USON US Oncology (MM)

US Oncology Reports Third Quarter 2003 Financial Results Quarter Produces Earnings Per Share of $0.20 on 18.9 Percent Year-Over-Year Increase in Net Operating Revenue HOUSTON, Oct. 30 /PRNewswire-FirstCall/ -- US Oncology, Inc. today reported results for the third quarter ended Sept. 30, 2003. US Oncology recorded year-over-year increases in net operating revenue, net income and earnings per share for the third quarter of 2003. The following table provides a review of the quarter's results, along with applicable comparisons: ($ in millions, except per share amounts) % % Q3 2003 Q3 2002 Change Q2 2003 Change Net Operating Revenue (A) $641.8 $539.8 18.9% $626.7 2.4% Revenue 509.1 418.3 21.7% 491.4 3.6% Net income (loss) 17.9 (36.2) N/A 17.7 1.1% EPS 0.20 (0.37) N/A 0.19 5.3% Excluding unusual charges for 2002 (B) EBITDA (C) $52.9 $45.4 16.5% $52.4 1.0% Net income 17.9 14.9 20.1% 17.7 1.1% EPS 0.20 0.15 33.3% 0.19 5.3% (A) See Key Operating Statistics for calculations. (B) Unusual charges for the third quarter of 2002 were impairment and restructuring costs of $76.8 million. (C) See Reconciliation of Selected Financial Data for calculations. "Our third quarter results demonstrate the strength and stability of our nationwide network of cancer-care providers," said R. Dale Ross, US Oncology chairman and chief executive officer. "At the beginning of the year, we projected a return to more predictable and stable operating results for 2003, and with a third consecutive quarter of year-over-year growth, we have sustained that projection. These results emphasize the importance of the patient services provided by affiliated practices, and the value of the operational and management services we offer." US Oncology highlights for 2003 are detailed below: -- US Oncology's EBITDA (C) for the third quarter was $52.9 million, compared to $45.4 million for the third quarter of 2002 and $52.4 million for the second quarter of 2003. EBITDA excludes unusual charges for the third quarter of 2002 and loss on sale of assets in the third quarter of 2003. -- The company's percentage of Field EBITDA (C) for the third quarter was 35 percent, which was relatively stable when compared to its percentage of Field EBITDA of 34 percent for the third quarter of 2002 and 34 percent for the second quarter of 2003. Field EBITDA excludes unusual charges for the third quarter of 2002 and loss on sale of assets in the third quarter of 2003. -- The company's affiliated practices' accounts receivable days outstanding were 44 at the end of the third quarter, compared to 47 at the end of the third quarter of 2002 and 43 at the end of the second quarter of 2003. -- Currently, 77 percent of US Oncology's net operating revenue is generated by non-net-revenue model practices, an increase from 72 percent at the end of the third quarter of 2002 and 76 percent at the end of the second quarter of 2003. -- The company's operating cash flow for the three months ended Sept. 30, 2003 was $69.2 million, which reflects a reduction in pharmaceutical inventory, payment of taxes and timing of certain working capital payments. As of Oct. 27, 2003, US Oncology had approximately $146.9 million in cash and cash equivalents. -- US Oncology repurchased 2.6 million shares of its common stock in the third quarter at a total cost of $20.2 million. The 9.6 million shares repurchased by US Oncology since Sept. 30, 2002 have reduced the company's weighted average shares used in diluted per-share calculations (excluding unusual charges for 2002) from 99.0 million in the third quarter of 2002 to 90.0 million for the third quarter of 2003. (C) See Reconciliation of Selected Financial Data for calculations. Medical Oncology Third quarter medical oncology net operating revenue increased by 22.4 percent year-over-year to $548.9 million. This increase is credited to growth in pharmaceutical revenue and same practice medical oncology visits. Pharmaceutical expenses as a percentage of revenues increased to 58.4 percent for the third quarter of 2003 from 53.3 percent for the third quarter of 2002. US Oncology's PPM network experienced growth in same practice medical oncology visits of 6.8 percent over the third quarter of 2002 and 0.6 percent over the second quarter of 2003. In addition, during the first nine months of 2003, US Oncology recruited 72 new physicians for its affiliated practices, 65 of whom started practicing as of the end of the third quarter. The remaining seven physicians are scheduled to begin practicing during the fourth quarter of 2003. "Our success in recruiting affiliated physicians to our network at a time in which demand is outpacing supply reflects highly on the quality of our affiliated practices and the services we provide to them," said Ross. "Adding physicians to our network is key to growing our company, and ensures that our affiliated practices can continue to provide high-quality cancer care in their communities." In its service line segment of the business, US Oncology commenced operations at three practices during the third quarter. Also in the quarter, the company converted an existing net revenue model practice, consisting of 16 physicians, to the service line model. Currently, 16 practices -- representing 104 oncologists -- have contracted to receive pharmacy-management services under the service line model. These practices include both new affiliates and existing practices that have converted to the model. The company has experienced significant growth in the service line segment of the business since introducing the offering in late 2001, and, based on third quarter 2003 results, the service line is generating annualized revenue of over $150 million. "Oncology practices are increasingly seeing the value of our service line offerings," Ross said. "We have secured nine new service line accounts this year and anticipate continued momentum in this area of our business, as reimbursement pressures compel many practices to take a closer look at maximizing efficiencies in all areas of their operations." In addition to its service line offerings, the company will continue to make its comprehensive management services solution available to oncology practices in both existing and new markets. Cancer Center Services The Cancer Center Services segment of the company also experienced growth in the third quarter. The division's net operating revenue increased 7.6 percent, as compared to the third quarter of 2002, with same practice radiation treatments per day increasing 1.7 percent over the third quarter of last year. The revenue increase is attributable to many of the company's affiliated practices expanding care options and the use of intensity modulated radiation therapy (IMRT) and high dose radiotherapy in patients requiring specialized treatments. US Oncology also continued its nationwide implementation of IMRT during the third quarter, with 11 cancer centers installing this advanced form of radiation therapy. Currently, 23 US Oncology facilities have IMRT as part of the comprehensive services available to patients treated by affiliated physicians. In addition, US Oncology is scheduled to open two cancer centers during the fourth quarter -- one in the Houston area and one in a suburb of Orlando, Fla. These centers will increase US Oncology's nationwide cancer-center network to 78 facilities. An additional eight centers are currently in various stages of development. "We continue to believe that cancer center services are invaluable to practices and the communities they serve," said Ross. "Enhancing their practices with diagnostic imaging and radiation therapy is an effective strategy for physicians to provide the complete continuum of integrated care to patients. These facilities often become the standard of care not only in their local communities, but the surrounding regions, as well. US Oncology has the experience and expertise to help physicians accomplish this goal." The company also installed two positron emission tomography (PET) systems in the third quarter, increasing the number of systems operating in the US Oncology network to 21. These systems serve a total of 38 patient-care locations. Five additional PET systems are in the development stage. Reimbursement and Business Outlook Provisions to reduce reimbursement for cancer care are currently included in Medicare prescription drug legislation being considered by Congress. Separate bills passed by the House and Senate would significantly reduce the amount that Medicare reimburses oncologists for pharmaceutical products by reducing reimbursement from an amount based on average wholesale price (AWP) to reduced reimbursement based on other models yet to be defined. Differences in the bills are currently being resolved in the conference committee process. In addition, the Centers for Medicare & Medicaid Services (CMS) has proposed changes to the Medicare system that would result in significant reductions to reimbursement for oncology pharmaceuticals. CMS has said that if Congress does not enact Medicare reform for oncology services, it would implement its changes beginning in January of 2004. The reimbursement environment has historically been an area of significant risk for US Oncology. At this time, the ultimate outcome of Medicare reform remains unclear. However, the reduction in Medicare reimbursement could materially and adversely affect the company's business. US Oncology, along with the entire cancer-care community, remains engaged in the ongoing debate on cancer-care reimbursement in Washington. In particular, the company has expended considerable resources in trying to educate members of Congress and officials at CMS regarding appropriate analysis of the costs of providing cancer care and the need for balanced reform, as well as potential impact of the current proposals. US Oncology remains committed to providing key decision-makers with the information they need in this regard. "Our efforts, as well as grassroots action, marches on Washington, advertisements and nationwide media coverage, have brought into clear focus that ill-considered cuts in reimbursement for cancer care could have a very serious and long-lasting impact," said Ross. "It is vital that any change in reimbursement does not compromise the ability of patients to access care in the community-based setting." Until such time as there is more clarity regarding the outcome of the current reimbursement reform debate, it is not possible to provide