, the Company adopted 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 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 gynecologic
services), diagnostic radiology services, retail pharmacy services and clinical
research. The Company's chief decision maker did not receive financial
information for separate product lines of the Company's business, nor did he
make resource allocation decisions through 1999 based upon financial information
for separate product lines. For the years ended 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 operations. Accumulated other comprehensive income
consists of the unrealized gain or loss (net of tax) relating to investments in
common stock available for sale.
34
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares 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. In 1999, FASB issued Statement No. 137 which delayed
the required implementation date for FAS 133 until the Company's year ended
December 31, 2001. Management expects to implement FAS 133 for the year ended
December 31, 2001 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 management
fee revenue.
The following presents the amounts included in the determination of the
Company's revenues:
Year Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
Medical service revenue............... $1,384,813 $1,073,446 $802,292
Amounts retained by affiliated
physician groups..................... 314,553 263,115 198,789
---------- ---------- --------
Management fee revenue................ 1,070,260 810,331 603,503
Other revenue......................... 22,681 26,265 21,910
---------- ---------- --------
Revenue............................... $1,092,941 $ 836,596 $625,413
========== ========== ========
For the years ended December 31, 1999, 1998 and 1997, the affiliated
physician groups derived approximately 35% of their medical service revenue from
services provided under the Medicare and state Medicaid programs. Capitation
revenues were less than 1% of total medical service revenue in 1999, 1998 and
1997. Changes in the payor reimbursement rates, particularly Medicare and
Medicaid 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, 1999.
The Company's most significant and only management service agreement to
provide more than 10% of revenues is with Texas Oncology, P.A. (TOPA). TOPA
accounted for approximately 25%, 32%, and 37% of the Company's total revenues
for the years ended December 31, 1999, 1998, and 1997, respectively. Set forth
below is selected, unaudited financial and statistical information concerning
TOPA.
35
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Medical service revenues............. $341,939 $338,113 $291,395
-------- -------- --------
Management fee paid to the Company
Reimbursement of expense.......... 232,255 218,083 183,863
Earnings component................ 37,726 42,010 37,636
-------- -------- --------
Total management fee................. 269,981 260,093 221,499
-------- -------- --------
Amounts retained by TOPA............. $ 71,958 $ 78,020 $ 69,896
======== ======== ========
Physicians employed by TOPA.......... 195 197 221
Cancer centers utilized by TOPA...... 29 24 21
The Company's operating margin for the TOPA service agreement was 14.0%,
16.1%, and 17.0% for the years ended December 31, 1999, 1998 and 1997,
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 1999 and 1998 is due to the utilization of multiple and 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 (Reformed Radiology) 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 providing clinical research services.
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,
-----------------------------
1999 1998 1997
-------- ------- --------
Cash and transaction costs.......... $ 43,513 $32,229 $ 42,821
Short-term and subordinated notes... 27,292 13,500 49,169
Common Stock to be issued........... 24,637 8,732 24,619
Liabilities assumed................. 4,882 2,687 8,252
-------- ------- --------
Total costs......................... $100,324 $57,148 $124,861
======== ======= ========
Number of practice affiliations.... 20 21 23
36
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
During 1999, the Company affiliated with 20 oncology physician groups on
the effective dates indicated as follows: January 1, Oncology & Hematology of
Southwest Virginia of Roanoke, Virginia, total consideration of $27,156
including 820 shares of common stock to be issued with a value of $9,840;
January 1, Hematology Associates Ltd. of Phoenix, Arizona, total consideration
of $10,772 including 284 shares of common stock to be issued with a value of
$3,415; June 4, Birmingham Hematology Oncology Associates, P.C. of Birmingham,
Alabama, total consideration of $12,625 including 402 shares of common stock to
be issued with a value of $3,505; 17 other physician groups, total consideration
of $44,889 including 1,126 shares of common stock to be issued with a value of
$7,877.
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.
37
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares 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, 1999, the
Company has recorded $449 of the $1,300 and no future liability exists. (See
Note 6 -"Subordinated Notes" herein.) Amounts that are earned under these
obligations are allocated to the affiliated long-term management services
agreement and are 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 Oncology,
Inc. ("ILEX"), a drug development company focused exclusively on cancer. Under
the terms of the agreement, PRN would refer all contract research business to
ILEX. As part of the agreement, ILEX issued to the Company 314 shares, 314
shares, and 312 shares of ILEX common stock in 1999, 1998, and 1997,
respectively. The Company has recognized $2,867, $3,523, and $1,716 as revenue
in 1999, 1998 and 1997, respectively, representing the fair value of the ILEX
stock received on June 30 of each year, recognized over the following year as
the Company was obligated to perform clinical research activities during that
period. Effective June 30, 1999, the Company amended its agreement with ILEX.
Under the amended agreement, ILEX accelerated the issuance of 315 shares of its
common stock valued at $3,152 and the parties agreed to terminate the Company's
obligations to provide research referral services to ILEX under the agreement.
ILEX's obligation to issue additional shares to the Company contingent upon
volume of activity was cancelled at this time.
Through the third quarter of 1999, the Company recognized subsequent
changes in the value of ILEX stock received as a component of other
comprehensive income in shareholders' equity in accordance with its intentions
and classification of the investment as "available for sale" under the guidance
of FASB 115. The valuation allowance was shown as a component of stockholders'
equity, net of applicable income taxes. During the fourth quarter of 1999, the
Company changed its intentions and reclassified the investment as a trading
security. In connection with this decision, the Company has recognized an
unrealized gain of $14,431 in the accompanying consolidated statement of
operations and comprehensive income to reflect the fair value of the investment
at December 31, 1999. The Company sold the investment in a private sale
transaction in March 2000 and realized net proceeds of $54,798, which will
result in the recognition of an additional gain of $27,540 in the consolidated
statement of operations and comprehensive income in the first quarter of 2000.
38
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
----------------------
1999 1998
---------- ---------
Land.................................... $ 18,080 $ 17,946
Furniture and equipment................. 222,771 197,290
Buildings and leasehold improvements.... 125,715 88,085
Construction in progress................ 15,105 6,081
--------- --------
381,671 309,402
Less - accumulated depreciation and
amortization........................... (127,382) (88,458)
--------- --------
$ 254,289 $220,944
========= ========
NOTE 6 - INDEBTEDNESS
The Company's long-term indebtedness consists of the following:
December 31,
----------------------
1999 1998
---------- ---------
Credit Facility A..................... $174,000 $104,000
Credit Facility B..................... 52,000
Senior secured notes.................. 100,000
Notes payable......................... 13,031 15,623
Subordinated notes.................... 97,997 80,611
Convertible notes..................... 900 900
Capital lease obligations and other... 956 3,766
-------- --------
386,884 256,900
Less - current maturities............. 26,693 22,426
-------- --------
$360,191 $234,474
======== ========
Credit Facility A
The Company has a loan agreement and revolving credit/term facility (Credit
Facility A) which was amended effective as of June 15, 1999 in connection with
the Merger to improve certain terms, covenants and capacity. Under the terms of
the agreement, the amounts available for borrowing are $275,000 through 2004
(the borrowing limit was $150,000 prior to the amendment). Credit Facility A
includes a $100,000 component that is renewable at the option of the lenders
under that agreement at one year intervals from the original date of the
agreement. The maximum borrowings outstanding during 1999 were $246,000.
Proceeds of loans may be used to finance medical practice transactions, provide
working capital or for other general corporate uses. The Company has classified
the entire balance outstanding under Credit Facility A as long-term due to its
ability and intent to maintain the borrowings past 2000.
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
National Bank (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, 1999
and 1998, the weighted average interest rate on all outstanding draws was 7.5%
and 5.8%, respectively.
39
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
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.
Credit Facility B
PRN had a loan agreement and revolving credit/term facility (Credit
Facility B). The facility was repaid and replaced during June 1999 in
conjunction with the amendment and restatement of Credit Facility A. Under the
terms of the agreement, the amounts available for borrowing under the revolver
was $140,000. Proceeds of loans could be used to finance medical practice
transactions, provide working capital or for other general corporate uses. PRN
had classified this facility as long-term due to its ability and intent to
maintain the borrowings past 1999. Credit Facility B contained restrictive
covenants and was secured by the capital stock of two of PRN's wholly owned
subsidiaries.
Senior secured notes
In November 1999, the Company issued $100,000 in senior secured notes to a
select group of institutional investors. The notes bear interest at 8.42%,
mature in installments from 2002 through 2006 and rank equal in right of payment
with all current and future senior indebtedness of the Company. The senior
secured notes contain restrictive financial and operational covenants and are
secured by the same collateral as Credit Facility A.
Notes payable
The notes payable bear interest, which is payable annually, at rates
ranging from 5.3% to 10% and mature between 2000 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.
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, 1999 and 1998 bear interest at 7%, are due in installments
through 2006 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.
40
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares 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% with original lease terms between two and
seven years. At December 31, 1999 and 1998, the gross amount of assets recorded
under the capital leases was $5,300 and $5,500, respectively, and the related
accumulated amortization was $3,000and $2,300, respectively. Amortization
expense is included with depreciation in the accompanying consolidated statement
of operations. Total future capital lease payments are $530. Other
indebtedness consists principally of installment notes and bank debt, with
varying interest rates, assumed in medical practice transactions.
Maturities
Future principal maturities of long-term indebtedness, including capital
lease obligations, are approximately $26,700 in 2000, $22,800 in 2001, $43,500
in 2002, $35,800 in 2003, $207,700 in 2004 and $50,400 thereafter.
NOTE 7 - INCOME TAXES
The Company's income tax provision consists of the following:
Year Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
Federal:
Current............................ $21,661 $27,767 $ 1,447
Deferred........................... 8,171 5,195 7,318
State:
Current............................ 1,129 2,612 2,161
Deferred........................... 1,268 610 667
------- ------- -------
$32,229 $36,184 $11,593
======= ======= =======
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,
---------------------------
1999 1998 1997
------- ------- -------
Provision for income taxes at U.S.
statutory rates...................... 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit.............................. 2.5 3.0 8.1
Non-deductible portion of merger
related costs........................ 2.1
Other................................. 0.5 (0.4) (0.5)
---- ---- ----
40.1% 37.6% 42.6%
---- ---- ----
41
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
Deferred income taxes are comprised of the following:
December 31,
------------------
1999 1998
------- -------
Deferred tax assets:
Deferred rent................................. $ 598 $ -
Accrued expenses.............................. 1,098 849
Other......................................... 167 421
------- -------
$ 1,863 $ 1,270
------- -------
Deferred tax liabilities:
Management service agreements................. $17,319 $13,556
Depreciation.................................. 11,853 11,164
Prepaid expenses.............................. 265 87
Unrealized gain on investment................. 5,650 -
------- -------
35,087 24,807
------- -------
Net deferred tax liability.................... $33,224 $23,537
======= =======
At December 31, 1999 and December 31, 1998, net deferred tax liability and
income taxes payable includes a tax liability of $11,900 and $5,000,
respectively. 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 may participate in either the AOR 401(k) plan or
the PRN 401(k) profit sharing and savings plan, based upon pre-Merger employment
status. Participants of the AOR plan are eligible to participate after 6 months
of employment and reaching the age of 21. Participants 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. Participants 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, 1999, no employer contributions were
made.
The PRN plan allows for an employer match of contributions made by plan
participants. For the year ended December 31, 1997, 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. In
1999 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. Effective June 15, 1999, the Company
elected to cease the employer match under the PRN plan. The Company's
contribution amounted to approximately $1,000, $1,600 and $1,800 for the years
ended December 31, 1999, 1998, and 1997, respectively.
NOTE 9 - STOCKHOLDERS' EQUITY
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.
42
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
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.
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;
658, and 1,110 shares at aggregate costs of $12,400, $6,400 and $9,400,
respectively. Shares repurchased have been used to satisfy commitments for the
delivery of the Company's Common Stock from medical practice transactions. On
March 21, 2000, the Board of Directors of the Company authorized the purchase of
up to 10,000 shares of the Company's Common Stock in public or private
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. A portion of the Common Stock to be issued commitment is based upon
obligations to deliver a specified dollar value of Common Stock shares. The
value of these shares is not discounted and the number of shares to be issued
would change with change in the market value of the Company's Common Stock.
For transactions completed through December 31, 1999, the scheduled
issuance of the shares of Common Stock that the Company is committed to deliver
over the passage of time are approximately 5,172 in 2000, 1,947 in 2001, 2,817
in 2002, 1,408 in 2003, 1,535 in 2004 and 1,103 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. In connection with the
merger of AOR and PRN, all outstanding options of PRN became fully vested and
exercisable at the merger date and were assumed by the Company. Outstanding PRN
options became options to purchase 0.94 shares of the Company's common stock
with an exercise price equal to the original exercise price divided by 0.94.
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, 1999, 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.
43
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
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 4
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, 1999, 296 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 3,000 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. Of the outstanding options to
purchase shares of Common Stock granted under this plan, 1,004 were granted to
physician employees of the affiliated physician groups and 25 were granted to
other employees of the affiliated physician groups. In 1999, 1998 and 1997, the
fair value of the options granted to non-employees was $5.89, $8.48 and 8.21 per
share, respectively. Compensation expense will be recognized over the respective
vesting periods. Expense of $1,300, $600 and $300 was recognized in 1999, 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.
44
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares 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, 1997................. 6,786 $ 4.97
Granted.................................. 3,312 11.84
Exercised................................ (613) 3.37
Canceled................................. (414) 7.39
------
Balance, December 31, 1997............... 9,071 7.54
Granted.................................. 2,351 12.87
Exercised................................ (1,264) 4.08
Canceled................................. (574) 9.53
------
Balance, December 31, 1998............... 9,584 9.28
Granted.................................. 6,660 6.63
Exercised................................ (358) 8.77
Canceled................................. (1,278) 9.73
------
Balance, December 31, 1999............... 14,608 8.16
======
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ------------------------------------
WEIGHTED
WEIGHTED RANGE NUMBER AVERAGE WEIGHTED
OF AVERAGE OUTSTANDING AT REMAINING AVERAGE EXERCISE EXERCISABLE AT
EXERCISE PRICE 12/31/99 CONTRACTUAL LIFE PRICE 12/31/99 EXERCISE PRICE
- -------------- ------------- --------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$1 to $3 1,141 1.8 $ 2.65 1,141 $ 2.65
4 to 9 7,153 7.6 5.44 2,623 5.96
10 to 14 5,184 8.4 11.39 2,610 11.55
15 to 24 1,130 7.4 16.35 552 16.97
------ -----
1 to 24 14,608 7.4 8.18 6,926 16.97
------
</TABLE>
The Company has adopted the disclosure-only provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation" for stock options granted to
employees and directors. Accordingly, no compensation cost has been recognized
for fixed options granted to Company employees and directors. 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 unaudited pro forma
information for 1999, 1998 and 1997 are as follows and includes compensation
expense of approximately $12,600, $14,700 and $3,500, respectively:
45
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
Year Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
Pro forma net income....................... $35,555 $45,290 $12,107
Pro forma net income per share - basic..... $ 0.35 $ 0.46 $ 0.13
Pro forma net income per share - diluted... $ 0.35 $ 0.45 $ 0.12
Options granted in 1999, 1998 and 1997 had weighted-average fair values of
$5.42, $8.46, and $9.11 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 1999, 1998 and 1997:
1999 1998 1997
------- ------- -------
Expected life (years) 5 5 5
Risk-free interest rate............... 5.0% 4.9% 5.2%
Expected volatility................... 77% 76% 81%
Expected dividend yield............... 0% 0% 0%
NOTE 11 - MERGER, RESTRUCTURING AND INTEGRATION COSTS
In connection with the merger of AOR and PRN, the combined company incurred
substantial costs. The company incurred costs directly related to its efforts
to consummate the merger ("merger costs"), costs related to restructuring
certain duplicate operating costs ("restructuring costs") and costs related to
its efforts to integrate the operations of the two companies ("integration
costs"). These costs totaled $29,014 and have been summarized in the
accompanying consolidated statement of operations and comprehensive income as
Merger, restructuring and integration costs in the year ended December 31, 1999.
The Company's merger costs totaled $14,587 and include professional fees
and expenses incurred in connection with the due diligence, negotiation and
solicitation of shareholder approval for the transaction, as well as incremental
travel costs and contractual change of control payments of approximately $5,000
to the executive management of PRN.
The Company's management made certain decisions to restructure its
operations to reduce overlapping personnel and duplicative facilities. The
costs of personnel reductions include severance pay for terminated employees and
payments attributable to stay bonuses paid before December 31, 1999 for
employees providing transition assistance services. The Company also determined
that certain furniture, fixtures, leasehold improvements, computer equipment and
software was impaired as a result of personnel terminations, facility closings
and decisions to harmonize certain information systems. The Company has
recognized and accounted for these costs in accordance with the provisions of
Emerging Issues Task Force Consensus No. 94-3 "Accounting for Restructuring
Costs". The Company's restructuring costs recognized in the year ended December
31, 1999 totaled $7,193 and are summarized as follows:
<TABLE>
<CAPTION>
RESTRUCTURING PAYMENTS TO ACCRUED
EXPENSE SETTLE ASSET LIABILITY AT
OBLIGATIONS DISPOSITIONS 12/31/99
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Employee severance and stay bonuses... $2,097 $(2,097)
Lease terminations.................... 2,796 (320) $2,476
Asset impairments..................... 2,300 $(2,300)
------ ------- ------- ------
Total............................ $7,193 $(2,417) $(2,300) $2,476
====== ======= ======= ======
</TABLE>
46
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
The Company also incurred specifically identified costs related to its
efforts to integrate the two companies totaling $7,234 during the year ended
December 31, 1999. These integration costs include costs for a physician
conference to address combined Company operating strategies, employee
orientation meetings, consulting fees related to integration activities and
adoption of common employee benefit programs. These costs have been recognized
as incurred and do not include costs related to inefficiencies incurred as the
Company has attempted to integrate the operating activities of AOR and PRN.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
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 $20,600 in 2000, $17,400 in 2001, $13,900
in 2002, $11,300 in 2003, $8,900 in 2004, and $14,600 thereafter. Rental
expense under noncancelable operating leases was approximately $46,632 in 1999,
$34,863 in 1998 and $27,883 in 1997.
The Company enters into commitments with various construction companies and
equipment vendors in connection with the development of cancer centers. As of
December 31, 1999, the Company's commitments were approximately $5,800.
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, 1999 were $43,400.
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.
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 annually 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.
47
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
The Company has been informed that the Company and an affiliated physician
group are the subject of allegations that their billing practices may violate
the Federal False Claims Act. The allegations are the result of two qui tam
complaints filed under seal prior to the merger of PRN with a subsidiary of US
Oncology. The U.S. Department of Justice is currently investigating the
allegations in order to determine if the United States will intervene and pursue
the claims on behalf of the plaintiffs. If the United States does not intervene,
the plaintiffs may continue to pursue the claims individually. Because the
complaints are under seal, and because the Department of Justice is in the
process of investigating the claims, the Company is unable to fully assess at
this point in time the nature or magnitude of these allegations. If the
plaintiffs and/or the United States were to prevail in these claims, the
resulting judgment could have a material adverse effect on the Company. Because
qui tam actions are filed under seal, there is a possibility that the Company
could be the subject of other qui tam actions of which it is unaware.
NOTE 13 - 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 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 $3,300 in 1999, $3,700 in 1998,
and $2,600 in 1997 and total future commitments are $13,800 as of December 31,
1999.
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 $6,300 in 1999, $5,800 in
1998, and $5,200 in 1997.
A director and a stockholder is of counsel and previously was a partner of
a law firm utilized by the Company. The Company incurred $816, $558, and $584
for legal services provided by the firm in 1999, 1998 and 1997, respectively.
Three of the Company's existing directors and three directors holding
positions through June 15, 1999 are practicing physicians with physician groups
affiliated with the Company. In 1999, the physician groups in which these
directors participate generated total medical service revenues of $516,000 of
which $110,300 was retained by the groups and $405,700 was included in the
Company's revenue. 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, three of the Company's directors were practicing physicians with
physician groups affiliated with the Company. In 1997, the three physician
groups in which these directors participate 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.
48
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
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 TOPA 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 of non-physician employees, medical supply expense and
pharmaceuticals. In 1999, 1998 and 1997, TOPA paid the Company an aggregate of
approximately $270,000, $260,000 and $221,000 respectively, pursuant to the
TOPA management service agreement. Dr. Jones, a director of the Company, and Dr.
Bailes, an executive of the Company, are employed by TOPA. TOPA beneficially
owns approximately 9.1% of the Company's outstanding common stock. At December
31, 1999 and 1998, TOPA was indebted to the Company in the aggregate amount of
approximately $10,137 and $11,574, respectively. 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 (8.5% at December 31, 1999). 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 in 1998 and $7,500 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
1999 and 1998, payments by the Company to BUMC totaled an aggregate of
approximately $2,400 and $3,900, respectively, for these services.
As part of the consideration for Minnesota Oncology Hematology, P.A.
("MOHPA") entering into its management service agreement with the Company, the
Company is required to make quarterly payments of $464 to MOHPA through July 1,
2000. During 1999, 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 1999, the Company issued 104 shares of
common stock to MOHPA pursuant to such yearly issuances. A shareholder of MOHPA
is currently a director of the Company.
The Company enters into medical director agreements with certain of its
affiliated physicians. Under a typical medical director agreement, the Company
retains an affiliated physician to advise the Company on a specific initiative
or matter, such as stem cell transplantation or clinical research, and, in
return, the Company pays to the affiliated physician a medical director fee,
typically $100 to $250 annually. During 1999, 1998 and 1997, the Company had
agreements with seven, six and zero medical directors under which the Company
paid $875, $567 and zero, respectively.
49
<PAGE>
US ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands except per share data)
NOTE 14 - QUARTERLY FINANCIAL DATA
The following table presents unaudited quarterly information:
<TABLE>
<CAPTION>
1999 QUARTER ENDED 1998 QUARTER ENDED
------------------------------------------ -----------------------------------------
DEC 31 SEP 30 JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31
-------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................... $299,526 $277,789 $266,412 $249,214 $227,299 $216,916 $204,744 $187,637
Income from operations......... 20,836 26,991 9,338 31,076 29,459 27,898 28,681 26,035
Other income................... 14,431
Net income..................... 17,871 14,983 (1,214) 16,515 15,843 15,045 15,504 13,589
Net income per share-basic..... .18 .15 (.01) .17 .16 .15 .16 .14
Net income per share-diluted... .18 .15 (.01) .16 .16 .15 .15 .14
</TABLE>
50
<PAGE>
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
The Proxy Statement issued in connection with the 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the caption, "Election of Directors" information
required by Item 10 of Form 10-K as to directors of the Company and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement issued in connection with the 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the caption, "Compensation of Executive Officers"
information required by Item 11 of Form 10-K as to directors and certain
executive officers of the Company and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement issued in connection with the 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the caption, "Beneficial Ownership of US Oncology,
Inc. Common Stock" information required by Item 12 of Form 10-K as to directors,
certain executive officers and certain beneficial owners of the Company and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement issued in connection with the 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the caption, "Certain Relationships and Related
Transactions" information required by Item 13 of Form 10-K as to directors,
certain executive officers and certain beneficial owners of the Company and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are files as a part of this report:
1. Financial Statements: See Item 8 of this report
2. Financial Statement Schedules: See Item 8 of this report
3. Exhibit Index
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger by American Oncology Resources, Inc.,
Diagnostic Acquisition, Inc. and Physician Reliance Network, Inc.
(filed as Exhibit 2.1 to the Form 8-K filed with the Securities and
Exchange Commission on December 15, 1998).
3.1 Amended and Restated Certificate of Incorporation of the Company,
(filed as Exhibit 3.1 to, and incorporated by reference from, the
Company's Form 8-K/A filed June 17, 1999).
3.2 Amended and Restated By-Laws of the Company, (filed as Exhibit 3.2
to, and incorporated by reference from, the Company's Form 8-K/A
filed June 17, 1999).
4.1 Rights Agreement between the Company and American Stock Transfer &
Trust Company (incorporated by reference from Form 8-A filed June 2,
1997).
4.2 Form of 8.42% Senior Secured Note due 2006.
10.1 Fourth Amended and Restated Loan Agreement dated as of May 11, 1999
among the Company and First Union National Bank, as agent and the
various Lenders named therein (filed as Exhibit 10.1 to Form 10-Q for
the fiscal quarter ended June 30, 1999 and incorporated herein by
reference).
51
<PAGE>
10.2 Participation Agreement among US Oncology Synthetic Real Estate,
Inc., the Company, First Union National Bank and the other parties
identified therein (filed as Exhibit 10.2 to Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference).
10.3 Credit Agreement among the Company, First Security Bank, First Union
National Bank and the other parties identified therein (filed as
Exhibit 10.3 to Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
10.4 Third Amendment to Certain Operative Agreements dated as of May 14,
1999 by and among the Company, various of its subsidiaries, First
Security Bank, National association as owner trustee, various Lenders
and Holders (as defined therein) and First Union National Bank as
Agent (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 and incorporated herein
by reference).
10.5* Chief Executive Officer Stock Option Plan and Agreement (filed as an
exhibit to the Registration Statement on Form S-1 (Registration No.
33-90634) and incorporated herein by reference).
10.6* Everson Stock Option Plan and Agreement (filed as an exhibit to the
Registration Statement on Form S-1 (Registration No. 33-90634) and
incorporated herein by reference).
10.7 1993 Non-Employee Director Stock Option Plan as amended (filed as
Exhibit 4.4 to the Registration Statement on Form S-8 (Reg. No.
333-85855) and incorporated herein by reference).
10.8 Key Employee Stock Option Plan, as amended (filed as Exhibit 4.4 to
the Registration Statement on Form S-8 (Registration No. 333-85853)
and incorporated herein by reference).
10.9 1993 Affiliate Stock Option Plan as amended (filed as Exhibit 4.4 to
the Registration Statement on Form S-8 (Registration No. 333-85859)
and incorporated herein by reference)
10.10 Physician Reliance Network, Inc. 1994 Stock Option Plan for outside
directors (filed as Exhibit 4.3 to registration statement on Form S-8
(Registration No. 333-81069) and incorporated herein by reference).
10.11 Physician Reliance Network, Inc. 1993 Stock Option Plan (filed as
Exhibit 4.3 to Registration Statement on Form S-8 (Registration No.
333-80977) and incorporated herein by reference).
10.13* Form of Executive Employment Agreement.
10.14 Form of Note Purchase Agreement, dated November 24, 1999, executed
by the Company in favor of the various Purchasers (as defined
therein).
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Arthur Andersen, LLP
27 Financial Data Schedule
_____________________
*Indicates agreement related to executive compensation
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fourth quarter
of 1999.
52
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED THIS 24TH DAY OF MARCH,
2000.
US ONCOLOGY, INC.
By: /s/ L. Fred Pounds
---------------------------------------
L. Fred Pounds
Chief Financial Officer and Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ R. Dale Ross Chairman of the Board, March 24, 2000
- ---------------------------------- Chief Executive Officer
R. Dale Ross and Director
/s/ L. Fred Pounds Chief Financial Officer March 24, 2000
- ---------------------------------- and Treasurer [Principal
L. Fred Pounds Financial and Accounting
Officer]
Director March 24, 2000
- ----------------------------------
Russell L. Carson
/s/ James E. Dalton Director March 24, 2000
- ----------------------------------
James E. Dalton
/s/ Richard B. Mayor Director March 24, 2000
- ----------------------------------
Richard B. Mayor
/s/ Robert A. Ortenzio Director March 24, 2000
- ----------------------------------
Robert A. Ortenzio
/s/ Edward E. Rogoff, M.D. Director March 24, 2000
- ----------------------------------
Edward E. Rogoff, M.D.
/s/ J. Taylor Crandall Director March 24, 2000
- ----------------------------------
J. Taylor Crandall
/s/ Nancy G. Brinker Director March 24, 2000
- ----------------------------------
Nancy G. Brinker
/s/ Robert W. Daly Director March 24, 2000
- ----------------------------------
Robert W. Daly
/s/ Boone Powell, Jr. Director March 24, 2000
- ----------------------------------
Boone Powell, Jr.
/s/ Stephen E. Jones, M.D. Director March 24, 2000
- ----------------------------------
Stephen E. Jones, M.D.
/s/ Burton S. Schwartz, M.D. Director March 24, 2000
- ----------------------------------
Burton S. Schwartz, M.D.
</TABLE>
53
<PAGE>
EXHIBIT I
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(THE "SECURITIES ACT"). NO SALE OR TRANSFER OF THIS NOTE (OTHER THAN TO THE
ISSUER OF THIS NOTE) MAY BE MADE UNLESS EITHER (A) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (B) PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
US ONCOLOGY, INC.
8.42% SENIOR SECURED NOTE DUE 2006
No. [_____] November 24, 1999
$[_______] PPN: 90338W AA 1
FOR VALUE RECEIVED, the undersigned, US Oncology, Inc. (herein called the
"Company"), a corporation organized and existing under the laws of the State of
Delaware, hereby promises to pay to [______________________], or registered
assigns, the principal sum of [_______________________________] DOLLARS on
November 24, 2006, with interest (computed on the basis of a 360-day year of
twelve 30-day months) (a) on the unpaid balance thereof at the rate of 8.42% per
annum from the date hereof, payable semiannually, on the 24th day of May and
November in each year, commencing with May 24, 2000, until the principal hereof
shall have become due and payable, and (b) to the extent permitted by law on any
overdue payment (including any overdue prepayment) of principal, any overdue
payment of interest and any overdue payment of any Make-Whole Amount (as defined
in the Note Purchase Agreements referred to below), payable semiannually as
aforesaid (or, at the option of the registered holder hereof, on demand), at a
rate per annum from time to time equal to the greater of (i) 10.42% or (ii) 2%
over the rate of interest publicly announced by Chase Bank, N.A. from time to
time in New York, New York as its "base" or "prime" rate.
Payments of principal of, interest on and any Make-Whole Amount with respect
to this Note are to be made in lawful money of the United States of America at
Houston, Texas or at such other place as the Company shall have designated by
written notice to the holder of this Note as provided in the Note Purchase
Agreements referred to below.
This Note is one of a series of Senior Secured Notes (herein called the
"Notes") issued pursuant to separate Note Purchase Agreements, dated as of
November 24, 1999 (as from time to time amended, the "Note Purchase
Agreements"), between the Company and the respective Purchasers named therein
and is entitled to the benefits thereof. Each holder of this Note will be
deemed, by its acceptance hereof, (i) to have agreed to the confidentiality
provisions set forth in Section 21 of the Note Purchase Agreements and (ii) to
have made the representation set forth in Section 6.2 of the Note Purchase
Agreements.
This Note is a registered Note and, as provided in, and subject to any
limitations set forth in, the Note Purchase Agreements, upon surrender of this
Note for registration of transfer, duly endorsed, or accompanied by a written
instrument of transfer duly executed, by the registered holder hereof or such
holder's attorney duly authorized in writing, a new Note for a like principal
amount
<PAGE>
will be issued to, and registered in the name of, the transferee. Prior
to due presentment for registration of transfer, the Company may treat the
person in whose name this Note is registered as the owner hereof for the purpose
of receiving payment and for all other purposes, and the Company will not be
affected by any notice to the contrary.
The Company will make required prepayments of principal on the dates and in
the amounts specified in the Note Purchase Agreements. This Note is also
subject to optional prepayment, in whole or from time to time in part, at the
times and on the terms specified in the Note Purchase Agreements, but not
otherwise.
If an Event of Default, as defined in the Note Purchase Agreements, occurs and
is continuing, the principal of this Note may be declared or otherwise become
due and payable in the manner, at the price (including any applicable Make-Whole
Amount) and with the effect provided in the Note Purchase Agreements.
This Note and the obligations hereunder are secured by certain security
interests and guarantees pursuant to the Security Documents (as defined in the
Note Purchase Agreements) and the holder hereof is entitled to the benefits
thereof.
Anything in this Note, the Note Purchase Agreements or the other Security
Documents to the contrary notwithstanding, the Company shall never be required
to pay interest on or with respect to this Note, the Note Purchase Agreements or
the other Security Documents at a rate in excess of the Highest Lawful Rate (as
defined below), and if the effective rate of interest that would otherwise be
payable on or with respect to this Note, the Note Purchase Agreements or the
other Security Documents would exceed the Highest Lawful Rate, or if the
registered holder of this Note shall receive anything of value that is deemed or
determined to constitute interest that would increase the effective rate of
interest payable on or with respect to this Note, the Note Purchase Agreements
or the other Security Documents to a rate in excess of the Highest Lawful Rate,
then (a) the amount of interest that would otherwise be payable on or with
respect to this Note, the Note Purchase Agreements or the other Security
Documents shall be reduced to the amount allowed at the Highest Lawful Rate
under applicable law, and (b) any unearned interest paid by the Company or any
interest paid by the Company in excess of the Highest Lawful Rate shall, at the
option of the registered holder of this Note, be either refunded to the Company
or credited on the principal of this Note or any other obligation outstanding
under or with respect to this Note, the Note Purchase Agreements or the other
Security Documents. It is further agreed that, without limitation of the
foregoing, all calculations of the rate of interest contracted for, charged or
received by any registered holder of this Note, or under the Note Purchase
Agreements or the other Security Documents, that are made for the purpose of
determining whether such rate exceeds the Highest Lawful Rate, shall be made, to
the extent permitted by applicable law (now or, to the extent permitted by law,
hereafter enacted) governing the Highest Lawful Rate, by (i) characterizing any
non-principal payment as an expense, fee or premium rather than as interest, and
(ii) amortizing, prorating, allocating and spreading in equal parts during the
period of the full term of this Note (including the period of any renewal or
extension hereof), all interest at any time contracted for, charged or received
by such registered holder in connection herewith. As used herein, the term
"Highest Lawful Rate" means the maximum non-usurious rate of interest permitted
from time to time to be contracted for, taken, charged or
-2-
<PAGE>
received with respect to this Note, the Note Purchase Agreements or the other
Security Documents by the registered holder hereof, under applicable law in
effect with respect to this Note, the Note Purchase Agreements or the other
Security Documents.
This Note shall be construed and enforced in accordance with the laws of the
state of Texas, excluding choice-of-law principles of the law of such state that
would require the application of the laws of a jurisdiction other than such
states.
US ONCOLOGY, INC.
By:
--------------------------------
L. Fred Pounds
Chief Financial Officer
-3-
<PAGE>
US ONCOLOGY
EMPLOYMENT AGREEMENT
This Agreement is made and entered into this day of _______, , by and
between US ONCOLOGY, INC., a Delaware corporation (together with its
subsidiaries, hereinafter referred to as the "Company"), and __________
(hereinafter referred to as "Employee"). In consideration of the mutual terms,
conditions and covenants hereinafter set forth, the Company and
Employee agree to the following:
1. TERM AND RENEWAL.
Except as otherwise provided herein, the Company hereby agrees to employ
the Employee, and the Employee hereby agrees to remain in the employ of the
Company, for a three (3) year period commencing on the date of this Agreement.
Provided that this Agreement has not already been terminated, this Agreement
shall automatically renew for successive one-year terms, unless the Company
provides to the Employee written notice at least thirty (30) days prior to the
expiration of the initial or any renewal term that the Company is not renewing
this Agreement.
2. POSITION AND DUTIES.
The Employee, at the discretion of the Board of Directors, Chief Executive
Officer of the Company or his designee, in accordance with Company policy, shall
perform such duties and services as assigned. The reporting relationship of the
Employee may from time to time be determined by the Board of Directors, Chief
Executive Officer or his designee and shall not be construed as a loss of
responsibility or a change in control. Employee shall not have the authority to
enter into any contracts, agreements, undertakings or other arrangements on
behalf of the Company except to the extent that he is authorized to do so by the
Board of Directors, Chief Executive Officer of the Company or his designee.
Employee shall, at all times, devote his full time and attention to the
business and affairs of the Company, and shall use his best efforts to perform
faithfully and efficiently such responsibilities. The foregoing shall not be
construed as preventing the Employee from making passive investments in other
businesses or enterprises, provided, however, that:
(i) such investments would not require services on the part of the
Employee which would in any way impair the performance of his
duties under this Agreement;
(ii) such investments are not in violation of any provision of Section
5 or Section 6 of this Agreement; or
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 2
(iii) such investments are not in violation of Company policies in
effect from time to time.
Employee shall not be required by the Company to be relocated out of the
Greater Houston metropolitan area, except for routine visits to the Company's
locations and except as may be necessary or desirable in the ordinary course of
the Company's business.
3. COMPENSATION AND BENEFITS.
The Company shall provide the following compensation to Employee for his
services under this Agreement:
(a) Base Salary.
The Company shall pay Employee a base salary at an annual rate of $
___________
(the "Base Salary"). The Base Salary shall be payable in equal semi-
monthly installments on the fifteenth and final days of each month during the
term of this Agreement or the standard payroll cycle in effect during this
Agreement. The Base Salary may be reviewed and increased on an annual basis by
the Company's Board of Directors (or a committee thereof), as circumstances
dictate and in the sole discretion of the Company's Board of Directors (or a
committee thereof).
(b) Annual Bonus.
The Employee shall be eligible for a bonus as determined by the Company's
Board of Directors (or a committee thereof).
(c) Expense Reimbursement.
The Company shall reimburse Employee for all business-related expenses
incurred by Employee in conducting authorized business activities on behalf of
the Company; provided, however, that Employee must provide reasonably suitable
receipts and other records of the expenses to be reimbursed.
(d) Welfare Benefit Plans.
In accordance with, and subject to, the terms of the applicable plan
documents, Employee shall be eligible to participate in such welfare benefit
plans of the Company as may be in effect from time to time. The foregoing shall
not, in any respect, require the Company to implement, continue or amend any
plan.
(e) Vacation Holidays.
Employee shall be eligible for such annual paid vacation, sick leave and
holidays as the Company may, in its discretion, provide for the employees of the
Company under the Company's policies and programs, it being agreed that the
foregoing shall not in any respect require the Company to continue or put into
effect any plan, practice, policy or program. Employee shall have no right to
receive pay in lieu of vacation, sick leave or holidays, and upon the
termination of the Employee's employment pursuant to this Agreement, all
unearned vacation, sick leave or holidays shall be lost.
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 3
(f) The compensation paid pursuant to Sections 3(a) and 3(b) of this
Agreement as referred to herein shall be subject to any and all applicable
payroll and withholding deductions required by the law of any jurisdiction,
state or federal, with taxing authority with respect thereto.
4. TERMINATION.
(a) Termination Events.
This Agreement, and the employment relationship between Employee and the
Company, shall terminate upon the occurrence of any of the following:
(i) the death of Employee;
(ii) the disability, as defined and determined by the Company's Long
Term Disability carrier, of Employee for a continuous period of
at least six (6) months;
(iii) the Company providing Employee with written notice that it is
genuinely dissatisfied with his performance and is therefore
terminating his employment;
(iv) the expiration of the thirtieth (30th) day after the Company
provides Employee with written notice that it is terminating his
employment without cause, or for any reason that does not
constitute genuine dissatisfaction with his performance;
(v) the expiration of the thirtieth (30th) day after Employee
provides the Company with written notice that he is resigning
his employment.
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 4
(vi) the expiration of the stated term of this Agreement, as it may
from time to time be extended.
(vii) the Company may by action of the Board of Directors, Chief
Executive Officer or his designee terminate Employee's
employment under this Agreement for cause without any prior
notice, upon the occurrence of any of the following events:
(a) the conviction of Employee, whether or not appeal be taken,
of any misdemeanor or felony crime involving personal
dishonesty, moral turpitude or willfully violent conduct;
(b) any embezzlement or wrongful diversion of funds of the
Company or any affiliate of the Company;
(c) gross business misconduct by Employee;
(d) gross malfeasance by Employee in the conduct of his duties;
(e) breach of Section 5 or Section 6 of this Agreement; or
(f) any other breach of any of the terms of this Agreement and
such breach has not been corrected after the Company has
given Employee reasonable notice thereof and a reasonable
opportunity to correct any such breach.
(viii) the Employee providing the Company with written notice that the
Company has breached the last paragraph of Section 2 hereof.
(b) Effect of Termination and Severance Benefits.
If this Agreement is terminated under Section 4(a)(i), Section 4(a)(ii),
Section 4(a)(iii), Section 4(a)(iv) or Section 4(a)(viii), then Employee shall
be entitled to termination pay. Employee shall continue to receive his Base
Salary from the date of termination for a period equal to the greater of one (1)
year or the remaining term of this Agreement. In addition, the Employee will be
eligible to receive COBRA benefits. The Company shall make such severance
payments on a monthly basis, equal to the annual base salary then in effect
divided by twelve (12). The monthly severance payments shall be made by the end
of the first payroll cycle currently in effect.
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 5
If this Agreement is terminated under Section 4(a)(v), Section 4(a)(vi) or
Section 4(a)(vii), then Employee shall be entitled to no additional compensation
following the date of termination.
If Employee is fifty (50) or more years of age at the time his
employment terminates under Section 4(a)(i), Section 4(a)(ii), Section
4(a)(iii), Section 4(a)(iv) or Section 4(a)(viii), and Employee has worked for
the Company for five (5) or more years prior to his termination, then Employee
and eligible dependents at the time of terminating event shall be permitted, in
addition to any other benefits, to participate in the Company's health benefit
plan, at Employee's expense, until age 65. This provision is not applicable,
however, if the provisions of the Company's health benefit plan in effect during
coverage period up to age 65 terminates. In this event, the Company will make
available an equivalent individual policy of comparative coverage, payable by
Employee up to the Company's then current group rate. In the event of Medicare
eligibility, the Company's obligation for providing insurance coverage ceases.
(c) Survival of Provisions Following Termination.
Notwithstanding any termination of this Agreement, Sections 3, 4, 5, 6, 7,
8, 9 and 10 of this Agreement, and the rights and obligations created therein,
shall survive without limitation.
5. CONFIDENTIALITY.
(a) Confidential and Proprietary Information.
The Company's business profitability and good will are directly dependent
upon the confidential development, implementation and use of various marketing
and purchasing strategies, management and operating techniques, designs and
systems and other matters of a similar proprietary nature. Such activities
necessarily include, without limitation, reviewing financial data, presentation
or sales materials, materials regarding the Company's affiliated physician
groups, materials regarding the Company's products and lists or other
compilations of information concerning aspects of the Company's business and
existing and prospective clients, and the business, operations and affairs of
the Company's existing and prospective clients. All such information is
proprietary in nature, and the Company strives to keep such information
confidential (hereinafter collectively referred to as the Company's
"Confidential and Proprietary Information").
To enhance Employee's work performance and abilities, the Company has
agreed to and will provide Employee with access to, and the right to use its
Confidential and Proprietary Information. Employee acknowledges that such
information is, and must be treated as, confidential. Employee further
acknowledges that access to, and
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 6
knowledge of, the Company's Confidential and Proprietary Information will give
him a competitive advantage in any future endeavors.
(b) Confidentiality Maintained.
Employee is or will be employed in a position which is directly involved in
the development and conduct of the Company's business, and in such capacity
Employee will be provided access to and will gain knowledge of the Company's
Confidential and Proprietary Information. Employee shall, both during and after
his employment by the Company, preserve, protect and hold in strictest
confidence the Company's Confidential and Proprietary Information. Employee
will at all times, during and after the term of this Agreement, strictly observe
and comply with the terms of any confidentiality or similar agreements between
the Company and its clients.
(c) No Use of Information.
Employee shall not, either during or after his employment with the Company,
use for himself or disclose to or use for any other persons, directly or
indirectly, any of the Company's Confidential and Proprietary Information,
except in carrying out his duties and responsibilities as an employee of the
Company or as such disclosure or use is expressly authorized by the Company in
writing.
(d) Non-Removal of Records.
All Confidential and Proprietary Information and all files, reports,
computer discs, tapes, cards or other computer records, materials, designs,
records, documents, notes, memoranda, specifications, equipment and other items,
and any originals or copies thereof, relating to the business of the Company
which the Employee is either provided, prepares himself, uses, or otherwise
acquires during his employment with the Company, are and shall remain the sole
and exclusive property of the Company, and no such items (to the extent they
exist or are recorded in any tangible form) shall be removed from the Company's
premises without the prior consent of the Company, and all such items shall be
immediately returned to the Company upon termination of the Employee's
employment with the Company.
(e) Exceptions.
(i) The restrictions contained in this Section 5 shall not apply to
any information that is or becomes generally available to and
known by the public (other than as a result of unpermitted
disclosure directly or indirectly by Employee or his affiliates,
advisors or representatives).
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 7
(ii) It shall not be a breach or violation of Employee's covenants
under Section 5 if a disclosure is made pursuant to a court
order, a valid administrative subpoena or a lawful request for
information by an administrative or regulatory agency. Employee
shall give the Company prompt notice of any such court order,
subpoena or request for information.
6. NON-COMPETITION AND NON-SOLICITATION.
(a) Consideration Acknowledged.