specific guidance for the company that attempts to account for the impact of potential changes to the current reimbursement model. For this reason, US Oncology cannot provide guidance for 2004. In the meantime, the company expects 2003 year-over-year growth in net income of approximately 15 to 20 percent and EBITDA growth of approximately 8 to 12 percent, both excluding unusual charges. These estimates are forward-looking statements, subject to uncertainty. Investors should refer to the company's cautionary advice regarding forward- looking statements appearing elsewhere in this news release and in the company's filings with the Securities and Exchange Commission. Financial Exhibits Exhibits -- including key operating statistics, financial statements, reconciliation of selected financial data and financial discussion -- are included in this news release. Conference Call US Oncology will host a conference call for investors Thursday, Oct. 30 at 9 a.m., CST. Investors are invited to access the call at 1-877-615-1716 and reference password "US Oncology." The conference call also can be accessed via Web cast. Details of the Web cast are available at http://www.usoncology.com/ . A replay of the conference call will be available through Nov. 13 at 1-800-642-1687. The access code for the replay is 3317884. About US Oncology, Inc. US Oncology, headquartered in Houston, Texas, is America's premier cancer- care services company. The company provides comprehensive services to a network of affiliated practices -- comprising more than 875 affiliated physicians in over 450 sites, including 76 integrated cancer centers -- in 30 states, with the mission of expanding access to and improving the quality of cancer care in local communities. These practices care for approximately 15 percent of the country's new cancer cases each year. The services the company offers include: -- Oncology Pharmaceutical Services. The company purchases and manages specialty oncology pharmaceuticals for affiliated practices. -- Cancer Center Services. The company develops and manages comprehensive, community-based cancer centers for affiliated practices. These centers integrate a comprehensive array of outpatient cancer-care services, from chemotherapy and radiation therapy to laboratory and diagnostic radiology. -- Cancer Research Services. The company facilitates a broad range of cancer research and development activities through its network of affiliated practices. -- Other Practice Management Services. Under the company's physician practice management arrangements, it acts as the exclusive manager and administrator of all day-to-day, non-medical business functions connected with affiliated practices. US Oncology operates with its affiliated practices under three economic models. In its practice-management business, the company generally offers all of the above services under two models: the "earnings model," in which management fees are based on practice earnings before income taxes; and the "net revenue model," in which the management fee consists of a fixed fee, a percentage fee of the practice's net revenues and, if certain performance criteria are met, a performance fee. In certain states, the company's fee is a fixed fee. The company also markets its core services under separate agreements through a non-physician management model, the "service line model," in which each service is offered under a separate contract and the company does not necessarily provide all of the practice management services described above. This news release contains forward-looking statements, including statements that include the words "believes," "expects," "anticipates," "estimates," "intends," "plans," "projects," or similar expressions and statements regarding our prospects. All statements concerning business outlook, reimbursement outlook, expected financial results, business development activities, the benefits of the service line model and all other statements other than statements of historical fact included in this news release are forward-looking statements. Although the company believes that the expectations reflected in such statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Matters that could further impact future results and financial condition include reimbursement rates, including in particular, reimbursement for pharmaceutical products, the success of the service line model, transition of existing practices, our ability to maintain good relationships with existing practices, expansion into new markets and development of existing markets, our ability to complete cancer centers and PET facilities currently in development, our ability to recover the costs of our investments in cancer centers, our ability to complete negotiations and enter into agreements with practices currently negotiating with us, reimbursement for health-care services, continued efforts by payors to lower their costs, government regulation and enforcement, continued relationships with pharmaceutical companies and other vendors, changes in cancer therapy or the manner in which care is delivered, drug utilization, increases in the cost of providing cancer treatment services and the operations of the company's affiliated physician