Employee acknowledges that his employment with the Company has been, and
will continue to be, special, unique and of an extraordinary character and that,
in connection with such employment, he has acquired, acquires, and will continue
to acquire, special skills and training. Employee further acknowledges that the
covenants contained in this Section 6 are an essential part of his engagement by
the Company and that, but for his agreement to comply with such covenants, the
Company would not have entered into this Agreement. Finally, Employee
acknowledges that he has gained access to and use of the Company's Confidential
and Proprietary Information because of his covenants contained in this Section
6, and that he would be competitively advantaged against the Company because of
his knowledge of such Confidential and Proprietary Information.
(b) Employee Covenant.
Employee covenants, and agrees, that he shall not, during the Employment
Period and for a period of one (1) year after the termination of his employment
with the Company:
(i) directly or indirectly, either as principal, agent, independent
contractor, consultant, director, officer, employee, employer,
advisor, stockholder, partner or in any other individual or
representative capacity whatsoever, either for his own benefit or
for the benefit of any other person or entity either (a) hire,
attempt to hire, contact or solicit with respect to hiring any
employee of the Company or (b) induce or otherwise counsel,
advise or encourage any employee of the Company to leave the
employment of the Company; or
(ii) directly or indirectly, either as principal, agent, independent
contractor, consultant, director, officer, employee, employer,
advisor, stockholder, partner or in any other individual or
representative capacity whatsoever, either for his own
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 8
benefit or for the benefit of any other person or entity,
solicit, divert or take away any existing or prospective
customers, clients, affiliated physician groups or affiliated
physicians of the Company, who were such during his employment
with the Company; or
(iii) act or serve, directly or indirectly, as principal, agent,
independent contractor, consultant, director, officer,
employee, employer or advisor or in any other position or
capacity with or for, or acquire a direct or indirect ownership
interest in or otherwise conduct (whether as stockholder,
partner, investor, joint venturer or as owner of any other type
of interest) any business, undertaking or entity that conducts
a business similar to the Business (as hereinafter defined) or
provides or sells a service which is the same or substantially
similar to, or otherwise competitive with, the services
provided by the Business within the United States of America.
"Business" shall mean (i) management and administration of the
non-medical aspects of oncology and diagnostic radiology
practices, (ii) operation and management of a clinical research
or site management organization focusing on oncology or
diagnostic radiology, (iii) any Internet or technology based
applications focusing on oncology or diagnostic radiology or
(iv) any business or undertaking substantially similar to any
of the foregoing.
(c) Anti-Disparagement.
Employee shall not, either during or after the termination of Employee's
employment with the Company, make any public or private remarks or comments that
are intended, or could reasonably be construed as, disparaging of the Company,
its directors, officers, products, business or services.
(d) Limitation on Scope.
Should any portion of this Section 6 be deemed unenforceable because of the
scope, duration or territory encompassed by the undertakings of the Employee
hereunder, and only in such event, then the parties consent and agree to such
limitation on scope, duration or territory as may be finally adjudicated as
enforceable by a court of competent jurisdiction after the exhaustion of all
appeals.
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 9
7. EFFECT OF CHANGE OF CONTROL.
For purposes of this Agreement, a "Change of Control" is defined as (i) the
transfer of beneficial ownership of a majority of the outstanding shares of US
Oncology stock to any person or entity (including a "group" as such term is used
in Section 13(d)(3) of the Securities Exchange Act of 1934); (ii) the
stockholders of the Company prior to any merger, consolidation or other
transaction do not continue to own at least fifty percent (50%) of the surviving
entity following such merger, consolidation or other transaction; (iii) the
Company sells, leases or exchanges all or substantially all if its assets to any
other person or entity (other than a wholly owned subsidiary of the Company);
(iv) the Company is materially or completely liquidated; or (v) during any
consecutive two-year period, individuals who constituted the Board of Directors
of the Company (together with any new directors whose election by the Board of
Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of at least three quarters of the directors still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in office .
Notwithstanding anything contained herein to the contrary, a "Change of Control"
shall not be deemed to have occurred in the event of a tender offer, leveraged
buyout, leveraged recapitalization or similar transaction in which one or more
then executive officers of the Company participates directly or indirectly as an
investor or participant in such transaction. If a Change of Control occurs,
then the following provisions become applicable and prevail over any
inconsistent provisions found in this Agreement:
(a) The term of this Agreement shall automatically extend to a period of
three (3) years commencing on the date of the Change of Control, and may, upon
the expiration of that three (3) year term, be renewed for successive one (1)
year terms as provided for in Section 1 of this Agreement;
Employee may, at any time within six (6) months (consideration period) of
the date of the Change of Control, terminate his employment for any reason, or
no reason at all, by providing written notice of his resignation to the Company.
Upon submitting such a resignation within six (6) months of the date of the
Change of Control, Employee shall, for a period of twelve (12) months from the
date of termination, continue to receive his Base Salary and be eligible to
participate in the Company's COBRA benefit plan. The Company shall make such
severance payments on a monthly basis, equal to the annual base salary then in
effect divided by twelve (12). The monthly severance payments shall be make by
the end of the first payroll cycle currently in effect.
(b) If Employee does not submit such a resignation within six (6) months of
the date of the Change of Control, Employee termination rights, and eligibility
for any severance benefits, revert to only those provided for in Section 4 of
this Agreement.
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 10
8. REMEDIES AND DISPUTE RESOLUTION.
With respect to each and every breach or violation or threatened breach or
violation by Employee of Section 5 or Section 6 of this Agreement, the Company
may, in addition to all other remedies available to it, file a lawsuit or
otherwise apply to any court of competent Jurisdiction for entry of an immediate
order enjoining or restraining Employee from engaging in any such breach or
violation or threatened breach or violation by Employee.
With the exception of the Company's right to seek injunctive relief in a
judicial forum for any breach or violation or threatened breach or violation by
employee of Section 5 or Section 6 of this Agreement, all disputes between
Employee and the Company that arise out of concern, or are based, in whole or in
part, upon any provision of this Agreement shall be resolved through binding
arbitration conducted under the Employment Arbitration Procedures of the
American Arbitration Association. The parties shall bear their own costs in any
such arbitration proceeding; provided, however, that the Company shall reimburse
the Employee for the Employee's legal costs, including attorneys' fees, incurred
in such arbitration proceeding if the Employee substantially prevails in such
arbitration proceeding.
9. SEVERABILITY.
The provisions of this Agreement are severable, and any judicial
determination that one or more of such provisions, or any portion thereof, is
invalid or unenforceable shall not affect the validity or enforceability of any
other provisions, or portion thereof, but rather shall cause this Agreement to
first be construed in all respects as if such invalid or unenforceable
provisions, or portions thereof, were modified to terms which are valid and
enforceable and provide the greatest protection to the Company's business and
interests; provided, however, that if necessary to render this Agreement
enforceable, it shall be construed as if such invalid or unenforceable
provisions, or portions thereof, were omitted.
10. SUCCESSORS.
(A) Employee.
This Agreement is personal and without the prior written consent of the
Company shall not be assignable by the Employee otherwise than by will or the
laws of descent and distribution.
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 11
(B) Company.
This Agreement is personal and without the prior written consent of the
Employee shall not be assignable by the Company. This Agreement shall inure to
the benefit of and be binding upon the Company and its successors and assigns.
11. MISCELLANEOUS.
(a) Governing Law; Captions; Amendment.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Texas, without reference to principles of conflict of laws.
The captions of this Agreement are not part of the provisions hereof and shall
have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) Notices.
All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid addressed as follows:
If to the Employee:
---------------------
If to the Company:
c/o Chief Executive Officer
US Oncology, Inc.
16825 Northchase Drive, #1300
Houston, Texas 77060
or to such other address as any party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually delivered to the addressee or when delivered to the address
specified in accordance with the terms of this Agreement.
<PAGE>
US Oncology Confidential
Employee Agreement ------------
Page 12
(c) Entire Agreement.
This Agreement contains the entire understanding of the Company and the
Employee with respect to the subject matter hereof and supersedes and completely
replaces any earlier agreement, written or oral, with regard thereto.
IN WITNESS WHEREOF, the Employee has hereunto set his hand and the Company
has caused this Agreement to be executed in its name and on its behalf, all as
of the day and year first above written.
EMPLOYEE
-------------------------------
US Oncology, Inc.
By:----------------------------
R. Allen Pittman
Chief Administrative Officer &
Vice President of Corporate Services
US Oncology, Inc.
For: R. Dale Ross
Chief Executive Officer
US Oncology, Inc.
<PAGE>
EXHIBIT 10.14
US Oncology, Inc.
$100,000,000
8.42% Senior Secured Notes due November 2006
__________________
NOTE PURCHASE AGREEMENT
__________________
Dated November 24, 1999
<PAGE>
TABLE OF CONTENTS
1. AUTHORIZATION OF NOTES............................................. 1
2. SALE AND PURCHASE OF NOTES......................................... 1
3. CLOSING............................................................ 2
4. CONDITIONS TO CLOSING.............................................. 2
4.1 Representations and Warranties..................................... 2
4.2 Performance; No Default............................................ 2
4.3 Compliance Certificates............................................ 2
4.4 Opinions of Counsel................................................ 3
4.5 Purchase Permitted By Applicable Law, etc.......................... 3
4.6 Sale of Other Notes................................................ 3
4.7 Payment of Special Counsel Fees.................................... 3
4.8 Private Placement Number........................................... 4
4.9 Changes in Corporate Structure..................................... 4
4.10 Proceedings and Documents.......................................... 4
4.11 Execution and Delivery of Security Documents....................... 4
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................... 4
5.1 Organization; Power and Authority.................................. 4
5.2 Authorization, etc................................................. 5
5.3 Disclosure......................................................... 5
5.4 Organization and Ownership of Shares of Subsidiaries; Affiliates... 5
5.5 Financial Statements............................................... 6
5.6 Compliance with Laws, Other Instruments, etc....................... 7
5.7 Governmental Authorizations, etc................................... 7
5.8 Litigation; Statutes and Orders.................................... 7
5.9 Contracts.......................................................... 8
5.10 Licenses; Approvals................................................ 8
5.11 Labor Matters...................................................... 9
5.12 Taxes.............................................................. 9
5.13 Title to Property; Leases.......................................... 9
5.14 Intellectual Property.............................................. 10
<PAGE>
5.15 Compliance with ERISA.............................................. 10
5.16 Private Offering by the Company.................................... 11
5.17 Use of Proceeds; Margin Regulations................................ 11
5.18 Existing Indebtedness; Future Liens................................ 12
5.19 Foreign Assets Control Regulations, etc............................ 12
5.20 Status under Certain Statutes...................................... 12
5.21 Environmental Matters.............................................. 12
5.22 Solvency of the Company............................................ 13
5.23 Year 2000 Compliance............................................... 13
5.24 No Defaults........................................................ 13
6. REPRESENTATIONS OF THE PURCHASER................................... 14
6.1 Purchase for Investment............................................ 14
6.2 Source of Funds.................................................... 14
7. INFORMATION AS TO THE COMPANY...................................... 15
7.1 Financial and Business Information................................. 15
7.2 Officer's Certificate.............................................. 18
7.3 Inspection......................................................... 18
8. PREPAYMENT OF THE NOTES............................................ 19
8.1 Required Prepayments............................................... 19
8.2 Optional Prepayments with Make-Whole Amount........................ 19
8.3 Allocation of Partial Prepayments.................................. 19
8.4 Maturity; Surrender, etc........................................... 20
8.5 Purchase of Notes.................................................. 20
8.6 Make-Whole Amount.................................................. 20
8.7 Change in Control.................................................. 21
9. AFFIRMATIVE COVENANTS.............................................. 22
9.1 Compliance with Law................................................ 22
9.2 Insurance.......................................................... 23
9.3 Maintenance of Properties.......................................... 23
9.4 Payment of Taxes and Claims........................................ 23
9.5 Corporate Existence, etc........................................... 23
9.6 Additional Subsidiaries............................................ 24
<PAGE>
9.7 Notes to Rank Pari Passu........................................... 24
9.8 Notices Regarding Company Affiliated Physician Groups.............. 24
10. NEGATIVE COVENANTS................................................. 24
10.1 Transactions with Affiliates....................................... 24
10.2 Merger, Consolidation, etc......................................... 25
10.3 Sale of Assets..................................................... 25
10.4 Conduct of Business................................................ 26
10.5 Liens.............................................................. 26
10.6 Maintenance of Consolidated Net Worth.............................. 28
10.7 Limitation on Debt................................................. 28
10.8 Minimum Fixed Charge Coverage...................................... 28
10.9 Restricted Payments................................................ 28
10.10 Permitted Investments.............................................. 28
10.11 Priority Debt...................................................... 29
10.12 Subsidiary Debt.................................................... 30
10.13 Hospital Joint Venture............................................. 30
11. EVENTS OF DEFAULT.................................................. 31
12. REMEDIES ON DEFAULT, ETC........................................... 33
12. Acceleration....................................................... 33
12.2 Other Remedies..................................................... 34
12.3 Rescission......................................................... 34
12.4 No Waivers or Election of Remedies, Expenses, etc.................. 34
13. INTENTIONALLY OMITTED.............................................. 34
14. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES...................... 34
14.1 Registration of Notes.............................................. 34
14.2 Transfer and Exchange of Notes..................................... 35
14.3 Replacement of Notes............................................... 35
15. PAYMENTS ON NOTES.................................................. 36
15.1 Place of Payment................................................... 36
15.2 Home Office Payment................................................ 36
16. EXPENSES, ETC...................................................... 36
16.1 Transaction Expenses............................................... 36
<PAGE>
16.2 Survival........................................................... 37
17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT....... 37
18. AMENDMENT AND WAIVER............................................... 37
18.1 Requirements....................................................... 37
18.2 Solicitation of Holders of Notes................................... 38
18.3 Binding Effect, etc................................................ 38
18.4 Notes held by Company, etc......................................... 38
19. NOTICES............................................................ 39
20. REPRODUCTION OF DOCUMENTS.......................................... 39
21. CONFIDENTIAL INFORMATION........................................... 39
22. SUBSTITUTION OF PURCHASER.......................................... 40
23. MISCELLANEOUS...................................................... 41
23.1 Successors and Assigns............................................. 41
23.2 Payments Due on Non-Business Days.................................. 41
23.3 Severability....................................................... 41
23.4 Construction....................................................... 41
23.5 Counterparts....................................................... 41
23.6 Governing Law...................................................... 42
23.7 Waiver of Trial by Jury............................................ 42
<PAGE>
US ONCOLOGY, INC.
16825 Northchase Drive, Suite 1300
Houston, Texas 77060
8.42% Senior Secured Notes due November 2006
November 24, 1999
TO EACH OF THE PURCHASERS LISTED IN
THE ATTACHED SCHEDULE A
Ladies and Gentlemen:
US Oncology, Inc., a Delaware corporation (the "COMPANY"), agrees with you
as follows:
1. AUTHORIZATION OF NOTES.
The Company will authorize the issue and sale of $100,000,000 aggregate
principal amount of its 8.42% Senior Secured Notes due November 2006 (the
"NOTES"), such term to include any such notes issued in substitution therefor
pursuant to Section 14 of this Agreement or the Other Note Agreements (as
hereinafter defined). The Notes shall be substantially in the form set out in
Exhibit I, with such changes therefrom, if any, as may be approved by you and
the Company. In connection with the issuance and sale of the Notes, the Company
and certain of its subsidiaries will execute and deliver a Security Agreement, a
Guaranty Agreement and a Guarantors' Security Agreement, all as further
specified herein. Certain capitalized terms used in this Agreement are defined
in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise
specified, to a Schedule or an Exhibit attached to this Agreement.
2. SALE AND PURCHASE OF NOTES.
Subject to the terms and conditions of this Agreement, the Company will
issue and sell to you and you will purchase from the Company, at the Closing
provided for in Section 3, Notes in the principal amount specified opposite your
name in Schedule A at the purchase price of 100% of the principal amount
thereof. Contemporaneously with entering into this Agreement, the Company is
entering into separate Note Purchase Agreements identical with this Agreement
with each of the other purchasers named in Schedule A (the "OTHER PURCHASERS"),
providing for the sale at such Closing to each of the Other Purchasers of Notes
in the principal amount specified opposite its name in Schedule A (each other
Note Purchase Agreement is collectively referred to herein as the "OTHER NOTE
AGREEMENTS"). Your obligation hereunder and the obligations of the Other
Purchasers under the Other Note Agreements are several and not joint obligations
and you shall have no obligation under any Other Note Agreement and no liability
to any Person for the performance or non-performance by any Other Purchaser
thereunder.
<PAGE>
3. CLOSING
The sale and purchase of the Notes to be purchased by you and the Other
Purchasers shall occur at the offices of Locke Liddell & Sapp LLP, 2200 Ross
Avenue, Suite 2200, Dallas, Texas 75201, at 10:00 a.m., local time, at a closing
(the "CLOSING") on November 24, 1999 or on such other Business Day thereafter on
or prior to November 30, 1999 as may be agreed upon by the Company and you and
the Other Purchasers. At the Closing the Company will deliver to you the Notes
to be purchased by you in the form of a single Note (or such greater number of
Notes in denominations of at least $100,000 as you may request) dated the date
of the Closing and registered in your name (or in the name of your nominee),
against delivery by you by wire transfer of immediately available funds for the
account of the Company to account number 2000001210622 at First Union National
Bank, Charlotte, North Carolina, ABA No. 053000219 of the amount set forth
opposite your name on Schedule A. If at the Closing the Company shall fail to
tender such Notes to you as provided above in this Section 3, or any of the
conditions specified in Section 4 shall not have been fulfilled to your
satisfaction, you shall, at your election, be relieved of all further
obligations under this Agreement, without thereby waiving any rights you may
have by reason of such failure or such nonfulfillment.
4. CONDITIONS TO CLOSING.
Your obligation to purchase and pay for the Notes to be sold to you at the
Closing is subject to the fulfillment to your satisfaction, prior to or at the
Closing of the following conditions:
4.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company in this Agreement shall be
correct when made and at the time of the Closing.
4.2 PERFORMANCE; NO DEFAULT.
The Company shall have performed and complied with all agreements and
conditions contained in this Agreement required to be performed or complied with
by it prior to or at the Closing and after giving effect to the issue and sale
of the Notes (and the application of the proceeds thereof as contemplated by
Schedule 5.17), no Default or Event of Default shall have occurred and be
continuing. Neither the Company nor any Subsidiary shall have entered into any
transaction since June 30, 1999 that would have been prohibited by Section 10
hereof had such Section applied since such date.
4.3 COMPLIANCE CERTIFICATES.
(a) Officer's Certificate. The Company shall have delivered to you an
Officer's Certificate, dated the date of the Closing, certifying that the
conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled.
Page 2
<PAGE>
(b) Secretary's Certificate. The Company and each Subsidiary (other than the
Excluded Subsidiaries) shall have delivered to you a certificate certifying
as to the resolutions attached thereto and other corporate proceedings
relating to the authorization, execution and delivery of the Notes, the
Other Note Agreements and the Security Documents.
4.4 OPINIONS OF COUNSEL.
You shall have received opinions in form and substance satisfactory to you,
dated the date of the Closing (a) from Bass, Berry & Sims PLC, counsel for the
Company, covering the matters set forth in Exhibit 4.4(a) and covering such
other matters incident to the transactions contemplated hereby as you or your
counsel may reasonably request (and the Company hereby instructs its counsel to
deliver such opinion to you) and (b) from Locke Liddell & Sapp LLP, your special
counsel in connection with such transactions, substantially in the form set
forth in Exhibit 4.4(b) and covering such other matters incident to such
transactions as you may reasonably request.
4.5 PURCHASE PERMITTED BY APPLICABLE LAW, ETC.
On the date of the Closing your purchase of Notes shall (i) be permitted by
the laws and regulations of each jurisdiction to which you are subject, without
recourse to provisions (such as Section 1405(a)(8) of the New York Insurance
Law) permitting limited investments by insurance companies without restriction
as to the character of the particular investment, (ii) not violate any
applicable law or regulation (including, without limitation, Regulation G, T or
X of the Board of Governors of the Federal Reserve System) and (iii) not subject
you to any tax, penalty or liability under or pursuant to any applicable law or
regulation, which law or regulation was not in effect on the date hereof. If
requested by you, you shall have received an Officer's Certificate certifying as
to such matters of fact as you may reasonably specify to enable you to determine
whether such purchase is so permitted.
4.6 SALE OF OTHER NOTES.
Contemporaneously with the Closing, the Company shall sell to the Other
Purchasers and the Other Purchasers shall purchase the Notes to be purchased by
them at the Closing as specified in Schedule A.
4.7 PAYMENT OF SPECIAL COUNSEL FEES.
Without limiting the provisions of Section 16.1, the Company shall have paid
on or before the Closing the fees, charges and disbursements of your special
counsel referred to in Section 4.4(b) to the extent reflected in a statement of
such counsel rendered to the Company prior to the Closing.
Page 3
<PAGE>
4.8 PRIVATE PLACEMENT NUMBER.
A Private Placement number issued by Standard & Poor's CUSIP Service Bureau
(in cooperation with the Securities Valuation Office of the National Association
of Insurance Commissioners) shall have been obtained for the Notes.
4.9 CHANGES IN CORPORATE STRUCTURE.
Except as specified in Schedule 4.9, the Company shall not have changed its
jurisdiction of incorporation or been a party to any merger or consolidation and
shall not have succeeded to all or any substantial part of the liabilities of
any other entity, at any time following the date of the most recent financial
statements referred to in Schedule 5.5.
4.10 PROCEEDINGS AND DOCUMENTS.
All corporate and other proceedings in connection with the transactions
contemplated by this Agreement and all documents and instruments incident to
such transactions shall be satisfactory to you and your special counsel, and you
and your special counsel shall have received all such counterpart originals or
certified or other copies of such documents as you or they may reasonably
request.
4.11 EXECUTION AND DELIVERY OF SECURITY DOCUMENTS.
The Company and the Subsidiaries (other than the Excluded Subsidiaries and
AOR Synthetic Real Estate, Inc.) shall have executed and delivered to the
Collateral Agent, for your benefit and for the benefit of the Other Purchasers,
the Security Documents, to the extent a party thereto, and such agreements shall
be in full force and effect.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to you that:
5.1 ORGANIZATION; POWER AND AUTHORITY.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and is duly
qualified as a foreign corporation and is in good standing in each jurisdiction
in which such qualification is required by law, other than those jurisdictions
as to which the failure to be so qualified or in good standing could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. The Company has the corporate power and authority to own or
hold under lease the properties it purports to own or hold under lease, to
transact the business it transacts and proposes to transact, to execute and
deliver this Agreement, the Other Note Agreements, the Notes and the Security
Documents and to perform the provisions hereof and thereof.
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5.2 AUTHORIZATION, ETC.
This Agreement, the Other Note Agreements, the Notes and the Security
Documents have been duly authorized by all necessary corporate action on the
part of the Company and each Subsidiary (other than the Excluded Subsidiaries),
and this Agreement and the Other Note Agreements constitute, and upon execution
and delivery thereof each Note and Security Document will constitute, a legal,
valid and binding obligation of the Company or its Subsidiaries (other than
Excluded Subsidiaries), as the case may be, enforceable against the Company or
such Subsidiary, in accordance with its terms, except as such enforceability may
be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws affecting the enforcement of
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
5.3 DISCLOSURE.
The Company, through its agents, Banc One Capital Markets, Inc. and First
Union Capital Markets Corp., has delivered to you and each Other Purchaser a
copy of a Confidential Offering Memorandum, dated August 1999, which is deemed
to incorporate the most recent periodic and current reports filed under the
Exchange Act (the "MEMORANDUM"), relating to the transactions contemplated
hereby. The Memorandum fairly describes, in all material respects, the general
nature of the business and principal properties of the Company and its
Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Other
Note Agreements, the Memorandum, the documents, certificates or other writings
delivered to you by or on behalf of the Company in connection with the
transactions contemplated hereby and the financial statements listed in Schedule
5.5, taken as a whole, do not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were made. Except as
disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one
of the documents, certificates or other writings identified therein, or in the
financial statements listed in Schedule 5.5, since January 1, 1999, there has
been no change in the financial condition, operations, business, properties or
prospects of the Company, any Subsidiary or, to the knowledge of the Company,
any Company Affiliated Physician Group, except changes that individually or in
the aggregate could not reasonably be expected to have a Material Adverse
Effect. There is no fact known to the Company that it expects to have a
Material Adverse Effect that has not been set forth herein or in the Memorandum
or in the other documents, certificates and other writings, delivered to you by
or on behalf of the Company specifically for use in connection with the
transactions contemplated hereby.
5.4 ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES.
(a) Schedule 5.4 contains (except as noted therein) complete and correct
lists (i) of the Company's Subsidiaries, showing, as to each Subsidiary, the
correct name thereof, the jurisdiction of its organization, and the percentage
of shares of each class of its capital stock or
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similar equity interests outstanding owned by the Company and each other
Subsidiary, (ii) of the Company's Affiliates, other than Subsidiaries, and (iii)
of the Company's directors and senior officers.
(b) All of the outstanding shares of capital stock or similar equity
interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company
and its Subsidiaries have been validly issued, are fully paid and nonassessable
and are owned by the Company or another Subsidiary free and clear of any Lien
(except as otherwise disclosed in Schedule 5.4).
(c) Each Subsidiary identified in Schedule 5.4 is a corporation or other
legal entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization, and is duly qualified as a foreign
corporation or other legal entity and is in good standing in each jurisdiction
in which such qualification is required by law, other than those jurisdictions
as to which the failure to be so qualified or in good standing could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Each such Subsidiary has the corporate or other power and
authority to own or hold under lease the properties it purports to own or hold
under lease and to transact the business it transacts and proposes to transact.
(d) No Subsidiary is a party to, or otherwise subject to any legal
restriction or any agreement (other than this Agreement, the agreements listed
on Schedule 5.4 and customary limitations imposed by corporate law statutes)
restricting the ability of such Subsidiary to pay dividends out of profits or
make any other similar distributions of profits to the Company or any of its
Subsidiaries that owns outstanding shares of capital stock or similar equity
interests of such Subsidiary.
(e) Schedule 5.4 sets forth each physician group or entity with which
the Company or any of the Subsidiaries is affiliated, either through a
management or service agreement or other arrangement (the "Company Affiliated
Physician Groups"). To the knowledge of the Company, Schedule 5.4 also sets
forth the number of physicians employed by each such Company Affiliated
Physician Group as of July 31, 1999 (collectively, the "Company Affiliated
Physicians" and, together with the Company Affiliated Physician Groups, the
"Company Affiliated Providers"). The Company has made available to you and the
Other Purchasers true and correct copies of the material documents (i) by which
each Company Affiliated Physician Group became affiliated with the Company or
one of its Subsidiaries and (ii) that currently define and set forth the
material terms of affiliation between the Company or one of its Subsidiaries and
each Company Affiliated Physician Group.
5.5 FINANCIAL STATEMENTS.
The Company has delivered to you and to each Other Purchaser copies of the
financial statements of the Company and its Subsidiaries listed on Schedule 5.5.
All of said financial statements (including in each case the related schedules
and notes) fairly present in all material respects the consolidated financial
position of the Company and its Subsidiaries as of the
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respective dates specified in such Schedule and the consolidated results of
their operations and cash flows for the respective periods so specified and have
been prepared in accordance with GAAP consistently applied throughout the
periods involved except as set forth in the notes thereto (subject, in the case
of any interim financial statements, to normal year-end adjustments).
5.6 COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.
The execution, delivery and performance by the Company and its Subsidiaries
of this Agreement, the Other Note Agreements, the Notes and the Security
Documents (to the extent a party thereto) will not (i) contravene, result in any
breach of, or constitute a default under, or result in the creation of any Lien
(except for the Liens granted pursuant to the Security Documents) in respect of
any property of the Company or any Subsidiary under, any indenture, mortgage,
deed of trust, loan, purchase or credit agreement, lease, corporate charter or
by-laws, or any other agreement or instrument to which the Company or any
Subsidiary is bound or by which the Company or any Subsidiary or any of their
respective properties may be bound or affected, (ii) conflict with or result in
a breach of any of the terms, conditions or provisions of any order, judgment,
decree, or ruling of any court, arbitrator or Governmental Authority applicable
to the Company, any Subsidiary or, to the knowledge of the Company, any Company
Affiliated Physician Group or (iii) violate any provision of any statute or
other rule or regulation of any Governmental Authority applicable to the
Company, any Subsidiary or, to the knowledge of the Company, any Company
Affiliated Physician Group.
5.7 GOVERNMENTAL AUTHORIZATIONS, ETC.
No consent, approval or authorization of, or registration, filing or
declaration with, any Governmental Authority is required on the part of the
Company or any Subsidiary in connection with the execution, delivery or
performance by the Company and its Subsidiaries of this Agreement, the Other
Note Agreements, the Notes or the Security Documents (other than the filing of
UCC-1 financing statements, as contemplated by the Security Documents).
5.8 LITIGATION; STATUTES AND ORDERS.
Except as disclosed on Schedule 5.8,
(a) There are no actions, suits, proceedings or governmental investigations
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any Subsidiary or any property of the Company or any Subsidiary in
any court or before any arbitrator of any kind or before or by any Governmental
Authority that, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect nor are there any facts, conditions or
incidents that are reasonably likely to result in any such action, suit,
proceeding or investigation. In addition, there is no action, suit, proceeding,
claim, investigation or hearing pending, or to the knowledge of the Company,
threatened against or affecting any Company Affiliated Physician Group or
Company Affiliated Provider, or any of their respective assets that has or that
individually or in the aggregate could be reasonably expected to have a Material
Adverse Effect. Neither the Company, nor any Subsidiary nor, to the knowledge
of the
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Company, any Company Affiliated Physician Group is subject to or in default with
respect to any writ, order, judgment, injunction or decree that has or that,
individually or in the aggregate, would have a Material Adverse Effect.
(b) Except as would not be reasonably expected to have a Material Adverse
Effect, neither the Company nor any Subsidiary nor, to the knowledge of the
Company, any Company Affiliated Physician Group, has engaged in any prohibited
activities under or is in violation or has received any notices, written or
oral, of violations of, federal, state or local laws, regulations or ordinances
relating to its business and operations, including, without limitation, the
Occupational Safety and Health Act, the Americans with Disabilities Act, the
applicable Medicare and Medicaid statutes and regulations and ordinances
promulgated thereunder, including, without limitation, the Anti-Fraud and Abuse
Amendments to the Medicare and Medicaid statutes, any applicable state or
federal physician self-referral laws, and any state prohibited corporate
practice of medicine or fee-splitting laws or regulations, and no written notice
of any pending inspection or inquiry of a violation of any such law, regulation
or ordinance has been received by the Company or any Subsidiary or, to the
knowledge of the Company, any Company Affiliated Physician Group.
5.9 CONTRACTS.
Except as disclosed on Schedule 5.9, all contracts, leases, agreements and
arrangements, material to the operation and business of the Company, to which
the Company or any of the Subsidiaries or, to the knowledge of the Company, any
Company Affiliated Physician Group is a party, including, but not limited to,
management services agreements with Company Affiliated Physician Groups and
covenants not to compete with Company Affiliated Providers, are legally valid,
binding and enforceable in accordance with their terms and are in full force and
effect. The Company, each Subsidiary and, to the Company's knowledge, each
Company Affiliated Physician Group, has complied and, to the knowledge of the
Company, all other parties to such contracts, leases, agreements and
arrangements have complied with the provisions of such contracts, leases,
agreements and arrangements, and to the knowledge of the Company, no party is in
default thereunder, and no event has occurred which, but for the passage of time
or the giving of notice or both, would constitute a default thereunder, except,
in each case, where the invalidity of the lease, contract, agreement or
arrangement or the default or breach thereunder or thereof, as applicable, would
not, individually or in the aggregate, have a Material Adverse Effect.
5.10 LICENSES; APPROVALS.
The Company and each Subsidiary and, to the knowledge of the Company, each
Company Affiliated Physician Group, hold all licenses, permits, certificates of
need and other regulatory approvals required or necessary to be applied for or
obtained in connection with their businesses as presently conducted or as
proposed to be conducted, except where the failure to obtain or hold such
license, permit, certificate of need or regulatory approval would not have a
Material Adverse Effect. All such licenses, permits, certificates of need and
other regulatory
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approvals related to the business, operations and facilities of the Company and
each Subsidiary and, to the knowledge of the Company, each Company Affiliated
Physician Group, are in full force and effect, except where any failure of such
license, certificate of need or regulatory approval to be in full force and
effect would not have a Material Adverse Effect. Any and all past litigation
concerning such licenses, certificates of need and regulatory approvals,
including all claims and causes of action raised therein, has been finally
adjudicated. No such license, certificate of need or regulatory approval has
been revoked, conditioned (except as may be customary), limited or restricted
(except as may be customary), and no action (equitable, legal or
administrative), arbitration or other process is pending or, to the knowledge of
the Company, threatened which in any way challenges the validity of or seeks to
revoke, condition or restrict any such license, permit, certificate of need, or
regulatory approval. To the knowledge of the Company, the Company Affiliated
Physician Groups, where applicable, have current valid provider contracts with
both Medicare and Medicaid. The Company is not aware of any reasons why the
Company, the Subsidiaries or (without independent investigation) any Company
Affiliated Physician Group would be prevented from participating in the Medicare
or Medicaid Programs.
5.11 LABOR MATTERS.
Neither the Company nor any of its Subsidiaries nor, to the knowledge of
the Company, any Company Affiliated Physician Group is a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by the Company or any such Subsidiary or any Company Affiliated
Physician Group, and, to the knowledge of the Company, there are no activities
or proceedings of any labor union or any such employees to organize any such
employees.
5.12 TAXES.
The Company and its Subsidiaries have filed all tax returns that are
required to have been filed in any jurisdiction, and have paid all taxes shown
to be due and payable on such returns and all other taxes and assessments levied
upon them or their properties, assets, income or franchises, to the extent such
taxes and assessments have become due and payable and before they have become
delinquent, except for any taxes and assessments (i) the amount of which is not
individually or in the aggregate Material or (ii) the amount, applicability or
validity of which is currently being contested in good faith by appropriate
proceedings and with respect to which the Company or a Subsidiary, as the case
may be, has established adequate reserves in accordance with GAAP. The Company
knows of no basis for any other tax or assessment that could reasonably be
expected to have a Material Adverse Effect. The charges, accruals and reserves
on the books of the Company and its Subsidiaries in respect of federal, state or
other taxes for all fiscal periods are adequate. The federal income tax
liabilities of the Company and its Subsidiaries have been determined by the
Internal Revenue Service and paid for all fiscal years up to and including the
fiscal year ended December 31, 1998.
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5.13 TITLE TO PROPERTY; LEASES.
The Company and its Subsidiaries have good and marketable title to their
respective properties that individually or in the aggregate are Material,
including all such properties reflected in the most recent audited balance sheet
referred to in Section 5.5 or purported to have been acquired by the Company or
any Subsidiary after said date (except as sold or otherwise disposed of in the
ordinary course of business), in each case free and clear of Liens prohibited by
this Agreement. All leases that individually or in the aggregate are Material
are valid and subsisting and are in full force and effect in all material
respects.
5.14 INTELLECTUAL PROPERTY.
Except as disclosed in Schedule 5.14,
(a) The Company and its Subsidiaries own or possess all franchises,
authorizations, patents, copyrights, service marks, trademarks and trade names,
or rights thereto, that individually or in the aggregate are Material, without
known conflict with the rights of others;
(b) To the knowledge of the Company, no product of the Company infringes in
any material respect any license, permit, franchise, authorization, patent,
copyright, service mark, trademark, trade name or other right owned by any other
Person; and
(c) To the knowledge of the Company, there is no Material violation by any
Person of any right of the Company or any of its Subsidiaries with respect to
any patent, copyright, service mark, trademark, trade name or other right owned
or used by the Company or any of its Subsidiaries.
5.15 COMPLIANCE WITH ERISA.
(a) The Company and each ERISA Affiliate have operated and administered
each Plan in compliance with all applicable laws except for such instances of
noncompliance as have not resulted in and could not reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any ERISA
Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the
penalty or excise tax provisions of the Code relating to employee benefit plans
(as defined in Section 3 of ERISA), and no event, transaction or condition has
occurred or exists that could reasonably be expected to result in the incurrence
of any such liability by the Company or any ERISA Affiliate, or in the
imposition of any Lien on any of the rights, properties or assets of the Company
or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to
such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the
Code, other than such liabilities or Liens as would not be individually or in
the aggregate Material.
(b) The present value of the aggregate benefit liabilities under each of
the Plans (other than Multiemployer Plans), determined as of the end of such
Plan's most recently ended plan year on the basis of the actuarial assumptions
specified for funding purposes in such Plan's most recent actuarial valuation
report, did not exceed the aggregate current value of the assets of such Plan
allocable to such benefit liabilities. The term "BENEFIT LIABILITIES" has the
meaning
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specified in section 4001 of ERISA and the terms "CURRENT VALUE" and "PRESENT
VALUE" have the meaning specified in section 3 of ERISA.
(c) The Company and its ERISA Affiliates have not incurred withdrawal
liabilities (and are not subject to contingent withdrawal liabilities) under
section 4201 or 4204 of ERISA in respect of Multiemployer Plans that
individually or in the aggregate are Material.
(d) The expected postretirement benefit obligation (determined as of the
last day of the Company's most recently ended fiscal year in accordance with
Financial Accounting Standards Board Statement No. 106, without regard to
liabilities attributable to continuation coverage mandated by section 4980B of
the Code) of the Company and its Subsidiaries is not Material.
(e) The execution and delivery of this Agreement, the Other Note
Agreements, the Security Documents and the issuance and sale of the Notes
hereunder will not involve any transaction that is subject to the prohibitions
of section 406 of ERISA or in connection with which a tax could be imposed
pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the
Company in the first sentence of this Section 5.15(e) is made in reliance upon
and subject to (i) the accuracy of your representation in Section 6.2 as to the
sources of the funds used to pay the purchase price of the Notes to be purchased
by you and (ii) the assumption, made solely for the purpose of making such
representation, that Department of Labor Interpretive Bulletin 75-2 with respect
to prohibited transactions remains valid in the circumstances of the
transactions contemplated herein.
5.16 PRIVATE OFFERING BY THE COMPANY.
Neither the Company nor anyone acting on its behalf has offered the Notes or
any similar securities for sale to, or solicited any offer to buy any of the
same from, or otherwise approached or negotiated in respect thereof with, any
person other than you, the Other Purchasers and not more than 50 other
Institutional Investors, each of which has been offered the Notes as a private
sale for investment. Neither the Company nor anyone acting on its behalf has
taken, or will take, any action that would subject the issuance or sale of the
Notes to the registration requirements of Section 5 of the Securities Act.
5.17 USE OF PROCEEDS; MARGIN REGULATIONS.
The Company will apply the proceeds of the sale of the Notes as set forth in
Schedule 5.17. No part of the proceeds from the sale of the Notes hereunder
will be used, directly or indirectly, for the purpose of buying or carrying any
margin stock within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System (12 CFR 207), or for the purpose of buying or carrying or
trading in any securities under such circumstances as to involve the Company in
a violation of Regulation X of said Board (12 CFR 224) or to involve any broker
or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin
stock does not constitute more than 10% of the value of the consolidated assets
of the Company and its Subsidiaries and the Company does not have any present
intention that margin stock will
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constitute more than 10% of the value of such assets. As used in this Section,
the terms "MARGIN STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the
meanings assigned to them in said Regulation U.
5.18 EXISTING INDEBTEDNESS; FUTURE LIENS.
(a) Except as described therein, Schedule 5.18 sets forth a complete and
correct list of all outstanding Indebtedness of the Company and its Subsidiaries
as of August 31, 1999, since which date there has been no Material change in the
amounts, interest rates, sinking funds, installment payments or maturities of
the Indebtedness of the Company or its Subsidiaries. Neither the Company nor
any Subsidiary is in default and no waiver of default is currently in effect, in
the payment of any principal or interest on any Indebtedness of the Company or
such Subsidiary and no event or condition exists with respect to any
Indebtedness of the Company or any Subsidiary that would permit (or that with
notice or the lapse of time, or both, would permit) one or more Persons to cause
such Indebtedness to become due and payable before its stated maturity or before
its regularly scheduled dates of payment.
(b) Except as disclosed in Schedule 5.18, neither the Company nor any
Subsidiary has agreed or consented to cause or permit in the future (upon the
happening of a contingency or otherwise) any of its property, whether now owned
or hereafter acquired, to be subject to a Lien not permitted by Section 10.5.
5.19 FOREIGN ASSETS CONTROL REGULATIONS, ETC.
Neither the sale of the Notes by the Company hereunder nor its use of the
proceeds thereof will violate the Trading with the Enemy Act, as amended, or any
of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto.
5.20 STATUS UNDER CERTAIN STATUTES.
Neither the Company nor any Subsidiary is subject to regulation under the
Investment Company Act of 1940, as amended, the Public Utility Holding Company
Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal
Power Act, as amended.
5.21 ENVIRONMENTAL MATTERS.
Neither the Company nor any Subsidiary has knowledge of any claim or has
received any notice of any claim, and no proceeding has been instituted raising
any claim against the Company or any of its Subsidiaries or any of their
respective real properties now or formerly owned, leased or operated by any of
them or other assets, alleging any contamination of the environment or violation
of any Environmental Laws, except, in each case, such as could not reasonably be
expected to result in a Material Adverse Effect. Except as otherwise disclosed
to you in writing,
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(a) neither the Company nor any Subsidiary has knowledge of any facts which
would give rise to any claim, public or private, of violation of Environmental
Laws or damage to the environment emanating from, occurring on or in any way
related to real properties now or formerly owned, leased or operated by any of
the Company or any Subsidiary or to other assets or their use, except, in each
case, such as could not reasonably be expected to result in a Material Adverse
Effect;
(b) neither the Company nor any of Subsidiary has stored any Hazardous
Materials on real properties now or formerly owned, leased or operated by any of
them in a manner that is in violation of Environmental Laws and has not disposed
of any Hazardous Materials in a manner contrary to any Environmental Laws in
each case in any manner that could reasonably be expected to result in a
Material Adverse Effect; and
(c) all buildings on all real properties now owned, leased or operated by
the Company or any of its Subsidiaries are in compliance with applicable
Environmental Laws, except where failure to comply could not reasonably be
expected to result in a Material Adverse Effect.
5.22 SOLVENCY OF THE COMPANY.
The Company and each Significant Subsidiary is solvent, and the Company and
all of its Subsidiaries collectively are solvent, in each case prior to and
after giving effect to the issuance and sale of the Notes, and after taking into
account any Indebtedness owing to the Company or any of its Subsidiaries.
Neither the Company nor any of its Subsidiaries, upon giving effect to the
transactions contemplated hereby, will be engaged in any business or
transaction, or about to engage in any business or transaction, for which it has
an unreasonably small capital, and the Company has no intent (a) to hinder,
delay or defraud any entity to which it is, or will become, on or after the
Closing, indebted, or (b) to incur debts that would be beyond its ability to pay
as they mature. For purposes of this Section 5.22, a "Significant Subsidiary"
shall mean any Subsidiary that accounts for 5% or more of the Company's revenues
on a consolidated basis.
5.23 YEAR 2000 COMPLIANCE.
All computer hardware, computer software and other systems or equipment that
rely on, utilize or perform data or time processing that are owned or leased by
the Company or any of its Subsidiaries Material to the business of the Company
or any of its Subsidiaries will at all times function accordingly and in
accordance with its specifications in processing time and date data prior to,
during and after the calendar year 2000 and such hardware, software and systems
will not cease to function, function abnormally or provide invalid or incorrect
results as a result of processing time and date data, with values before, during
and after calendar year 2000 including time and date data which represent or
reference different centuries or more than one century ("Y2K Compliance") except
where the failure to do so could not reasonably be expected to have a Material
Adverse Effect. The Company has made inquiries of each of its and its
Subsidiaries, Material vendors and other parties with which it has Material
dealings regarding their Y2K
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Compliance and the Company does not expect that any such noncompliance would
have a Material Adverse Effect.
5.24 NO DEFAULTS.
At the time of the Closing, there exists no Default or Event of Default.
6. REPRESENTATIONS OF THE PURCHASER.
6.1 Purchase for Investment.
You represent that you are purchasing the Notes for your own account or for
one or more separate accounts maintained by you or for the account of one or
more pension or trust funds and not with a view to the distribution thereof,
provided that the disposition of your or their property shall at all times be
within your or their control, subject to the provisions of Section 14.2 hereof.
You understand that the Notes have not been registered under the Securities Act
and may be resold only if registered pursuant to the provisions of the
Securities Act or if an exemption from registration is available, except under
circumstances where neither such registration nor such exemption is required by
law, and that the Company is not required to register the Notes.