practices. Please refer to the attached financial discussion and the company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for 2002 and subsequent SEC filings, for a more extensive discussion of factors that could cause actual results to differ materially from the company's expectations. US ONCOLOGY, INC. Key Operating Statistics ($ in millions) (unaudited) Q3 2003 Q3 2002 % Change Net operating revenue $641.8 $539.8 18.9% Physician compensation 132.7 121.5 9.2% Revenue $509.1 $418.3 21.7% Physician Summary: Physician Practice Management (PPM) physicians 792 836 -5.3% Service Line physicians 90 34 164.7% Total physicians 882 870 1.4% Medical Oncology/Hematology: Medical oncologists 729 670 8.8% PPM medical oncology visits 605,966 595,484 1.8% Other oncologists 38 38 0.0% Radiation Oncology: Radiation oncologists 115 123 -6.5% Radiation treatments per day 2,497 2,510 -0.5% Total cancer centers 76 77 -1.3% Imaging/Diagnostics: Diagnostic radiologists --- 39 -100.0% PET installations 2 1 100.0% Total PET installations 21 14 50.0% PET scans 5,453 3,084 76.8% New patients enrolled in research studies 673 821 -18.0% Days sales outstanding 44 47 -6.4% US ONCOLOGY, INC. Key Operating Statistics (Continued) ($ in millions) (unaudited) YTD 2003 YTD 2002 % Change Net operating revenue $1,842.6 $1,572.3 17.2% Physician compensation 394.9 351.9 12.2% Revenue $1,447.7 $1,220.4 18.6% Physician Summary: Physician Practice Management (PPM) physicians 792 836 -5.3% Service Line physicians 90 34 164.7% Total physicians 882 870 1.4% Medical Oncology/Hematology: Medical oncologists 729 670 8.8% PPM medical oncology visits 1,800,860 1,830,332 -1.6% Other oncologists 38 38 0.0% Radiation Oncology: Radiation oncologists 115 123 -6.5% Radiation treatments per day 2,569 2,544 1.0% Total cancer centers 76 77 -1.3% Imaging/Diagnostics: Diagnostic radiologists --- 39 -100.0% PET installations 5 2 150.0% Total PET installations 21 14 50.0% PET scans 14,416 9,096 58.5% New patients enrolled in research studies 2,529 2,435 3.9% Days sales outstanding 44 47 -6.4% US ONCOLOGY, INC. Condensed Consolidated Income Statement (in thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 Revenue (A) $509,100 $418,293 $1,447,722 $1,220,397 Operating expenses: Pharmaceuticals and supplies 297,544 223,149 825,498 634,964 Field compensation and benefits 90,062 84,108 267,500 256,401 Other field costs 49,382 49,027 148,125 143,288 General and administrative 19,222 16,623 51,163 45,893 Depreciation and amortization 17,187 17,112 54,966 53,330 Impairment, restructuring and other charges 1,752 76,831 1,752 116,804 475,149 466,850 1,349,004 1,250,680 Income(loss) from operations 33,951 (48,557) 98,718 (30,283) Other income (expense): Interest expense, net (A) (4,667) (4,189) (14,751) (15,752) Loss on early extinguishment of debt (A) --- --- --- (13,633) Income(loss) before income taxes 29,284 (52,746) 83,967 (59,668) Income taxes (11,421) 16,539 (32,200) 19,170 Net income(loss) $17,863 $(36,207) $51,767 $(40,498) Net income(loss) per share - basic $0.20 ($0.37) $0.57 ($0.41) Net income(loss) per share - diluted $0.20 ($0.37) $0.56 ($0.41) Net income per share, excluding unusual charges (B) - diluted $0.20 $0.15 $0.56 $0.44 Shares used in per share calculations - basic 88,472 97,148 90,934 98,845 Shares used in per share calculations - diluted 89,986 97,148 92,545 98,845 (A) Certain previously reported financial information for 2002 has been reclassified to conform to the current presentation. Interest income of $1,884 for the quarter ended September 30, 2002 and $2,104 for the first nine months of 2002 has been reclassified from revenue to interest expense, net and extraordinary loss on early extinguishments of debt of $13,633 for the first nine months of 2002 has been reclassified to other income (expense). (B) See Reconciliation of Selected Financial Data for calculations. US ONCOLOGY, INC. Condensed Consolidated Statement of Cash Flows ($ in thousands) (unaudited) Nine Months Ended September 30, 2003 2002 Net cash provided by operating activities $185,770 $134,441 Cash flows from investing activities: Acquisition of property and equipment (63,059) (45,114) Net proceeds on sale of assets 1,581 --- Net proceeds in separation transactions --- 3,150 Net cash used in investing activities (61,478) (41,964) Cash flows from financing activities: Proceeds from Credit Facility --- 24,500 Repayment of Credit Facility --- (24,500) Proceeds from senior subordinated notes --- 175,000 Repayment of senior secured notes --- (100,000) Repayment of other indebtedness (16,039) (24,602) Purchase of treasury shares (61,200) (24,534) Deferred financing costs --- (7,449) Cash payments in lieu of stock issuance (845) (3,481) Premium payment upon early extinguishment of debt --- (11,731) Proceeds from exercise of stock options 4,185 2,309 Net cash provided from (used in) financing activities (73,899) 5,512 Increase in cash and equivalents 50,393 97,989 Cash and equivalents: Beginning of period 75,029 --- End of period $125,422 $97,989 Certain previously reported financial information for 2002 has been reclassified to conform to the current year presentation. US ONCOLOGY, INC. Condensed Consolidated Balance Sheet ($ in thousands) (unaudited) September 30, December 31, 2003 2002 ASSETS Current assets: Cash and equivalents $125,422 $75,029 Accounts receivable 287,253 281,560 Other receivables 41,095 42,363 Prepaids and other current assets 22,835 20,134 Inventories 4,840 31,371 Due from affiliates 40,972 47,583 Total current assets 522,417 498,040 Property and equipment, net 344,695 327,558 Service agreements, net 242,438 252,720 Due from affiliates, long-term --- 7,708 Deferred income taxes 13,292 43,214 Other assets 24,268 25,166 Total assets $1,147,110 $1,154,406 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $80,800 $15,363 Accounts payable 152,432 163,009 Due to affiliates 63,108 32,877 Accrued compensation costs 23,322 25,417 Income taxes payable 10,711 20,441 Other accrued liabilities 42,418 36,379 Total current liabilities 372,791 293,486 Long-term indebtedness 190,308 272,042 Total liabilities 563,099 565,528 Minority interests 9,553 10,338 Stockholders' equity 574,458 578,540 Total liabilities and stockholders' equity $1,147,110 $1,154,406 Certain reclassifications have been made to the previously reported 2002 amounts to conform to the current year presentation. US ONCOLOGY, INC. Reconciliation of Selected Financial Data (in thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 Net Income / EPS before unusual charges (A) Income(loss) before income taxes $29,284 $(52,746) $83,967 $(59,668) Unusual charges (A) --- 76,831 --- 130,437 Income before income taxes and unusual charges 29,284 24,085 83,967 70,769 Tax rate 39.0% 38.0% 38.3% 38.0% Net income before unusual charges $17,863 $14,933 $51,767 $43,877 Weighted average shares outstanding - diluted 89,986 98,979 92,545 99,775 EPS before unusual charges $0.20 $0.15 $0.56 $0.44 EBITDA / Field EBITDA before unusual charges (A) Income before income taxes and unusual charges $29,284 $24,085 $83,967 $70,769 Loss on sale of assets 1,752 --- 1,752 --- Depreciation expense 13,081 12,153 42,235 36,689 Amortization expense 4,106 4,959 12,731 16,641 Interest expense, net 4,667 4,189 14,751 15,752 EBITDA before unusual charges 52,890 45,386 155,436 139,851 General & administrative expenses 19,222 16,623 51,163 45,893 Physician compensation 132,674 121,472 394,885 351,892 Field EBITDA before unusual charges $204,786 $183,481 $601,484 $537,636 (A) Unusual charges include impairment and restructuring costs of $76,831, $39,268 and $705 in Q3 2002, Q2 2002 and Q1 2002, respectively and loss on early extinguishment of debt of $13,633 in Q1 2002. US ONCOLOGY, INC. Reconciliation of Selected Financial Data (unaudited) (continued) In this news release, we use certain measurements of our performance that are not calculated in accordance with Generally Accepted Accounting Principles ("GAAP"). These non-GAAP measures are derived from relevant items in our GAAP financials. A reconciliation of the non-GAAP measure to our income statement is included in this report. Management believes that the non-GAAP measures we use are useful to investors, since they can provide investors with additional information that is not directly available in a GAAP presentation. In all events, these non- GAAP measures are not intended to be a substitute for GAAP measures, and investors are advised to review such non-GAAP measures in conjunction with GAAP information provided by us. The following is a discussion of these non- GAAP measures. "Net operating revenue" is our revenue, plus amounts retained by our affiliated physicians under the PPM model. We believe net operating revenue is useful to investors as an indicator of the overall performance of our network, since it represents the total revenue of all of our PPM practices, without taking into account what portion of that is retained as physician compensation. In addition, by comparing trends in net operating revenue to trends in our revenue, investors are able to assess the impact of trends in physician compensation on our overall performance. "Net patient revenue" is the net revenue of our affiliated practices under the PPM model for services rendered to patients by those affiliated practices. Net patient revenue is the largest component (92.7% in the first nine months of 2003) of net operating revenue. It is a useful measure because it gives investors a sense of the overall operations of our PPM network and other business lines in which our revenue is derived from payments for medical services to patients and in which we are responsible for billing and collecting such amounts. "EBITDA" is earnings before interest, taxes, depreciation and amortization, loss on early extinguishment of debt, and impairment, restructuring and other charges. We believe EBITDA is a commonly applied measurement of financial performance. We believe EBITDA is useful to investors because it gives a measure of operational performance without taking into account items that we do not believe relate directly to operations -- such as depreciation and amortization, which are typically based on predetermined asset lives, and thus not indicative of operational performance, or that are subject to variations that are not caused by operational performance -- such as tax rates or interest rates. EBITDA is a key tool used by management in assessing our business performance both