6.2 SOURCE OF FUNDS.
You represent that at least one of the following statements is an accurate
representation as to each source of funds (a "SOURCE") to be used by you to pay
the purchase price of the Notes to be purchased by you hereunder:
(a) if you are an insurance company, the Source is an "insurance company
general account," as such term is defined in Department of Labor Prohibited
Transaction Class Exemption 95-60 (issued July 12, 1995) ("PTCE 95-60"), and
there is no employee benefit plan, treating as a single plan all plans
maintained by the same employer (and affiliates thereof as defined in section
V(a)(1) of PTCE 95-60) or by the same employee organization, with respect to
which the amount of the general account reserves and liabilities for all
contracts held by or on behalf of such plan, exceeds 10% of the total reserves
and liabilities of such general account as determined under PTCE 95-60
(exclusive of separate account liabilities) plus surplus, as set forth in the
National Association of Insurance Commissioners Annual Statement filed with your
state of domicile; or
(b) the Source is either (i) an insurance company pooled separate account,
within the meaning of Prohibited Transaction Exemption ("PTE") 90-1 (issued
January 29, 1990), or (ii) a bank collective investment fund, within the meaning
of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the
Company in writing pursuant to this paragraph (b), no employee benefit plan or
group of plans maintained by the same employer or employee organization
beneficially owns more than 10% of all assets allocated to such pooled separate
account or collective investment fund; or
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(c) the Source constitutes assets of an "investment fund" (within the
meaning of Part V of the QPAM Exemption) managed by a "qualified professional
asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption),
no employee benefit plan's assets that are included in such investment fund,
when combined with the assets of all other employee benefit plans established or
maintained by the same employer or by an affiliate (within the meaning of
Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee
organization and managed by such QPAM, exceed 20% of the total client assets
managed by such QPAM, the conditions of Part 1(c) and (g) of the QPAM Exemption
are satisfied, neither the QPAM nor a person controlling or controlled by the
QPAM (applying the definition of "control" in Section V(e) of the QPAM
Exemption) owns a 5 % or more interest in the Company and (i) the identity of
such QPAM and (ii) the names of all employee benefit plans whose assets are
included in such investment fund have been disclosed to the Company in writing
pursuant to this paragraph (c); or
(d) the Source is a governmental plan; or
(e) the Source is one or more employee benefit plans, or a separate account
or trust fund comprised of one or more employee benefit plans, each of which has
been identified to the Company in writing pursuant to this paragraph (e); or
(f) the Source does not include assets of any employee benefit plan, other
than a plan exempt from the coverage of ERISA.
As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN," "GOVERNMENTAL
PLAN," "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
7. INFORMATION AS TO THE COMPANY.
7.1 Financial and Business Information.
The Company shall deliver to each holder of Notes that is an Institutional
Investor:
(a) Quarterly Statements -- within 60 days after the end of each quarterly
fiscal period in each fiscal year of the Company (other than the last quarterly
fiscal period of each such fiscal year), duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of such quarter, and
(ii) consolidated statements of income, changes in shareholders'
equity and cash flows of the Company and its Subsidiaries, for such
quarter and (in the case of the second and third quarters) for the
portion of the fiscal year ending with such quarter,
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setting forth in each case in comparative form the figures for the corresponding
periods in the previous fiscal year, all in reasonable detail, prepared in
accordance with GAAP applicable to quarterly financial statements generally, and
certified by a Senior Financial Officer as fairly presenting, in all material
respects, the financial position of the companies being reported on and their
results of operations and cash flows, subject to changes resulting from year-end
adjustments, provided that delivery within the time period specified above of
copies of the Company's Quarterly Report on Form 10-Q prepared in compliance
with the requirements therefor and filed with the Securities and Exchange
Commission shall be deemed to satisfy the requirements of this Section 7.1(a);
(b) Annual Statements -- within 120 days after the end of each fiscal year
of the Company, duplicate copies of,
(i) a consolidated balance sheet of the Company and its
Subsidiaries, as at the end of such year, and
(ii) consolidated statements of income, changes in shareholders'
equity and cash flows of the Company and its Subsidiaries, for such
year,
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail, prepared in accordance with GAAP, and
accompanied
(A) by an opinion thereon of independent certified public
accountants of recognized national standing, which opinion shall state
that such financial statements present fairly, in all material
respects, the financial position of the companies being reported upon
and their results of operations and cash flows and have been prepared
in conformity with GAAP, and that the examination of such accountants
in connection with such financial statements has been made in
accordance with generally accepted auditing standards, and that such
audit provides a reasonable basis for such opinion in the
circumstances, and
(B) a certificate of such accountants stating that they have
reviewed this Agreement and stating further whether, in making their
audit, they have become aware of any condition or event that then
constitutes a Default or an Event of Default and, if they are aware
that any such condition or event then exists, specifying the nature and
period of the existence thereof (it being understood that such
accountants shall not be liable, directly or indirectly, for any
failure to obtain knowledge of any Default or Event of Default unless
such accountants should have obtained knowledge thereof in making an
audit in accordance with generally accepted auditing standards or did
not make such an audit), such certificate to be in the form of Exhibit
VI hereto,
provided that the delivery within the time period specified above of the
Company's Annual Report on Form 10-K for such fiscal year (together with the
Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3
under the Exchange Act) prepared in
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accordance with the requirements therefor and filed with the Securities and
Exchange Commission, together with the accountant's certificate described in
clause (B) above, shall be deemed to satisfy the requirements of this Section
7.1(b);
(c) SEC and Other Reports -- promptly upon their becoming available, one
copy of (i) each financial statement, report, notice or proxy statement sent by
the Company or any Subsidiary to its public securities holders generally, and
(ii) each regular or periodic report, each registration statement (without
exhibits except as expressly requested by such holder), and each prospectus and
all amendments thereto filed by the Company or any Subsidiary with the
Securities and Exchange Commission and of all press releases and other
statements made available generally by the Company or any Subsidiary to the
public concerning developments that are Material;
(d) Notice of Default or Event of Default -- promptly, and in any event
within five days after a Responsible Officer becoming aware of the existence of
any Default or Event of Default or that any Person has given any notice or taken
any action with respect to a claimed default hereunder or that any Person has
given any notice or taken any action with respect to a claimed default of the
type referred to in Section 11(f), a written notice specifying the nature and
period of existence thereof and what action the Company is taking or proposes to
take with respect thereto;
(e) ERISA Matters -- promptly, and in any event within five days after a
Responsible Officer becoming aware of any of the following, a written notice
setting forth the nature thereof and the action, if any, that the Company or an
ERISA Affiliate proposes to take with respect thereto:
(i) with respect to any Plan, any reportable event, as defined in
section 4043(b) of ERISA and the regulations thereunder, for which
notice thereof has not been waived pursuant to such regulations as in
effect on the date hereof; or
(ii) the taking by the PBGC of steps to institute, or the
threatening by the PBGC of the institution of, proceedings under
section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by the Company or any
ERISA Affiliate of a notice from a Multiemployer Plan that such action
has been taken by the PBGC with respect to such Multiemployer Plan; or
(iii) any event, transaction or condition that could result in
the incurrence of any liability by the Company or any ERISA Affiliate
pursuant to Title I or IV of ERISA or the penalty or excise tax
provisions of the Code relating to employee benefit plans, or in the
imposition of any Lien on any of the rights, properties or assets of
the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA
or such penalty or excise tax provisions, if such liability or Lien,
taken together with any other such liabilities or Liens then existing,
could reasonably be expected to have a Material Adverse Effect;
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(f) Notices from Governmental Authority -- promptly, and in any event
within 30 days of receipt thereof, copies of any notice to the Company or any
Subsidiary from any federal or state Governmental Authority relating to any
order, ruling, statute or other law or regulation that could reasonably be
expected to have a Material Adverse Effect; and
(g) Requested Information -- with reasonable promptness, such other data
and information relating to the business, operations, affairs, financial
condition, assets or properties of the Company or any of its Subsidiaries or
relating to the ability of the Company to perform its obligations hereunder and
under the Notes as from time to time may be reasonably requested by any such
holder of Notes.
7.2 OFFICER'S CERTIFICATE.
Each set of financial statements delivered to a holder of Notes pursuant to
Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of
a Senior Financial Officer setting forth:
(a) Covenant Compliance -- the information (including detailed
calculations) required in order to establish whether the Company was in
compliance with the requirements of Section 10.6 through Section 10.12 hereof,
inclusive, during the quarterly or annual period covered by the statements then
being furnished (including with respect to each such Section, where applicable,
the calculations of the maximum or minimum amount, ratio or percentage, as the
case may be, permissible under the terms of such Sections, and the calculation
of the amount, ratio or percentage then in existence); and
(b) Event of Default -- a statement that such officer has reviewed the
relevant terms hereof and has made, or caused to be made, under his or her
supervision, a review of the transactions and conditions of the Company and its
Subsidiaries from the beginning of the quarterly or annual period covered by the
statements then being furnished to the date of the certificate and that such
review shall not have disclosed the existence during such period of any
condition or event that constitutes a Default or an Event of Default or, if any
such condition or event existed or exists (including, without limitation, any
such event or condition resulting from the failure of the Company or any
Subsidiary to comply with any Environmental Law), specifying the nature and
period of existence thereof and what action the Company shall have taken or
proposes to take with respect thereto.
7.3 INSPECTION.
The Company shall permit the representatives of each holder of Notes that is
an Institutional Investor:
(a) No Default -- if no Default or Event of Default then exists, at the
expense of such holder and upon reasonable prior notice to the Company, to
annually visit the principal executive office of the Company, to discuss the
affairs, finances and accounts of the Company and its Subsidiaries with the
Company's officers, and (with the consent of the Company, which consent will not
be unreasonably withheld) its independent public accountants, and (with the
consent of
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the Company, which consent will not be unreasonably withheld) to visit the other
offices and properties of the Company and each Subsidiary, all at such
reasonable times and as often as may be reasonably requested in writing; and
(b) Default -- if a Default or Event of Default then exists, at the expense
of the Company, to visit and inspect any of the offices or properties of the
Company or any Subsidiary, to examine all their respective books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss their respective affairs, finances and accounts with their respective
officers and independent public accountants (and by this provision the Company
authorizes said accountants to discuss the affairs, finances and accounts of the
Company and its Subsidiaries), all at such times and as often as may be
requested.
8. PREPAYMENT OF THE NOTES.
8.1 REQUIRED PREPAYMENTS.
On November 24, 2002 and on each November 24 thereafter to and including
November 24, 2005 the Company will prepay $20,000,000 principal amount (or such
lesser principal amount as shall then be outstanding) of the Notes at par and
without payment of the Make-Whole Amount or any premium, provided that upon any
partial prepayment of the Notes pursuant to Section 8.2 or purchase of the Notes
permitted by Section 8.5 or 8.7, the principal amount of each required
prepayment of the Notes becoming due under this Section 8.1 on and after the
date of such prepayment or purchase shall be reduced in the same proportion as
the aggregate unpaid principal amount of the Notes is reduced as a result of
such prepayment or purchase. The entire outstanding principal amount of the
Notes shall be due and payable on November 24, 2006.
8.2 OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT.
The Company may, at its option, upon notice as provided below, prepay at any
time all, or from time to time any part of, the Notes, in an amount not less
than 5% of the aggregate principal amount of the Notes then outstanding in the
case of a partial prepayment, at 100% of the principal amount so prepaid plus
the Make-Whole Amount determined for the prepayment date with respect to such
principal amount plus accrued interest on the Notes to be prepaid through the
date of payment. The Company will give each holder of Notes written notice of
each optional prepayment under this Section 8.2 not less than 30 days and not
more than 60 days prior to the date fixed for such prepayment. Each such notice
shall specify such date, the aggregate principal amount of the Notes to be
prepaid on such date, the principal amount of each Note held by such holder to
be prepaid (determined in accordance with Section 8.3), and the interest to be
paid on the prepayment date with respect to such principal amount being prepaid,
and shall be accompanied by a certificate of a Senior Financial Officer as to
the estimated Make-Whole Amount due in connection with such prepayment
(calculated as if the date of such notice was the date of the prepayment),
setting forth the details of such computation. Two Business Days prior to such
prepayment, the Company shall deliver to each holder of Notes a certificate of a
Senior
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Financial Officer specifying the calculation of such Make-Whole Amount as of the
specified prepayment date.
8.3 ALLOCATION OF PARTIAL PREPAYMENTS.
In the case of each partial prepayment of the Notes pursuant to Section 8.2,
the principal amount of the Notes to be prepaid shall be allocated among all of
the Notes at the time outstanding in proportion, as nearly as practicable, to
the respective unpaid principal amounts thereof not theretofore called for
prepayment.
8.4 MATURITY; SURRENDER, ETC.
In the case of each prepayment of Notes pursuant to this Section 8, the
principal amount of each Note to the extent the same is to be prepaid shall
mature and become due and payable on the date fixed for such prepayment,
together with interest on such principal amount accrued to such date and the
applicable Make-Whole Amount, if any. From and after such date, unless the
Company shall fail to pay such principal amount when so due and payable,
together with the interest and Make-Whole Amount, if any, as aforesaid, interest
on such principal amount shall cease to accrue. Any Note paid or prepaid in full
shall be surrendered to the Company and canceled and shall not be reissued, and
no Note shall be issued in lieu of any prepaid principal amount of any Note.
8.5 PURCHASE OF NOTES.
The Company will not and will not permit any Affiliate to purchase, redeem,
prepay or otherwise acquire, directly or indirectly, any of the outstanding
Notes except upon the payment or prepayment of the Notes in accordance with the
terms of this Agreement and the Notes. The Company will promptly cancel all
Notes acquired by it or any Affiliate pursuant to any payment, prepayment or
purchase of Notes pursuant to any provision of this Agreement and no Notes may
be issued in substitution or exchange for any such Notes.
8.6 MAKE-WHOLE AMOUNT.
The term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount
equal to the excess, if any, of the Discounted Value of the Remaining Scheduled
Payments with respect to the Called Principal of such Note over the amount of
such Called Principal, provided that the Make-Whole Amount may in no event be
less than zero. For the purposes of determining the Make-Whole Amount, the
following terms have the following meanings:
"CALLED PRINCIPAL" means, with respect to any Note, the principal of
such Note that is to be prepaid pursuant to Section 8.2 or has become or is
declared to be immediately due and payable pursuant to Section 12.1, as the
context requires.
"DISCOUNTED VALUE" means, with respect to the Called Principal of any
Note, the amount obtained by discounting all Remaining Scheduled Payments
with respect to such
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Called Principal from their respective scheduled due dates to the
Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Notes is payable) equal to
the Reinvestment Yield with respect to such Called Principal.
"REINVESTMENT YIELD" means, with respect to the Called Principal of
any Note, the yield to maturity implied by (i) the yields reported, as of
10:00 A.M. (New York City time) on the second Business Day preceding the
Settlement Date with respect to such Called Principal, on the display
designated as the "PX Screen" on the Bloomberg Financial Market Service (or
such other display as may replace the PX Screen on the Bloomberg Financial
Market Service) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal as of
such Settlement Date, plus 50 basis points or (ii) if such yields are not
reported as of such time or the yields reported as of such time are not
ascertainable, the Treasury Constant Maturity Series Yields reported, for
the latest day for which such yields have been so reported as of the second
Business Day preceding the Settlement Date with respect to such Called
Principal, in Federal Reserve Statistical Release H.15 (519) (or any
comparable successor publication) for actively traded U.S. Treasury
securities having a constant maturity equal to the Remaining Average Life
of such Called Principal as of such Settlement Date, plus 50 basis points.
Such implied yield will be determined, if necessary, by (a) converting U.S.
Treasury bill quotations to bond-equivalent yields in accordance with
accepted financial practice and (b) interpolating linearly between (1) the
actively traded U.S. Treasury security with the maturity closest to and
greater than the Remaining Average Life and (2) the actively traded U.S.
Treasury security with the maturity closest to and less than the Remaining
Average Life.
"REMAINING AVERAGE LIFE" means, with respect to any Called Principal,
the number of years (calculated to the nearest one-twelfth year) obtained
by dividing (i) such Called Principal into (ii) the sum of the products
obtained by multiplying (a) the principal component of each Remaining
Scheduled Payment with respect to such Called Principal by (b) the number
of years (calculated to the nearest one-twelfth year) that will elapse
between the Settlement Date with respect to such Called Principal and the
scheduled due date of such Remaining Scheduled Payment.
"REMAINING SCHEDULED PAYMENTS" means, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due after the Settlement Date with respect to such
Called Principal if no payment of such Called Principal were made prior to
its scheduled due date, provided that if such Settlement Date is not a date
on which interest payments are due to be made under the terms of the Notes,
then the amount of the next succeeding scheduled interest payment will be
reduced by the amount of interest accrued to such Settlement Date and
required to be paid on such Settlement Date pursuant to Section 8.2 or
12.1.
"SETTLEMENT DATE" means, with respect to the Called Principal of any
Note, the date on which such Called Principal is to be prepaid pursuant to
Section 8.2 or has
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become or is declared to be immediately due and payable pursuant to Section
12.1, as the context requires.
8.7 CHANGE IN CONTROL.
(a) Notice of Change in Control or Control Event -- The Company will,
within five (5) Business Days after any Responsible Officer has knowledge of the
occurrence of any Change in Control or Control Event, give written notice of
such Change in Control or Control Event to each holder of Notes. In the case
that a Change in Control has occurred, such notice shall contain and constitute
an offer to prepay the Notes as described in subparagraph (b) of this Section
8.7 and shall be accompanied by the certificate described in subparagraph (e) of
this Section 8.7.
(b) Offer to Prepay Notes -- The offer to prepay Notes contemplated by
subparagraph (a) of this Section 8.7 shall be an offer to prepay, in accordance
with and subject to this Section 8.7, all, but not less than all, the Notes held
by each holder (in this case only, "holder" in respect of any Note registered in
the name of a nominee for a disclosed beneficial owner shall mean such
beneficial owner) on a date specified in such offer (the "Proposed Prepayment
Date") that is not less than 30 days and not more than 60 days after the date of
such offer (if the Proposed Prepayment Date shall not be specified in such
offer, the Proposed Prepayment Date shall be the 60th day after the date of such
offer).
(c) Acceptance; Rejection -- A holder of Notes may accept the offer to
prepay made pursuant to this Section 8.7 by causing a notice of acceptance to be
delivered to the Company at least 10 days prior to the Proposed Prepayment Date.
A failure by a holder of Notes to respond to any offer to prepay made pursuant
to this Section 8.7 shall be deemed to constitute a rejection of such offer by
holder.
(d) Prepayment -- Prepayment of the Notes to be prepaid pursuant to this
Section 8.7 shall be at 100% of the outstanding principal amount of such Notes,
together with interest on such Notes accrued to the date of prepayment. The
prepayment shall be made on the Proposed Prepayment Date.
(e) Officer's Certificate -- Each offer to prepay the Notes pursuant to
this Section 8.7 shall be accompanied by a certificate, executed by a Senior
Financial Officer of the Company and dated the date of such offer, specifying:
(i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this
Section 8.7; (iii) the principal amount of such Note offered to be prepaid; (iv)
the interest that would be due on each Note offered to be prepaid, accrued to
the Proposed Prepayment Date; (v) that the conditions of this Section 8.7 have
been fulfilled; and (vi) in reasonable detail, the nature and date of the Change
in Control.
9. AFFIRMATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
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9.1 COMPLIANCE WITH LAW.
The Company will and will cause each of its Subsidiaries to comply with
all laws, ordinances or governmental rules or regulations to which each of them
is subject, including, without limitation, Environmental Laws, Medicare laws and
Medicaid laws and will obtain and maintain in effect all licenses, certificates,
permits, franchises and other governmental authorizations necessary to the
ownership of their respective properties or to the conduct of their respective
businesses, in each case to the extent necessary to ensure that non-compliance
with such laws, ordinances or governmental rules or regulations or failures to
obtain or maintain in effect such licenses, certificates, permits, franchises
and other governmental authorizations could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
9.2 INSURANCE.
The Company will and will cause each of its Subsidiaries to maintain,
with financially sound and reputable insurers, insurance with respect to their
respective properties and businesses against such casualties and contingencies,
of such types, on such terms and in such amounts (including deductibles, co-
insurance and self-insurance, if adequate reserves are maintained with respect
thereto) as is customary in the case of entities of established reputations
engaged in the same or a similar business and similarly situated.
9.3 MAINTENANCE OF PROPERTIES.
The Company will and will cause each of its Subsidiaries to maintain
and keep, or cause to be maintained and kept, their respective properties in
good repair, working order and condition (other than ordinary wear and tear), so
that the business carried on in connection therewith may be properly conducted
at all times, provided that this Section shall not prevent the Company or any
Subsidiary from discontinuing the operation and the maintenance of any of its
properties if such discontinuance is desirable in the conduct of its business
and the Company has concluded that such discontinuance could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
9.4 PAYMENT OF TAXES AND CLAIMS.
The Company will and will cause each of its Subsidiaries to file all
tax returns required to be filed in any jurisdiction and to pay and discharge
all taxes shown to be due and payable on such returns and all other taxes,
assessments, governmental charges, or levies imposed on them or any of their
properties, assets, income or franchises, to the extent such taxes and
assessments have become due and payable and before they have become delinquent
and all claims for which sums have become due and payable that have or might
become a Lien on properties or assets of the Company or any Subsidiary, provided
that neither the Company nor any Subsidiary need pay any such tax or assessment
or claims if (i) the amount, applicability or validity thereof is contested by
the Company or such Subsidiary on a timely basis in good faith and in
appropriate proceedings, and the Company or a Subsidiary has established
adequate reserves therefor in accordance with GAAP on the books of the Company
or such Subsidiary or (ii) the nonpayment
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of all such taxes and assessments in the aggregate could not reasonably be
expected to have a Material Adverse Effect.
9.5 CORPORATE EXISTENCE, ETC.
The Company will at all times preserve and keep in full force and
effect its corporate existence. Subject to Sections 10.2 and 10.3, the Company
will at all times preserve and keep in full force and effect the corporate
existence of each of its Subsidiaries (unless merged into the Company or a
Subsidiary) and all rights and franchises of the Company and its Subsidiaries
unless, in the good faith judgment of the Company, the termination of or failure
to preserve and keep in full force and effect such corporate existence, right or
franchise could not, individually or in the aggregate, have a Material Adverse
Effect.
9.6 ADDITIONAL SUBSIDIARIES.
In the event that the Company establishes any Subsidiaries after the
date hereof (whether by formation or acquisition or otherwise), the Company
shall (i) cause such Subsidiary to execute and deliver to the Collateral Agent,
for the benefit of the holders of the Notes, counterparts of the Security
Documents and (ii) pledge the stock or other securities of such Subsidiary to
the Collateral Agent for the benefit of the holders of the Notes (including
delivery of the certificates therefor), and in each case execute instruments and
certificates as the Collateral Agent may request with respect thereto; provided,
that any new Subsidiary that is a single purpose entity created solely for the
purpose of a Permitted Asset Securitization will not be subject to (i) above.
9.7 NOTES TO RANK PARI PASSU.
The Notes and all other obligations under this Agreement of the Company
are and at all times shall remain direct and secured obligations of the Company
ranking pari passu as against the assets of the Company with all other Notes
from time to time issued and outstanding hereunder or under the Other Note
Agreements without any preference among themselves and pari passu with all other
present and future senior secured Indebtedness (actual or contingent) of the
Company which is not expressed to be subordinate or junior in rank to any other
unsecured Indebtedness of the Company (other than Indebtedness incurred pursuant
to ELLF (as such term is defined in the Bank Loan Agreement)).
9.8 NOTICES REGARDING COMPANY AFFILIATED PHYSICIAN GROUPS.
The Company will promptly, and in any event within 30 days after
becoming aware thereof, notify the holders of any noncompliance of laws,
ordinances or regulations by any Company Affiliated Physician Group or Company
Affiliated Provider that could reasonably be expected to have a Material Adverse
Effect.
10. NEGATIVE COVENANTS.
The Company covenants that so long as any of the Notes are outstanding:
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10.1 TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any Subsidiary to, enter
into directly or indirectly any transaction or Material group of related
transactions (including without limitation the purchase, lease, sale or exchange
of properties of any kind or the rendering of any service) with any Affiliate
(other than the Company or another Subsidiary), except in the ordinary course
and pursuant to the reasonable requirements of the Company's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the Company or such Subsidiary than would be obtainable in a comparable arm's-
length transaction with a Person not an Affiliate.
10.2 MERGER, CONSOLIDATION, ETC.
The Company shall not consolidate with or merge with any other
corporation or convey, transfer or lease substantially all of its assets in a
single transaction or series of transactions to any Person unless:
(a) the successor formed by such consolidation or the survivor of such
merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Company as an entirety, as the case may
be, shall be a solvent corporation organized and existing under the laws of the
United States or any state thereof (including the District of Columbia), and, if
the Company is not such corporation, such corporation (i) shall have executed
and delivered to each holder of any Notes its assumption of the due and punctual
performance and observance of each covenant and condition of this Agreement, the
Other Note Agreements, the Notes and the Security Documents and (ii) shall have
caused to be delivered to each holder of any Notes an opinion of nationally
recognized independent counsel, or other independent counsel reasonably
satisfactory to the Required Holders, to the effect that all agreements or
instruments effecting such assumption are enforceable in accordance with their
terms and comply with the terms hereof;
(b) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(c) immediately after giving effect to such transaction, the Company or the
surviving corporation would be permitted under this Agreement to incur at least
$1.00 of additional Indebtedness.
No such conveyance, transfer or lease of substantially all of the assets of the
Company shall have the effect of releasing the Company or any successor
corporation that shall theretofore have become such in the manner prescribed in
this Section 10.2 from its liability under this Agreement, the Other Note
Agreements, the Notes or the Security Documents.
10.3 SALE OF ASSETS.
The Company shall not, and shall not permit any Subsidiary to, sell,
lease, transfer or otherwise dispose of assets and/or the capital stock of any
such Subsidiaries, other than in the
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ordinary course of business or in connection with a transfer which constitutes a
Permitted Asset Securitization, if the aggregate amount of such assets disposed
of exceeds 15% of Consolidated Total Assets of the Company in any given fiscal
year, unless such proceeds from the disposition are used:
(a) to purchase or be committed to purchase other property of a similar
nature within 365 days of such sale; or
(b) to repay Indebtedness ranking pari passu with the Notes (other than
Indebtedness owing to the Company or any of its Subsidiaries or Affiliates),
provided that in connection with any prepayment of Indebtedness under a
revolving credit or similar credit facility providing the Company or any of its
Subsidiaries with the right to obtain loans or other extensions of credit from
time to time, the availability of credit under such credit facility is
permanently reduced by an amount not less than the amount of such proceeds
applied to the payment of such Indebtedness.
10.4 CONDUCT OF BUSINESS.
The Company shall not, and shall not permit any Subsidiary to, engage
in any business other than business engaged in by it on the date hereof, other
businesses or activities substantially similar or related thereto, and other
lines of business consented to by the Required Holders.
10.5 LIENS.
The Company shall not, and shall not permit any Subsidiary to, directly or
indirectly, create, assume, incur or permit to exist (upon the happening of a
contingency or otherwise) any Lien on or with respect to any property or asset
(including without limitation any document or instrument in respect of goods or
accounts receivable) of the Company or any such Subsidiary, whether now owned or
held or hereafter acquired, or any income or profits therefrom, or assign or
otherwise convey any right to receive income or profits, except:
(a) Liens for the benefit of the holders of the Notes and the Banks
pursuant to the Intercreditor Agreement;
(b) Liens for taxes, assessments or other governmental charges which are
not yet due and payable or the payment of which is not at the time required by
Section 9.4;
(c) Any attachment or judgment Lien, unless the judgment it secures shall
not, within sixty (60) days after the entry thereof, have been discharged or
execution thereof stayed pending appeal, or shall not have been discharged
within sixty (60) days after the expiration of any such stay;
(d) Other Liens incidental to the normal conduct of the business of the
Company or any Subsidiary or the ownership of its property which are not
incurred in connection with the
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incurrence of Indebtedness and which do not, in the aggregate, materially impair
the use of such property in the operation of the business of the Company and its
Subsidiaries taken as a whole or the value of such property for the purposes of
such business;
(e) Liens existing at the time of the issuance of the Notes as set forth on
Schedule 10.5 hereto;
(f) the extension, renewal or refunding of any Lien permitted by Section
10.5(e) or (g) in respect of the same property subject thereto (without any
increase of the principal amount of the Indebtedness secured thereby from the
amount outstanding as of the time of such extension, renewal or refunding),
provided that at the time of such extension, renewal or refunding (and after
giving effect thereto) no Default or Event of Default exists (or would result
therefrom);
(g) Any lien created to secure all or any part of the purchase price, or to
secure Indebtedness incurred or assumed to pay all or any part of the purchase
price or cost of construction of property (or any improvement thereon) acquired
or constructed by the Company or a Subsidiary after the date of the Closing,
provided that
(i) any such Lien shall extend solely to the item or items of such
property (or improvement thereon) so acquired or constructed and
the proceeds from the sale of such property and, if required by
the terms of the instruments originally creating such Lien, other
property (or improvement thereon) which is an improvement to or
is acquired for specific use in connection with such acquired or
constructed property (or improvement thereon) or which is real
property being improved by such acquired or constructed property
(or improvement thereon),
(ii) the principal amount of the Indebtedness secured by any such Lien
shall at no time exceed an amount equal to the lesser of (A) the
cost to the Company or such Subsidiary of the property (or
improvement thereon) so acquired or constructed and (B) the fair
market value (as determined in good faith by the board of
directors of the Company) of such property (or improvement
thereon) at the time of such acquisition or construction, and
(iii) any such Lien shall be created contemporaneously with, or
within one hundred eighty (180) days after, the acquisition or
construction of such property;
(h) any Lien existing on property of a Person immediately prior to its
being consolidated with or merged into the Company or a Subsidiary or its
becoming a Subsidiary, or any Lien existing on any property acquired by the
Company or any Subsidiary at the time such property is so acquired (whether or
not the Indebtedness secured thereby shall have been assumed), provided that (i)
no such Lien shall have been created or assumed in contemplation of such
consolidation or merger or such Person's becoming a Subsidiary or such
acquisition of
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property, and (ii) each such Lien shall extend solely to the item or items of
property so acquired and, if required by the terms of the instrument originally
creating such Lien, other property which is an improvement to or is acquired for
specific use in connection with such acquired property;
(i) Liens on property or assets of the Company or any of its Subsidiaries
securing Indebtedness owing to the Company or any of its Subsidiaries; and
(j) any Liens on the assets that are the subject of and related to a
Permitted Asset Securitization.
10.6 MAINTENANCE OF CONSOLIDATED NET WORTH.
The Company shall not, at any time, permit its Consolidated Net Worth to be
less than the sum of (a) $500,000,000, plus (b) 50% of its Consolidated Net
Income (but, in each case, only if Consolidated Net Income is greater than or
equal to $1.00) for each completed fiscal quarter beginning with the fiscal
quarter ended September 30, 1999.
10.7 LIMITATION ON DEBT.
The Company shall not permit the ratio of Consolidated Total Debt to
Consolidated Operating Cash Flow (which shall include Consolidated Operating
Cash Flow of any Person acquired by the Company or a Subsidiary which becomes a
Subsidiary as if the acquisition occurred at the beginning of the applicable
calculation period) to exceed 3.25 to 1.00.
10.8 MINIMUM FIXED CHARGE COVERAGE.
The Company shall not permit, as at the end of each fiscal quarter, the
ratio of Consolidated Income Available for Fixed Charges (measured on a rolling
four quarter basis) to Consolidated Fixed Charges to be less than 1.75 to 1.00.
10.9 RESTRICTED PAYMENTS.
The Company shall not, and shall not permit any of its Subsidiaries to, at
any time, declare or make, or incur any liability to declare or make, any
Restricted Payment unless immediately after giving effect thereto:
(a) the aggregate amount of Restricted Payments of the Company and its
Subsidiaries declared or made during the period commencing on November 1, 1999,
and ending on the date such Restricted Payment is declared or made, inclusive,
would not exceed the sum of
(i) $50,000,000, plus
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(ii) 50% of Consolidated Net Income for such period (or minus 100% of
Consolidated Net Income for such period if Consolidated Net Income for
such period is a loss), plus
(iii) the aggregate amount of Net Cash Proceeds of Capital Stock for
such period; and
(b) no Default or Event of Default would exist.
10.10 PERMITTED INVESTMENTS.
The Company shall not, and shall not permit any of its Subsidiaries to,
make any Investments other than the following:
(a) Investments in property to be used in the ordinary course of business
of the Company and its Subsidiaries;
(b) Investments in current assets arising from the sale of goods and
services in the ordinary course of business of the Company and its Subsidiaries;
(c) Investments existing as of the date hereof as set forth on Schedule
10.10 hereto;
(d) Investments in or advances to one or more Subsidiaries or any Person
that concurrently with such Investment becomes a Subsidiary;
(e) Investments in certificates of deposit or banker's acceptances issued
by an Acceptable Bank, provided that such obligations mature within 365 days
from the date of acquisition thereof;
(f) Investments in commercial paper given the highest rating by a credit
rating agency of recognized national standing, and maturing not more than 270
days from the date of creation thereof;
(g) Investments in United States Governmental Securities, provided that
such obligations mature within 365 days from the date of acquisition thereof;
(h) Investments in Repurchase Agreements;
(i) money market preferred stock rated "A" or above by Standard & Poor's
Corporation or Moody's Investors Services;
(j) Investments in tax-exempt obligations of any state of the United
States, or any municipality of any such state, in each case rated "AA" or better
by S&P, "Aa2" or better by Moody's or an equivalent rating by any other credit
rating agency of recognized national standing, provided that such obligations
mature within 365 days from the date of acquisition thereof;
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(k) money market funds organized and existing under the laws of the United
States and investing primarily in investments described in clauses (e) through
(j) above; and
(l) other Investments not to exceed, in the aggregate, 15% of the Company's
Consolidated Net Worth; provided, that Investments in Hospital Joint Ventures
shall not exceed 10% of the Company's Consolidated Net Worth.
10.11 PRIORITY DEBT.
The Company shall not, and shall not permit any of its Subsidiaries to, at
any time permit Priority Debt to exceed 15% of Consolidated Net Worth as of the
then most recently ended fiscal quarter.
10.12 SUBSIDIARY DEBT.
The Company shall not at any time permit any Subsidiary to, directly or
indirectly, create, incur, assume, guarantee, have outstanding, or otherwise
become or remain directly or indirectly liable with respect to, any Indebtedness
other than:
(a) Indebtedness of a Subsidiary outstanding on the date of Closing, as set
forth on Schedule 10.12 hereto, and any extension, renewal or refunding thereof,
provided that there is no increase in the principal amount thereof from the
amount outstanding as of the time of such extension, renewal or refunding, and
that at the time of such extension, renewal or refunding (and after giving
effect thereto) no Default or Event of Default exists (or would result
therefrom);
(b) Indebtedness of a Subsidiary owed to the Company or a Wholly-Owned
Subsidiary;
(c) Indebtedness of a Subsidiary in connection with a Permitted Asset
Securitization program, which program shall not exceed $150,000,000;
(d) Indebtedness of a Subsidiary in addition to that otherwise permitted
under clauses (a) through (c) of this Section 10.12, provided that on the date
the Subsidiary incurs or otherwise becomes liable with respect to any such
additional Indebtedness and immediately after giving effect thereto,
(i) no Default or Event of Default exists, and
(ii) the total amount of Priority Debt does not exceed 15% of the
Company's Consolidated Net Worth.
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10.13 HOSPITAL JOINT VENTURE.
Notwithstanding anything in this Agreement or any of the Other Note
Agreements, in no event shall a Hospital Joint Venture be considered a
Subsidiary for any purpose under this Agreement or any Other Note Agreement, nor
shall any Hospital Joint Venture be required to become a Guarantor or enter into
the Guarantors' Security Agreement except that (a) each Hospital Joint Venture
shall be deemed a Subsidiary for purposes of Sections 10.3, 10.4, 10.5, 10.6,
10.7, 10.8, 10.10, 10.11 and 10.12 and (b) the amount or value of any
Distribution or payment by a Hospital Joint Venture that constitutes a
Restricted Payment shall be included in the calculation of the total amount of
Restricted Payments made for purposes of Section 10.9, but in no event shall any
Hospital Joint Venture be prevented or otherwise restricted from making any
Restricted Payment if such payment is required to be made under an agreement to
which such Hospital Joint Venture is a party or under such Hospital Joint
Venture's relevant organizational documents, provided that no such agreement or
other organizational documents shall require or permit the distribution of
Restricted Payments by any Hospital Joint Venture in any manner other than in
direct proportion to the respective ownership interests of the joint venture
partners in such Hospital Joint Venture ("Pro Rata Distribution"). In no event
shall a Default or Event of Default occur as a result of any such Restricted
Payment made by a Hospital Joint Venture except in violation of the requirement
for Pro Rata Distribution. The Company's Hospital Joint Ventures as of the date
hereof are listed on Schedule 10.13.
11. EVENTS OF DEFAULT.
An "EVENT OF DEFAULT" shall exist if any of the following conditions or
events shall occur and be continuing:
(a) the Company defaults in the payment of any principal or Make-Whole
Amount, if any, on any Note when the same becomes due and payable, whether at
maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Company defaults in the payment of any interest on any Note for
more than five Business Days after the same becomes due and payable; or
(c) the Company defaults in the performance of or compliance with any term
contained in Section 10; or
(d) the Company defaults in the performance of or compliance with any term
contained herein (other than those referred to in paragraphs (a), (b) and (c) of
this Section 11) and such default is not remedied within 30 days after the
earlier of (i) a Responsible Officer obtaining actual knowledge of such default
and (ii) the Company receiving written notice of such default from any holder of
a Note (any such written notice to be identified as a "notice of default" and to
refer specifically to this paragraph (d) of Section 11); or
(e) any representation or warranty made in writing by or on behalf of the
Company or by any officer of the Company in this Agreement or in any writing
furnished in connection with
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the transactions contemplated hereby proves to have been false or incorrect in
any material respect on the date as of which made;
(f) (i) the Company or any Subsidiary is in default (as principal or as
guarantor or other surety) in the payment of any principal of or premium or Make
Whole Amount or interest on any Indebtedness that is outstanding in an aggregate
principal amount of at least $5,000,000 beyond any period of grace provided with
respect thereto, or (ii) the Company or any Subsidiary is in default in the
performance of or compliance with any term of any evidence of any Indebtedness
in an aggregate outstanding principal amount of at least $5,000,000 or of any
mortgage, indenture or other agreement relating thereto or any other condition
exists, and as a consequence of such default or condition such Indebtedness has
become, or has been declared due and payable before its stated maturity or
before its regularly scheduled dates of payment, or (iii) as a consequence of
the occurrence or continuation of any event or condition (other than the passage
of time or the right of the holder of Indebtedness to convert such Indebtedness
into equity interests), the Company or any Subsidiary has become obligated to
purchase or repay Indebtedness before its regular maturity or before its
regularly scheduled dates of payment in an aggregate outstanding principal
amount of at least $5,000,000; or
(g) the Company or any Subsidiary (i) is generally not paying, or admits in
writing its inability to pay, its debts as they become due, (ii) files, or
consents by answer or otherwise to the filing against it of, a petition for
relief or reorganization or arrangement or any other petition in bankruptcy, for
liquidation or to take advantage of any bankruptcy, insolvency, reorganization,
moratorium or other similar law of any jurisdiction, (iii) makes an assignment
for the benefit of its creditors, (iv) consents to the appointment of a
custodian, receiver, trustee or other officer with similar powers with respect
to it or with respect to any substantial part of its property, (v) is
adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for
the purpose of any of the foregoing; or
(h) a court or governmental authority of competent jurisdiction enters an
order appointing, without consent by the Company or any of its Subsidiaries, a
custodian, receiver, trustee or other officer with similar powers with respect
to it or with respect to any substantial part of its property, or constituting
an order for relief or approving a petition for relief or reorganization or any
other petition in bankruptcy or for liquidation or to take advantage of any
bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution,
winding-up or liquidation of the Company or any of its Subsidiaries, or any such
petition shall be filed against the Company or any of its Subsidiaries and such
petition shall not be dismissed within 60 days; or
(i) a final judgment or judgments for the payment of money aggregating in
excess of $25,000,000 are rendered against one or more of the Company and its
Subsidiaries and which judgments are not, within 60 days after entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within 60
days after the expiration of such stay; or
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(j) if (i) any Plan shall fail to satisfy the minimum funding standards of
ERISA or the Code for any plan year or part thereof or a waiver of such
standards or extension of any amortization period is sought or granted under
section 412 of the Code, (ii) a notice of intent to terminate any Plan shall
have been or is reasonably expected to be filed with the PBGC or the PBGC shall
have instituted proceedings under ERISA section 4042 to terminate or appoint a
trustee to administer any Plan or the PBGC shall have notified the Company or
any ERISA Affiliate that a Plan may become a subject of any such proceedings,
(iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning
of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with
Title IV of ERISA, shall exceed $1,000,000, (iv) the Company or any ERISA
Affiliate shall have incurred or is reasonably expected to incur any liability
pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of
the Code relating to employee benefit plans, (v) the Company or any ERISA
Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any
Subsidiary establishes or amends any employee welfare benefit plan that provides
post-employment welfare benefits in a manner that would increase the liability
of the Company or any Subsidiary thereunder; and any such event or events
described in clauses (i) through (vi) above, either individually or together
with any other such event or events, could reasonably be expected to have a
Material Adverse Effect; or
(k) for any reason (i) any Security Document shall cease to be in full
force and effect at any time or is declared to be null and void with respect to
any material portion of the collateral thereunder, (ii) the Collateral Agent
ceases to have a perfected, first priority security interest in any material
portion of the collateral (subject to Permitted Liens), (iii) the Company denies
that it has any further liability under any applicable Security Document or
gives notice to such effect or (iv) any Subsidiary denies that it has any
further liability under the Guarantors' Security Agreement or the Subsidiary
Guarantee or gives notice to such effect, and such denial or notice is not
revoked within one Business Day after the earlier of (A) receipt by the Company
of notice from the Collateral Agent or any holder of any Note of such denial or
notice or (B) the Company becomes aware of such denial or notice being made or
given, as the case may be.
As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE
WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms
in Section 3 of ERISA.
12. REMEDIES ON DEFAULT, ETC.
12. ACCELERATION.
(a) If an Event of Default with respect to the Company described in
paragraph (g) or (h) of Section 11 (other than an Event of Default described in
clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by
virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has
occurred, all the Notes then outstanding shall automatically become immediately
due and payable.
(b) If any other Event of Default has occurred and is continuing, any
holder or holders of more than 35% in principal amount of the Notes at the time
outstanding may at any
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time at its or their option, by notice or notices to the Company, declare all
the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in paragraph (a) or (b) of Section 11
has occurred and is continuing, any holder or holders of Notes at the time
outstanding affected by such Event of Default may at any time, at its or their
option, by notice or notices to the Company, declare all the Notes held by it or
them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1, whether
automatically or by declaration, such Notes will forthwith mature and the entire
unpaid principal amount of such Notes plus (x) accrued and unpaid interest
thereon and (y) the Make-Whole Amount determined in respect of such principal
amount (to the full extent permitted by applicable law), shall all be
immediately due and payable, in each and every case without presentment, demand,
protest or further notice, all of which are hereby waived. The Company
acknowledges, and the parties hereto agree, that each holder of a Note has the
right to maintain its investment in the Notes free from repayment by the Company
(except as herein specifically provided for) and that the provision for payment
of a Make-Whole Amount by the Company in the event that the Notes are prepaid or
are accelerated as a result of an Event of Default, is intended to provide
compensation for the deprivation of such right under such circumstances.
12.2 OTHER REMEDIES.
If any Default or Event of Default has occurred and is continuing, and
irrespective of whether any Notes have become or have been declared immediately
due and payable under Section 12.1, the holder of any Note at the time
outstanding may proceed to protect and enforce the rights of such holder by an
action at law, suit in equity or other appropriate proceeding, whether for the
specific performance of any agreement contained herein or in any Note, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise.
12.3 RESCISSION.
At any time after any Notes have been declared due and payable pursuant to
clause (b) or (c) of Section 12.1, the holders of not less than 66% in principal
amount of the Notes then outstanding, by written notice to the Company, may
rescind and annul any such declaration and its consequences if (a) the Company
has paid all overdue interest on the Notes, all principal of and Make-Whole
Amount, if any, on any Notes that are due and payable and are unpaid other than
by reason of such declaration, and all interest on such overdue principal and
Make-Whole Amount, if any, and (to the extent permitted by applicable law) any
overdue interest in respect of the Notes, at the Default Rate, (b) all Events of
Default and Defaults, other than non-payment of amounts that have become due
solely by reason of such declaration, have been cured or have been waived
pursuant to Section 18, and (c) no judgment or decree has been entered for the
payment of any monies due pursuant hereto or to the Notes. No rescission and
annulment under this Section 12.3 will extend to or affect any subsequent Event
of Default or Default or impair any right consequent thereon.
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12.4 NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC.