as a whole and with respect to individual sites or product lines. "Field EBITDA" is EBITDA plus physician compensation and corporate general and administrative expenses. Like net operating revenue, Field EBITDA provides an indication of our overall network operational performance, without taking into account the effect of physician compensation and corporate general and administrative expense. FINANCIAL DISCUSSION INTRODUCTION The following discussion should be read in conjunction with the financial information appearing elsewhere in this news release. In addition, see "Forward-Looking Statements and Risk Factors" included in our Annual Report on Form 10-K for 2002 and subsequent filings with the Securities and Exchange Commission (SEC). Our SEC filings are available on our Web site at http://www.usoncology.com/ . General We provide comprehensive services to our network of affiliated practices, made up of more than 875 affiliated physicians in over 450 sites, with the mission of expanding access to and improving the quality of cancer care in local communities and advancing the delivery of care. The services we offer include: -- Medical Oncology Services. We provide oncology pharmaceutical services and other practice management services to medical oncologists. -- Oncology Pharmaceutical Services. We purchase and manage specialty oncology pharmaceuticals for our affiliated practices. We are responsible for purchasing, delivering and managing approximately $1.1 billion of pharmaceuticals annually through a network of 45 licensed pharmacies, 140 pharmacists and 265 pharmacy technicians. -- Other Practice Management Services. Under our physician practice management arrangements, we act as the exclusive manager and administrator of all day-to-day non-medical business functions connected with our affiliated medical oncology practices. As such, we are responsible for billing and collecting for medical oncology services, physician recruiting, data management, accounting, systems and capital allocation to facilitate growth in practice operations. -- Cancer Center Services. We develop and manage comprehensive, community-based cancer centers that integrate a broad array of outpatient cancer care services, from laboratory and diagnostic radiology capabilities to chemotherapy and radiation therapy. We have developed and operate 76 integrated community-based cancer centers and manage over one million square feet of medical office space. We have installed and manage 21 positron emission tomography (PET) units and 102 linear accelerators, including 23 units with intensity modulated radiation therapy (IMRT) capability as well as 50 computerized axial tomography (CT) units. -- Cancer Research Services. We facilitate a broad range of cancer research and development activities through our network. We contract with pharmaceutical and biotechnology firms to provide a comprehensive range of services relating to clinical trials. We currently manage 74 clinical trials, supported by our network of over 400 participating physicians in 169 research locations. We offer these services through two business models, the Physician Practice Management "PPM" model, under which we provide all of the above services under a single contract with a single fee based on overall practice performance, and the "service line model," under which practices contract with us to purchase certain of the above services, each under a separate contract, with a separate fee methodology for each service. Under the PPM model, we are reimbursed for all expenses and receive a fee generally based on one of two models. Under some agreements, the fees are based on practice earnings before taxes -- known as the "earnings model" -- subject to reductions in our fees for exceeding return on capital thresholds. In others, the fee consists of a fixed fee, a percentage of the practice's revenues (in most states) and, if certain performance criteria are met, a performance fee -- known as the "net revenue model." Under the net revenue model, the practice is entitled to retain a fixed portion of its net revenue before any service fee is paid, provided that all operating expenses have been reimbursed. In certain states our fee is a fixed fee. Our "service line model," which we are offering to practices outside of our existing PPM network, allows oncology practices to obtain our services without entering into comprehensive service agreements that would call for our involvement in all business aspects of their day-to-day operations. Instead, physician practices are able to purchase only some of our services (such as pharmacy services), as their needs warrant. Under this service line structure, we do not pay consideration to physicians in new markets to acquire the non-medical assets of their practices. We have organized the company in three divisions, and manage and operate our business under distinct service lines. This report includes segment financial information that reflects a division of our existing PPM operations into the various service line offerings in the PPM relationship. As we enter into new service line model agreements, we will report revenue from those agreements in the appropriate segment. Under the service line model, we are offering