No course of dealing and no delay on the part of any holder of any Note in
exercising any right, power or remedy shall operate as a waiver thereof or
otherwise prejudice such holder's rights, powers or remedies. No right, power
or remedy conferred by this Agreement or by any Note upon any holder thereof
shall be exclusive of any other right, power or remedy referred to herein or
therein or now or hereafter available at law, in equity, by statute or
otherwise. Without limiting the obligations of the Company under Section 16, the
Company will pay to the holder of each Note on demand such further amount as
shall be sufficient to cover all costs and expenses of such holder incurred in
any enforcement or collection under this Section 12, including, without
limitation, reasonable attorneys' fees, expenses and disbursements.
13. INTENTIONALLY OMITTED.
14. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
14.1 REGISTRATION OF NOTES.
The Company shall keep at its principal executive office a register for the
registration and registration of transfers of Notes. The name and address of
each holder of one or more Notes, each transfer thereof and the name and address
of each transferee of one or more Notes shall be registered in such register.
Prior to due presentment for registration of transfer pursuant to Section 14.2
below, the Person in whose name any Note shall be registered shall be deemed and
treated as the owner and holder thereof for all purposes hereof, and the Company
shall not be affected by any notice or knowledge to the contrary. The Company
shall give to any holder of a Note that is an Institutional Investor promptly
upon request therefor, a complete and correct copy of the names and addresses of
all registered holders of Notes.
14.2 TRANSFER AND EXCHANGE OF NOTES.
Upon surrender of any Note at the principal executive office of the Company
for registration of transfer or exchange (and in the case of a surrender for
registration of transfer, duly endorsed or accompanied by a written instrument
of transfer duly executed by the registered holder of such Note or his attorney
duly authorized in writing and accompanied by the address for notices of each
transferee of such Note or part thereof), the Company shall execute and deliver,
at the Company's expense (except as provided below), one or more new Notes (as
requested by the holder thereof) in exchange therefor, in an aggregate principal
amount equal to the unpaid principal amount of the surrendered Note. Each such
new Note shall be payable to such Person as such holder may request and shall be
substantially in the form of Exhibit I. Each such new Note shall be dated and
bear interest from the date to which interest shall have been paid on the
surrendered Note or dated the date of the surrendered Note if no interest shall
have been paid thereon. The Company may require payment of a sum sufficient to
cover any stamp tax or governmental charge imposed in respect of any such
transfer of Notes. Notes shall not be transferred in denominations of less than
$500,000 original principal amount, provided that if necessary to enable the
registration of transfer by a holder of its entire holding of Notes, one
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Note may be in a denomination of less than $500,000. Any transferee, by its
acceptance of a Note registered in its name (or the name of its nominee), shall
be deemed to have made the representation set forth in Section 6.2.
14.3 REPLACEMENT OF NOTES.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the ownership of and the loss, theft, destruction or mutilation of any Note
(which evidence shall be, in the case of an Institutional Investor, notice from
such Institutional Investor of such ownership and such loss, theft, destruction
or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it (provided that if the holder of such Note is, or is a nominee
for, an original Purchaser or another holder of a Note with a minimum net worth
of at least $50,000,000, such Person's own unsecured agreement of indemnity
shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
the Company at its own expense shall execute and deliver, in lieu thereof,
a new Note, dated and bearing interest from the date to which interest shall
have been paid on such lost, stolen, destroyed or mutilated Note or dated the
date of such lost, stolen, destroyed or mutilated Note if no interest shall have
been paid thereon.
15. PAYMENTS ON NOTES.
15.1 PLACE OF PAYMENT.
Subject to Section 15.2, payments of principal, Make-Whole Amount, if any,
and interest becoming due and payable on the Notes shall be made in Houston,
Texas at the principal office of the Company in such jurisdiction. The Company
may at any time, by notice to each holder of a Note, change the place of payment
of the Notes so long as such place of payment shall be either the principal
office of the Company in such jurisdiction or the principal office of a bank or
trust company in such jurisdiction.
15.2 HOME OFFICE PAYMENT.
So long as you or your nominee shall be the holder of any Note, and
notwithstanding anything contained in Section 15.1 or in such Note to the
contrary, the Company will pay all sums becoming due on such Note for principal,
Make-Whole Amount, if any, and interest by the method and at the address
specified for such purpose below your name in Schedule A, or by such other
method or at such other address as you shall have from time to time specified to
the Company in writing for such purpose, without the presentation or surrender
of such Note or the making of any notation thereon, except that upon written
request of the Company made concurrently with or reasonably promptly after
payment or prepayment in full of any Note, you shall surrender such Note for
cancellation, reasonably promptly after any such request, to the Company at its
principal executive office or at the place of payment most recently designated
by
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the Company pursuant to Section 15.1. Prior to any sale or other disposition
of any Note held by you or your nominee you will, at your election, either
endorse thereon the amount of principal paid thereon and the last date to which
interest has been paid thereon or surrender such Note to the Company in exchange
for a new Note or Notes pursuant to Section 14.2. The Company will afford the
benefits of this Section 15.2 to any Institutional Investor that is the direct
or indirect transferee of any Note purchased by you under this Agreement and
that has made the same agreement relating to such Note as you have made in this
Section 15.2.
16. EXPENSES, ETC.
16.1 TRANSACTION EXPENSES.
Whether or not the transactions contemplated hereby are consummated, the
Company will pay all costs and expenses (including reasonable attorneys' fees of
special counsel for the Purchasers as a group and, if reasonably required, local
or other counsel for the Purchasers as a group) incurred by you and each Other
Purchaser or holder of a Note in connection with such transactions and in
connection with any amendments, waivers or consents under or in respect of this
Agreement, the Other Note Agreements, the Notes or the Security Documents
(whether or not such amendment, waiver or consent becomes effective), including,
without limitation: (a) the costs and expenses incurred in enforcing or
defending (or determining whether or how to enforce or defend) any rights under
this Agreement, the Other Note Agreements, the Notes or the Security Documents
or in responding to any subpoena or other legal process or informal
investigative demand issued in connection with this Agreement or the Notes, or
by reason of being a holder of any Note and (b) the costs and expenses,
including financial advisors' fees, incurred in connection with the insolvency
or bankruptcy of the Company or any Subsidiary or in connection with any work-
out or restructuring of the transactions contemplated hereby and by the Notes.
The Company will pay, and will save you and each other holder of a Note harmless
from, all claims in respect of any fees, costs or expenses if any, of brokers
and finders (other than those retained by you).
16.2 SURVIVAL.
The obligations of the Company under this Section 16 will survive the
payment or transfer of any Note, the enforcement, amendment or waiver of any
provision of this Agreement, the Notes or the Security Documents, and the
termination of this Agreement.
17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the
execution and delivery of this Agreement, the Notes and the Security Documents,
the purchase or transfer by you of any Note or portion thereof or interest
therein and the payment of any Note, and may be relied upon by any subsequent
holder of a Note, regardless of any investigation made at any time by or on
behalf of you or any other holder of a Note. All statements contained in any
certificate or other instrument delivered by or on behalf of the Company
pursuant to this Agreement shall
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be deemed representations and warranties of the Company under this Agreement.
Subject to the preceding sentence, this Agreement, the Notes and the Security
Documents embody the entire agreement and understanding between you and the
Company and supersede all prior agreements and understandings relating to the
subject matter hereof.
18. AMENDMENT AND WAIVER.
18.1 REQUIREMENTS.
This Agreement, the Notes and the Security Documents may be amended, and
the observance of any term hereof or of the Notes may be waived (either
retroactively or prospectively), with (and only with) the written consent of the
Company and the Required Holders, except that (a) no amendment or waiver of any
of the provisions of Section 1, 2, 3, 4, 5, (but excluding a waiver of a breach
of a representation and warranty in Section 5) 6, 22 or 23.7 hereof, or any
defined term (as it is used therein), will be effective as to you unless
consented to by you in writing, and (b) no such amendment or waiver may, without
the written consent of the holder of each Note at the time outstanding affected
thereby, (i) subject to the provisions of Section 12 relating to acceleration or
rescission, change the amount or time of any prepayment or payment of principal
of, or reduce the rate or change the time of payment or method of computation of
interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage
of the principal amount of the Notes the holders of which are required to
consent to any such amendment or waiver, or (iii) amend any of Sections 8,
11(a), 11(b), 12, 18 or 21.
18.2 SOLICITATION OF HOLDERS OF NOTES.
(a) Solicitation. The Company will provide each holder of the Notes
(irrespective of the amount of Notes then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such holder to make an informed and considered decision with respect to
any proposed amendment, waiver or consent in respect of any of the provisions
hereof or of the Notes. The Company will deliver executed or true and correct
copies of each amendment, waiver or consent effected pursuant to the provisions
of this Section 18 to each holder of outstanding Notes promptly following the
date on which it is executed and delivered by, or receives the consent or
approval of, the requisite holders of Notes.
(b) Payment. The Company will not directly or indirectly pay or cause to
be paid any remuneration, whether by way of supplemental or additional interest,
fee or otherwise, or grant any security, to any holder of Notes as consideration
for or as an inducement to the entering into by any holder of Notes or any
waiver or amendment of any of the terms and provisions hereof unless such
remuneration is concurrently paid, or security is concurrently granted, on the
same terms, ratably to each holder of Notes then outstanding even if such holder
did not consent to such waiver or amendment.
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18.3 BINDING EFFECT, ETC.
Any amendment or waiver consented to as provided in this Section 18 applies
equally to all holders of Notes and is binding upon them and upon each future
holder of any Note and upon the Company without regard to whether such Note has
been marked to indicate such amendment or waiver. No such amendment or waiver
will extend to or affect any obligation, covenant, agreement, Default or Event
of Default not expressly amended or waived or impair any right consequent
thereon. No course of dealing between the Company and the holder of any Note
nor any delay in exercising any rights hereunder or under any Note shall operate
as a waiver of any rights of any holder of such Note. As used herein, the term
"THIS AGREEMENT" and references thereto shall mean this Agreement as it may from
time to time be amended or supplemented.
18.4 NOTES HELD BY COMPANY, ETC.
Solely for the purpose of determining whether the holders of the requisite
percentage of the aggregate principal amount of Notes then outstanding approved
or consented to any amendment, waiver or consent to be given under this
Agreement or the Notes, or have directed the taking of any action provided
herein or in the Notes to be taken upon the direction of the holders of a
specified percentage of the aggregate principal amount of Notes then
outstanding, Notes directly or indirectly owned by the Company or any of its
Affiliates shall be deemed not to be outstanding.
19. NOTICES.
All notices and communications provided for hereunder shall be in writing
and sent (a) by telecopy if the sender on the same day sends a confirming copy
of such notice by a recognized overnight delivery service (charges prepaid), or
(b) by registered or certified mail with return receipt requested (postage
prepaid), or (c) by a recognized overnight delivery service (with charges
prepaid). Any such notice must be sent:
(i) if to you or your nominee, to you or it at the address specified
for such communications in Schedule A, or at such other address as you or
it shall have specified to the Company in writing,
(ii) if to any other holder of any Note, to such holder at such
address as such other holder shall have specified to the Company in
writing, or
(iii) if to the Company, to the Company at its address set forth at
the beginning hereof to the attention of L. Fred Pounds, or at such other
address as the Company shall have specified to the holder of each Note in
writing.
Notices under this Section 19 will be deemed given only when actually received
or rejected.
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20. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications that may hereafter be
executed, (b) documents received by you at the Closing (except the Notes
themselves), and (c) financial statements, certificates and other information
previously or hereafter furnished to you, may be reproduced by you by any
photographic, photostatic, microfilm, microcard, miniature photographic or other
similar process and you may destroy any original document so reproduced. The
Company agrees and stipulates that, to the extent permitted by applicable law,
any such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by you in the regular
course of business) and any enlargement, facsimile or further reproduction of
such reproduction shall likewise be admissible in evidence. This Section 20
shall not prohibit the Company or any other holder of Notes from contesting any
such reproduction to the same extent that it could contest the original, or from
introducing evidence to demonstrate the inaccuracy of any such reproduction.
21. CONFIDENTIAL INFORMATION.
For the purposes of this Section 21, "CONFIDENTIAL INFORMATION" means
information delivered to you by or on behalf of the Company or any Subsidiary in
connection with the transactions contemplated by or otherwise pursuant to this
Agreement that is proprietary in nature and that was clearly marked or labeled
or otherwise adequately identified when received by you as being confidential
information of the Company or such Subsidiary, provided that such term does not
include information that (a) was publicly available or otherwise known to you
prior to the time of such disclosure, (b) subsequently becomes publicly
available through no act or omission by you or any person acting on your behalf,
(c) otherwise becomes known to you other than through disclosure by the Company
or any Subsidiary with no known breach of any confidentiality agreements or (d)
constitutes financial statements delivered to you under Section 7.1 that are
otherwise publicly available. You will maintain the confidentiality of such
Confidential Information in accordance with procedures adopted by you in good
faith to protect confidential information of third parties delivered to you,
provided that you may deliver or disclose Confidential Information to (i) your
directors, officers, employees, agents, attorneys and affiliates (to the extent
such disclosure reasonably relates to the administration of the investment
represented by your Notes), (ii) your financial advisors and other professional
advisors who agree to hold confidential the Confidential Information
substantially in accordance with the terms of this Section 21, (iii) any other
holder of any Note, (iv) any Institutional Investor to which you sell or offer
to sell such Note or any part thereof or any participation therein (if such
Person has agreed in writing prior to its receipt of such Confidential
Information to be bound by the provisions of this Section 21), (v) any Person
from which you offer to purchase any security of the Company (if such Person has
agreed in writing prior to its receipt of such Confidential Information to be
bound by the provisions of this Section 21), (vi) any federal or state
regulatory authority having jurisdiction over you, (vii) the National
Association of Insurance Commissioners or any similar organization, or any
nationally recognized rating agency that
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requires access to information about your investment portfolio or (viii) any
other Person to which such delivery or disclosure may be necessary or
appropriate (w) to effect compliance with any law, rule, regulation or order
applicable to you, (x) in response to any subpoena or other legal process, (y)
in connection with any litigation to which you are a party or (z) if an Event of
Default has occurred and is continuing, to the extent you may reasonably
determine such delivery and disclosure to be necessary or appropriate in the
enforcement or for the protection of the rights and remedies under your Notes
and this Agreement. Each holder of a Note, by its acceptance of a Note, will be
deemed to have agreed to be bound by and to be entitled to the benefits of this
Section 21 as though it were a party to this Agreement. On reasonable request by
the Company in connection with the delivery to any holder of a Note of
information required to be delivered to such holder under this Agreement or
requested by such holder (other than a holder that is a party to this Agreement
or its nominee), such holder will enter into an agreement with the Company
embodying the provisions of this Section 21. The parties acknowledge that all
information provided by the Company to Purchasers prior to the date hereof
(other than information previously filed with the Securities and Exchange
Commission and other publicly available information) is deemed Confidential
Information.
22. SUBSTITUTION OF PURCHASER.
You shall have the right to substitute any one of your Affiliates as the
purchaser of the Notes that you have agreed to purchase hereunder, by written
notice to the Company, which notice shall be signed by both you and such
Affiliate, shall contain such Affiliate's agreement to be bound by this
Agreement and shall contain a confirmation by such Affiliate of the accuracy
with respect to it of the representations set forth in Section 6. Upon receipt
of such notice, wherever the word "you" is used in this Agreement (other than in
this Section 22), such word shall be deemed to refer to such Affiliate in lieu
of you. In the event that such Affiliate is so substituted as a purchaser
hereunder and such Affiliate thereafter transfers to you all of the Notes then
held by such Affiliate, upon receipt by the Company of notice of such transfer,
wherever the word "you" is used in this Agreement (other than in this Section
22), such word shall no longer be deemed to refer to such Affiliate, but shall
refer to you, and you shall have all the rights of an original holder of the
Notes under this Agreement.
23. MISCELLANEOUS.
23.1 SUCCESSORS AND ASSIGNS.
All covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto bind and inure to the benefit of their respective
successors and assigns (including, without limitation, any subsequent holder of
a Note) whether so expressed or not.
23.2 PAYMENTS DUE ON NON-BUSINESS DAYS.
Anything in this Agreement or the Notes to the contrary notwithstanding,
any payment of principal of or Make-Whole Amount or interest on any Note that is
due on a date other than a Business Day shall be made on the next succeeding
Business Day without including the
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additional days elapsed in the computation of the interest payable on such next
succeeding Business Day.
23.3 SEVERABILITY.
Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by law) not invalidate or
render unenforceable such provision in any other jurisdiction.
23.4 CONSTRUCTION.
Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant contained
herein, so that compliance with any one covenant shall not (absent such an
express contrary provision) be deemed to excuse compliance with any other
covenant. Where any provision herein refers to action to be taken by any
Person, or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.
23.5 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall be an original but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
23.6 GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the law of the State of Texas
excluding choice-of-law principles of the law of such state that would require
the application of the laws of a jurisdiction other than such state.
23.7 WAIVER OF TRIAL BY JURY.
THE PARTIES TO THIS AGREEMENT HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING ARISING UNDER
OR WITH RESPECT TO THIS AGREEMENT, THE NOTES OR THE SECURITY DOCUMENTS, OR IN
ANY WAY CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO, THE DEALINGS OF THE
PARTIES HERETO WITH RESPECT TO THIS AGREEMENT, THE NOTES OR THE SECURITY
DOCUMENTS, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND IRRESPECTIVE OF WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE. THE PARTIES TO THIS AGREEMENT AGREE THAT ANY SUCH
CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A
COURT TRIAL WITHOUT A
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JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF
THIS SECTION 23.7 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER
PARTY OR PARTIES HERETO TO WAIVER OF THE RIGHT TO TRIAL BY JURY.
THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
* * * * *
If you are in agreement with the foregoing, please sign the form of
agreement on the accompanying counterpart of this Agreement and return it to the
Company, whereupon the foregoing shall become a binding agreement between you
and the Company.
Very truly yours,
US ONCOLOGY, INC.
By:
--------------------------
[Title]
The foregoing is hereby agreed to as of
the date thereof.
[PURCHASER]
By:
-----------------------------
[Title]
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SCHEDULE A
PURCHASERS
----------
Amount Purchaser
------ ---------
JOHN HANCOCK:
$ 2,000,000 John Hancock Mutual Life Insurance Company
$ 19,500,000 John Hancock Mutual Life Insurance Company
$ 500,000 John Hancock Variable Life Insurance Company
$ 500,000 Investors Partner Life Insurance Company
$ 2,500,000 The Northern Trust Company, as Trustee of The
Lucent Technologies, Inc. Master Pension Trust
ALLSTATE:
$ 7,000,000 Allstate Life Insurance Company
$ 5,000,000 Allstate Life Insurance Company
RELIASTAR:
$ 3,000,000 ReliaStar Life Insurance Company
$ 2,000,000 ReliaStar Life Insurance Company of New York
$ 2,000,000 Security Connecticut Life Insurance Company
CIGNA:
$ 5,200,000 Connecticut General Life Insurance Company
$ 3,800,000 Connecticut General Life Insurance Company
$ 3,000,000 Connecticut General Life Insurance Company
$ 2,000,000 Connecticut General Life Insurance Company
$ 1,000,000 Connecticut General Life Insurance Company
GE FINANCIAL
ASSURANCE $ 7,000,000 General Electric Capital Assurance Company
$ 3,000,000 First Colony Life Insurance Company
$ 2,000,000 Colonial Penn Insurance Company
$ 1,000,000 Union Fidelity Life Insurance Company
MASS MUTUAL $ 8,000,000 Massachusetts Mutual Life Insurance Company
$ 3,250,000 Massachusetts Mutual Life Insurance Company
$ 3,250,000 Massachusetts Mutual Life Insurance Company
$ 500,000 C.M. Life Insurance Company c/o
Massachusetts Mutual Life Insurance Company
NATIONWIDE $ 7,000,000 Nationwide Life Insurance Company
$ 1,000,000 Nationwide Life and Annuity Insurance Company
OHIO NATIONAL $ 5,000,000 Ohio National Life Insurance Company
<PAGE>
SCHEDULE B
DEFINED TERMS
-------------
As used herein, the following terms have the respective meanings set forth
below or set forth in the Section hereof following such term:
"ACCEPTABLE BANK" means any bank or trust company (i) which is organized
under the laws of the United States of America or any state thereof, or Canada
or any province thereof (ii) which has capital, surplus and undivided profits
aggregating at least $100,000,000, and (iii) whose long-term unsecured debt
obligations (or the long-term unsecured debt obligations of the bank holding
company owning all of the capital stock of such bank or trust company) shall
have been given a rating of "A" or better by S&P, "A2" or better by Moody's or
an equivalent rating by any other credit rating agency of recognized national
standing.
"ACCEPTABLE BROKER-DEALER" means any Person other than a natural person (i)
which is registered as a broker or dealer pursuant to the Exchange Act and (ii)
whose long-term unsecured debt obligations shall have been given a rating of "A"
or better by S&P, "A2" or better by Moody's or an equivalent rating by any other
credit rating agency of recognized national standing.
"AFFILIATE" means, at any time, and with respect to any Person, (a) any
other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person, and (b) any Person beneficially owning or holding, directly
or indirectly, 10% or more of any class of voting or equity interests of the
Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly,
10% or more of any class of voting or equity interests. As used in this
definition, "Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Unless the context otherwise clearly requires, any reference to an "Affiliate"
is a reference to an Affiliate of the Company.
"BANK DEBT" means the Indebtedness owing from the Company to the Banks
pursuant to the Bank Loan Agreement.
"BANKS" means each financial institution that is a signatory to the Bank
Loan Agreement.
"BANK LOAN AGREEMENT" means that certain Fourth Amended and Restated Loan
Agreement among First Union National Bank, as Administrative Agent, Banc One
Capital Markets, Inc., as Syndication Agent and the Company dated May 14, 1999,
as the same shall be amended from time to time in accordance with the terms of
the Intercreditor Agreement.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which commercial banks in Houston, Texas or New York City are required or
authorized to be closed.
B-1
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"CAPITALIZED LEASE" means any lease of property which in accordance with
GAAP should be capitalized on the lessee's balance sheet.
"CAPITAL RENTALS" means as of the date of any determination the amount at
which the aggregate rentals due and to become due under all Capitalized Leases
under which the Company or any Subsidiary is a lessee would be reflected as a
liability on a consolidated balance sheet of the Company and its Subsidiaries
prepared in accordance with GAAP.
"CHANGE OF CONTROL" means if any person (as such term is used in section
13(d) and section 14(d)(2) of the Exchange Act as in effect on the date of the
Closing) or related persons constituting a group (as such term is used in Rule
13d-5 under the Exchange Act), become the "beneficial owners" (as such term is
used in Rule 13d-3 under the Exchange Act as in effect on the date of the
Closing), directly or indirectly, of more than 50% of the total voting power of
all classes then outstanding of the Company's Voting Stock.
"CLOSING" is defined in Section 3.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations promulgated thereunder from time to time.
"COLLATERAL AGENT" means First Union National Bank, a national banking
association, or such successor Person designated by the Required Holders
pursuant to the Intercreditor Agreement.
"COMPANY" means US Oncology, Inc., a Delaware corporation.
"COMPANY AFFILIATED PHYSICIAN GROUP" is defined in Section 5.4.
"COMPANY AFFILIATED PROVIDER" is defined in Section 5.4.
"CONFIDENTIAL INFORMATION" is defined in Section 21.
"CONSOLIDATED FIXED CHARGES" means for the immediate past four fiscal
quarters the sum of consolidated interest expense (which includes capitalized
interest and the interest component of Capitalized Leases) plus actual rent
payments under operating leases.
"CONSOLIDATED INCOME AVAILABLE FOR FIXED CHARGES" means with respect to any
period, Consolidated Net Income for such period plus (to the extent deducted in
calculating Consolidated Net Income):
(a) all provisions for income taxes;
(b) Consolidated Fixed Charges for such period; and
(c) for the quarters ending June 30, 1999 and September 30, 1999, non-
recurring expenses relating to the merger of American Oncology Resources,
Inc. and Physician Reliance Network, Inc. in an aggregate amount not to
exceed $30,000,000.
B-2
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"CONSOLIDATED NET INCOME" means the net income (or loss) of the Company and
its Subsidiaries for such period (taken as a cumulative whole), as determined in
accordance with GAAP, excluding (to the extent added or deducted in calculating
net income):
(a) extraordinary gains and losses; and
(b) any equity interest of the Company on the unremitted earnings of
any corporation that is not a Subsidiary.
"CONSOLIDATED NET WORTH" means the stockholders' equity of the Company
determined in accordance with GAAP.
"CONSOLIDATED OPERATING CASH FLOW" means Consolidated Net Income for the
immediately preceding four fiscal quarters plus (to the extent deducted in
calculating Consolidated Net Income):
(a) provisions for federal, state and local income taxes;
(b) interest expense;
(c) nonrecurring items to the extent deducted in calculating
Consolidated Net Income;
(d) for the quarters ending June 30, 1999 and September 30, 1999, non-
recurring expenses relating to the merger of American Oncology Resources,
Inc. and Physician Reliance Network, Inc. in an aggregate amount not to
exceed $30,000,000;
(e) depreciation and amortization;
all determined in accordance with GAAP.
"CONSOLIDATED TOTAL ASSETS" means the total assets of the Company and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED TOTAL DEBT" means without duplication, all Indebtedness of
the Company and its Subsidiaries determined on a consolidated basis in
accordance with GAAP.
"CONTROL EVENT" means:
(i) the execution by the Company or any of its Subsidiaries or
Affiliates of any agreement or letter of intent with respect to
any proposed transaction or event or series of transactions or
events which, individually or in the aggregate, may reasonably be
expected to result in a Change in Control,
(ii) the execution of any written agreement which, when fully
performed by the parties thereto, would result in a Change in
Control, or
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(iii) the making of any written offer by any person (as such
term is used in section 13(d) and section 14(d)(2) of the
Exchange Act as in effect on the date of the Closing) or related
persons constituting a group (as such term is sued in Rule 13d-5
under the Exchange Act as in effect on the date of the Closing)
to the holders of the common stock of the Company, which offer,
if accepted by the requisite number of holders, would result in a
Change in Control.
"DEFAULT" means an event or condition the occurrence or existence of which
would, with the lapse of time or the giving of notice or both, become an Event
of Default.
"DEFAULT RATE" means that rate of interest that is the greater of (i) 2%
per annum above the rate of interest stated in clause (a) of the first paragraph
of the Notes or (ii) 2% over the rate of interest publicly announced by Chase
Bank, N.A. in New York, New York as its "base" or "prime" rate.
"DISTRIBUTION" means, in respect of any Person:
(a) dividends or other distributions or payments on capital stock or
other equity interest of such Person (except distributions in such stock or
other equity interest); and
(b) the redemption or acquisition of such stock or other equity
interests or of warrants, rights or other options to purchase such stock or
other equity interests (except when solely in exchange for such stock or
other equity interests) unless made, contemporaneously, from the net
proceeds of a sale of such stock or other equity interests.
"ENVIRONMENTAL LAWS" means any and all federal, state, local, and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or governmental
restrictions relating to pollution and the protection of the environment or the
release of any materials into the environment, including but not limited to
those related to hazardous substances or wastes, air emissions and discharges to
waste or public systems.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rules and regulations promulgated thereunder
from time to time in effect.
"ERISA AFFILIATE" means any trade or business (whether or not incorporated)
that is treated as a single employer together with the Company under section 414
of the Code.
"EVENT OF DEFAULT" is defined in Section 11.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
B-4
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"EXCLUDED SUBSIDIARIES" means Cancer Treatment Associates of Northeastern
Missouri, Ltd., Southeast Texas Cancer Centers, L.P., Aurora Cancer Centers, LLC
and any other Person that constitutes a Hospital Joint Venture.
"FAIR MARKET VALUE" means, at any time and with respect to any property,
the sale value of such property that would be realized in an arm's-length sale
at such time between an informed and willing buyer and an informed and willing
seller (neither being under a compulsion to buy or sell).
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America.
"GOVERNMENTAL AUTHORITY" means
(a) the government of
(i) the United States of America or any state or other
political subdivision thereof, or
(ii) any jurisdiction in which the Company or any Subsidiary
conducts all or any part of its business, or which asserts
jurisdiction over any properties of the Company or any Subsidiary,
or
(b) any entity exercising executive, legislative, judicial, regulatory
or administrative functions of, or pertaining to, any such government.
"GUARANTIES" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect guaranteeing any
indebtedness, dividend or other obligation, of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person:
(a) to purchase such indebtedness or obligation or any property or
assets constituting security therefor;
(b) to advance or supply funds (x) for the purchase or payment of such
Indebtedness or obligation, (y) to maintain working capital or other
balance sheet condition or otherwise to advance or make available funds for
the purchase or payment of such Indebtedness or obligation;
(c) to lease property or to purchase property or services primarily
for the purpose of assuring the owner of such indebtedness or obligations
of the ability of the primary obligor to make payment of the indebtedness
or obligation; or
(d) otherwise to assure the owner of the indebtedness or obligation of
the primary obligor against loss in respect thereof. For the purposes of
all computations made under this Agreement, a Guaranty in respect of any
indebtedness for borrowed
B-5
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money shall be deemed to be indebtedness equal to the principal amount of
such indebtedness for borrowed money which has been guaranteed, and a
Guaranty in respect of any other obligation or liability or any dividend
shall be deemed to be indebtedness equal to the maximum aggregate amount of
such obligation, liability or dividend.
"GUARANTORS" shall mean each party to the Subsidiary Guarantee, their
successors and assigns, each future direct or indirect Subsidiary of the Company
and any other Person that guarantees the Notes and the obligations of the other
Guarantors under the Subsidiary Guarantee.
"HAZARDOUS MATERIAL" means any and all pollutants, toxic or hazardous
wastes or any other substances that might pose a hazard to health or safety, the
removal of which may be required or the generation, manufacture, refining,
production, processing, treatment, storage, handling, transportation, transfer,
use, disposal, release, discharge, spillage, seepage, or filtration of which is
or shall be restricted, prohibited or penalized by any applicable law
(including, without limitation, asbestos, urea formaldehyde foam insulation and
polychlorinated biphenyls).
"HOLDER" means, with respect to any Note, the Person in whose name such
Note is registered in the register maintained by the Company pursuant to Section
14.1.
"HOSPITAL JOINT VENTURE" shall mean any Person that is a Subsidiary of the
Company, but not a Wholly-Owned Subsidiary, without giving effect to Section
10.13 and which (a) is formed for the purpose of (i) providing medical
equipment, office space or management services to a physician, physician group
or other medical provider or (ii) providing medical services; (b) is owned by
the Company or a Subsidiary of the Company and by a hospital, medical provider
or other medical organization; and (c) the Company's interest in which is
treated as an Investment under Section 10.10(l) hereof.
"INDEBTEDNESS" with respect to any Person means, at any time, without
duplication,
(a) its liabilities for borrowed money and its redemption obligations
in respect of mandatorily redeemable Preferred Stock;
(b) liabilities for the deferred purchase price of property acquired
by such Person (excluding accounts payable arising in the ordinary course
of business, but including, without limitation, all liabilities created or
arising under any conditional sale or other title retention agreement with
respect to any such property);
(c) all liabilities appearing on its balance sheet in accordance with
GAAP in respect of Capital Rentals under any Capitalized Lease;
(d) all liabilities for borrowed money secured by any Lien with
respect to any property owned by such Person (whether or not it has
assumed or become liable for such liabilities);
(e) all liabilities in respect of letters of credit or instruments
serving a similar function issued or accepted for its account by banks or
other financial institutions (whether or not representing obligations for
borrowed money);
B-6
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(f) all Guaranties by such Person with respect to liabilities of the
type described in (a) through (e) herein.
Indebtedness of any Person shall include all obligations of such Person of
the character described in clauses (a) through (f) to the extent such Person
remains legally liable in respect thereof notwithstanding that any such
obligation is deemed to be extinguished under GAAP.
"INSTITUTIONAL INVESTOR" means (a) any original purchaser of a Note, (b)
any holder of a Note holding more than 5% of the aggregate principal amount of
the Notes then outstanding, and (c) any bank, trust company, savings and loan
association or other financial institution, any pension plan, any investment
company, any insurance company, any broker or dealer, or any other similar
financial institution or entity, regardless of legal form.
"INTERCREDITOR AGREEMENT" means the Intercreditor Agreement in the form of
Exhibit V attached hereto.
"INVESTMENTS" means any direct or indirect advance, loan, guarantee of
Indebtedness or other extension of credit or capital contribution to, or any
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities (including derivatives) or evidence of Indebtedness issued by any
other person.
"KNOWLEDGE" means to the knowledge of the Company after reasonable inquiry
and investigation.
"LIEN" means, with respect to any Person, any mortgage, lien, pledge,
charge, security interest or other encumbrance, or any interest or title of any
vendor lessor, lender or other secured party to or of such person under
conditional sale or other title retention agreement or Capitalized Lease with
respect to any property or asset of such person.
"MAKE-WHOLE AMOUNT" is defined in Section 8.6.
"MATERIAL" means material in relation to the business, operations, affairs,
financial condition, assets, properties, or prospects of the Company and its
Subsidiaries taken as a whole.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
business, operations, affairs, financial condition, assets or properties of the
Company and its Subsidiaries taken as a whole, or (b) the ability of the Company
and its Subsidiaries to perform their respective obligations under this
Agreement, the Other Note Agreements, the Notes or the Security Documents, or
(c) the validity or enforceability of this Agreement, the Other Note Agreements,
the Notes or the Security Documents.
"MEMORANDUM" is defined in Section 5.3.
"MOODY'S" means Moody's Investors Service, Inc.
"MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such
term is defined in section 4001(a)(3) of ERISA).
B-7
<PAGE>
"NET CASH PROCEEDS OF CAPITAL STOCK" means, with respect to any period,
cash proceeds (net of all costs and out-of-pocket expenses in connection
therewith, including, without limitation, placement, underwriting and brokerage
fees and expenses), received by the Company and its Subsidiaries during such
period, from the sale of all capital stock (other than Redeemable capital stock)
of the Company, including in such net proceeds:
(a) the net amount paid upon issuance and exercise during such period
of any right to acquire any capital stock, or paid during such period to
convert a convertible debt Security to capital stock (but excluding any
amount paid to the Company upon issuance of such convertible debt
Security); and
(b) any amount paid to the Company upon issuance of any convertible
debt Security issued after November 1, 1999 and thereafter converted to
capital stock during such period.
"NOTES" is defined in Section 1.
"OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer
or of any other officer of the Company whose responsibilities extend to the
subject matter of such certificate.
"OTHER NOTE AGREEMENTS" is defined in Section 2.
"OTHER PURCHASERS" is defined in Section 2.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA or any successor thereto.
"PERMITTED ASSET SECURITIZATION" means any transaction or series of related
transactions (including extensions and increases in the amount of the financing)
providing for the financing of receivables and/or other assets through one or
more securitizations of the receivables and/or other assets of the Company and
its Subsidiaries up to a maximum aggregate capital or other equivalent principal
amount of $150,000,000; provided, in all cases, that such securitization is (i)
priced at Fair Market Value and (ii) non-recourse to the Company and its
Subsidiaries.
"PERMITTED LIENS" means those Liens permitted pursuant to Section 10.5.
"PERMITTED SUBORDINATED DEBT" means (i) any Indebtedness of the Company or
any of its Subsidiaries incurred in respect of a transaction relating to the
acquisition of assets from, or entering into a long term management agreement
with, any physician or physician group, which Indebtedness is subordinated to
the payment and performance of the Company's or such Subsidiary's obligations
under the Notes, this Agreement, the Other Note Agreements and the Security
Documents on terms substantially similar to those set forth on Schedule B-1 and
(ii) any other subordinated debt approved in writing by the Required Holders.
"PERSON" an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization, or a government or
agency or political subdivision thereof.
B-8
<PAGE>
"PLAN" means an "employee benefit plan" (as defined in section 3(3) of
ERISA) that is or, within the preceding five years, has been established or
maintained, or to which contributions are or, within the preceding five years,
have been made or required to be made, by the Company or any ERISA Affiliate or
with respect to which the Company or any ERISA Affiliate may have any liability.
"PREFERRED STOCK" means any class of capital stock of a corporation that is
preferred over any other class of capital stock of such corporation as to the
payment of dividends or the payment of any amount upon liquidation or
dissolution of such corporation.
"PRIORITY DEBT" means the sum, without duplication, of (i) Indebtedness of
the Company secured by Liens not otherwise permitted by clauses (a) through (i)
of Section 10.5; and (ii) Indebtedness of Subsidiaries not otherwise permitted
by clauses (a) through (c) of Section 10.12 (but excluding the Indebtedness
evidenced by the Subsidiary Guarantees).
"PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited,
real or personal property of any kind, tangible or intangible, choate or
inchoate.
"QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued
by the United States Department of Labor.
"REDEEMABLE" means, with respect to the capital stock of any Person, each
share of such Person's capital stock that is:
(a) redeemable, payable or required to be purchased or otherwise
retired or extinguished, or convertible into Indebtedness of such Person
(i) at a fixed or determinable date, whether by operation of sinking fund
or otherwise, (ii) at the option of any Person other than such Person, or
(iii) upon the occurrence of a condition not solely within the control of
such Person; or
(b) convertible into other Redeemable capital stock.
"REPURCHASE AGREEMENT" means any written agreement
(a) that provides for (i) the transfer of one or more United States
Governmental Securities in an aggregate principal amount at least equal to
the amount of the Transfer Price (defined below) to the Company or any of
its Subsidiaries from an Acceptable Bank or an Acceptable Broker-Dealer
against a transfer of funds (the "Transfer Price") by the Company or such
Subsidiary to such Acceptable Bank or Acceptable Broker-Dealer, and (ii) a
simultaneous agreement by the Company or such Subsidiary, in connection
with such transfer of funds, to transfer to such Acceptable Bank or
Acceptable Broker-Dealer the same or substantially similar United States
Governmental Securities for a price not less than the Transfer Price plus
a reasonable return thereon at a date certain not later than 365 days
after such transfer of funds;
(b) in respect of which the Company or such Subsidiary shall have the
right, whether by contract or pursuant to applicable law, to liquidate
such agreement upon the occurrence of any default thereunder; and
B-9
<PAGE>
(c) in connection with which the Company or such Subsidiary, or an
agent thereof, shall have taken all action required by applicable law or
regulations to perfect a Lien in such United States Government Securities.
"REQUIRED HOLDERS" means, at any time, the holders of at least 51% in
principal amount of the Notes at the time outstanding (exclusive of Notes then
owned by the Company or any of its Affiliates).
"RESPONSIBLE OFFICER" means any Senior Financial Officer and any other
officer of the Company with responsibility for the administration of the
relevant portion of this agreement.
"RESTRICTED PAYMENT" means
(a) any Distribution in respect of the Company or any Subsidiary of
the Company (other than on account of capital stock or other equity
interests of a Subsidiary of the Company owned legally and beneficially by
the Company or another Subsidiary of the Company), including, without
limitation, any Distribution resulting in the acquisition by the Company
of Securities which would constitute treasury stock; and
(b) any payment, repayment, redemption, retirement, repurchase or
other acquisition, direct or indirect, by the Company or any Subsidiary
of, on account of, or in respect of, the principal of any Subordinated
Debt (or any installment thereof) prior to the regularly scheduled
maturity date thereof (as in effect on the date such Subordinated Debt was
originally incurred).
For purposes of this Agreement, the amount of any Restricted Payment made
in property shall be the greater of (x) the Fair Market Value of such
property (as determined in good faith by the board of directors (or
equivalent governing body) of the Person making such Restricted Payment)
and (y) the net book value thereof on the books of such Person, in each
case determined as of the date on which such Restricted Payment is made;
provided, however, that any payment in respect of originally scheduled
installments of principal and/or interest on Permitted Subordinated Debt
made at the time such payment is scheduled to be made shall not constitute
a Restricted Payment.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill,
Inc.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time to
time.
"SECURITY" has the meaning set forth in section 2(l) of the Securities Act.
"SECURITY DOCUMENTS" means the Security Agreement in the form of Exhibit II
attached hereto, the Guaranty Agreement in the form of Exhibit III attached
hereto, the Guarantors' Security Agreement in the form of Exhibit IV attached
hereto, UCC-1 financing statements to be filed with respect to the collateral
identified in the Security Agreement and the Guarantors' Security Agreement, and
each other Security Agreement, Guaranty Agreement, Guarantors'
B-10
<PAGE>
Security Agreement or UCC-1 financing statement executed and delivered pursuant
to Section 9.6.
"SENIOR FINANCIAL OFFICER" means the chief financial officer, principal
accounting officer, treasurer or comptroller of the Company.
"SUBSIDIARY" means, as to any Person, any corporation, association or other
business entity in which such Person or one or more of its Subsidiaries or such
Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries (unless such partnership can and does ordinarily take major
business actions without the prior approval of such Person or one or more of its
Subsidiaries). Unless the context otherwise clearly requires, any reference to
a "Subsidiary" is a reference to a Subsidiary of the Company.
"SUBSIDIARY GUARANTEE" means, the Subsidiary Guaranty Agreement executed by
the Subsidiaries (other then the Excluded Subsidiaries) in favor of the
Collateral Agent for the benefit of Purchaser and the Other Purchasers.
"UNITED STATES GOVERNMENTAL SECURITY" means any direct obligation of, or
obligation guaranteed by, the United States of America, or any agency controlled
or supervised by or acting as an instrumentality of the United States of America
pursuant to authority granted by the Congress of the United States of America,
so long as such obligation or guarantee shall have the benefit of the full
faith and credit of the United States of America which shall have been pledged
pursuant to authority granted by the Congress of the United States of America.
"VOTING STOCK" means capital stock of any class or classes of a corporation
having power under ordinary circumstances to vote for the election of members by
the board of directors of such corporation, or person performing similar
functions (irrespective of whether or not at the time stock of any of the class
or classes shall have or might have special voting power or rights by reason of
the happening of any contingency).
"WHOLLY-OWNED SUBSIDIARY" means, at any time, any Subsidiary one hundred
percent (100%) of all of the equity interests (except directors' qualifying
shares) and voting interests of which are owned by any one or more of the
Company and the Company's other Wholly-Owned Subsidiaries at such time.
B-11
<PAGE>
Exhibit 21
----------
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Name State of Organization
- ---- ---------------------
US Oncology Corporate, Inc, Delaware
AOR Real Estate, Inc. Delaware
RMCC Cancer Center, Inc. Delaware
AOR Management Company of Indiana, Inc. Delaware
AOR Holding Company of Indiana, Inc. Delaware
AOR of Indiana Management Partnership Indiana
AOR Management Company of Oregon, Inc. Delaware
AOR Management Company of Missouri, Inc. Delaware
AOR Management Company of Arizona, Inc. Delaware
AOR Management Company of Oklahoma, Inc. Delaware
AOR Management Company of South Carolina, Inc. Delaware
AOR Management Company of Pennsylvania, Inc. Delaware
AOR Management Company of North Carolina, Inc. Delaware
AOR Management Company of Virginia, Inc. Delaware
AOR Management Company of New York, Inc. Delaware
AOR Management Company of Florida, Inc. Delaware
AOR Management Company of Nevada, Inc. Delaware
AOR Management Company of Texas, Inc. Delaware
AOR Management Company of Ohio, Inc. Delaware
AOR Management Company of Kansas, Inc. Delaware
AOR Management Company of Central Florida, Inc. Delaware
AORT Holding Company, Inc. Delaware
AOR of Texas Management Limited Partnership Texas
AORIP, Inc. Delaware
AOR Synthetic Real Estate, Inc. Delaware
Greenville Radiation Care, Inc. Delaware
Physician Reliance Network, Inc. Texas
TOPS Pharmacy Services, Inc. Texas
US Oncology Research, Inc. Texas
Physician Reliance Investments, LLC Delaware
PRN Physician Reliance, LLC Texas
Physician Reliance, L.P. Texas
AOR Management Company of Alabama, Inc. Delaware
<PAGE>
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, 333-81069, 333-85859, 333-85853 and 333-85855) of US
Oncology, Inc., formerly known as American Oncology Resources, Inc. of our
report dated March 21, 2000 appearing on page 24 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 24, 2000
<PAGE>
EXHIBIT 23.2
[ARTHUR ANDERSEN LOGO APPEARS HERE]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the 1998 and 1997 consolidated financial statements of Physician
Reliance Network, Inc. dated February 19, 1999, included in this Form 10-K and
to its incorporation by reference in the Registration Statements on Form S-8
(Nos. 333-778, 333-782, 333-784, 333-786, 333-30057, 333-80977, 333-81069,
333-85859, 333-85853 and 333-85855) of US Oncology, Inc. 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
March 24, 2000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<CURRENT-ASSETS> 476,241
<PP&E> 381,671
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<CURRENT-LIABILITIES> 195,448
<BONDS> 360,191
0
0
<COMMON> 873
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<TOTAL-LIABILITY-AND-EQUITY> 1,298,477
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<TOTAL-REVENUES> 1,092,941
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