physician groups three service lines, each with a separate agreement. Those agreements are structured as follows: -- Oncology Pharmaceutical Services. The oncology pharmaceutical services service line combines all of our core competencies and service offerings related to oncology drugs into a single, coordinated business division. The division provides a comprehensive, integrated solution to all of the drug needs of an oncology practice, from purchasing drugs and supplies to mixing and managing drugs for infusion, to post-use evaluation and data aggregation. We offer a variety of contract options under which practices may contract to purchase only selected services under this service line, with an option to upgrade to a fully integrated pharmacy solution. We also act as a group purchasing organization and receive a fee from pharmaceutical manufacturers for this service, as well as for providing data and informational services to pharmaceutical companies. -- Cancer Center Services. We agree to develop outpatient cancer centers under development agreements and leases with physician practices. Under the leases, we expect to receive our economic costs of the property. In addition, we provide management services and expect to receive an additional fee of 30% of net earnings from radiation and diagnostic operations, subject to adjustments. -- Cancer Research Services. We contract with pharmaceutical companies and others needing research services on a per trial basis. Our contracts with physician groups outline the terms of access to clinical trials and provide for research related services. We pay physicians for each trial based on economic considerations relating to that trial. Forward-looking Statements and Risk Factors The following statements are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) certain statements, including possible or assumed future results of operations contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," (ii) any statements contained herein regarding the prospects for any of our business or services and our development activities relating to the service line model, cancer centers and PET installations; (iii) any statements preceded by, followed by or that include the words "believes", "expects", "anticipates", "intends", "estimates", "plans" or similar expressions; and (iv) other statements contained herein regarding matters that are not historical facts. US Oncology's business and results of operations are subject to risks and uncertainties, many of which are beyond the Company's ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Factors that could cause actual results to differ materially include, but are not limited to, reimbursement rates for pharmaceutical products, the success of the service line model, transition of existing practices, our ability to attract and retain additional physicians and practices under the service line model, expansion into new markets, our ability to develop and complete cancer centers and PET installations, our ability to maintain good relationships with our affiliated practices, our ability to recover the cost of our investment in cancer centers, government regulation and enforcement (and the related impact of qui tam suits), reimbursement for healthcare services, particularly reimbursement for pharmaceuticals, changes in cancer therapy or the manner in which cancer care is delivered, drug utilization, our ability to create and maintain favorable relationships with pharmaceutical companies and other suppliers and the operations of the Company's affiliated physician groups. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and subsequent filings with the SEC, particularly the section entitled "Risk Factors," for a more detailed discussion of certain of these risks and uncertainties. The cautionary statements contained or referred to herein should be considered in connection with any written or oral forward-looking statements that may be issued by US 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. In addition to the Risk Factors discussed and referenced above, investors should consider the following additional risks. Legislation pending in the United States Congress could have a material adverse effect on our business. On June 27, 2003, both the United States Senate and House of Representatives passed bills providing for a broad prescription drug benefit under Medicare. Each of those bills would also change the way in which oncologists are reimbursed for oncology pharmaceuticals under Medicare and lead to significant reductions in that reimbursement. The bills are now before a conference committee of the House and Senate, which must agree on a single, negotiated bill in order for legislation to be enacted. Currently, drugs used by oncologists are among the few drugs covered by Medicare for outpatients. Providers are reimbursed for drugs based on the average wholesale price (AWP) of the drugs. AWP is determined by third-party information services using data furnished by pharmaceutical companies or market surveys. Cancer care providers are reimbursed by Medicare for pharmaceuticals themselves and the costs of administration, with the bulk of reimbursement being for the drugs themselves. Typically, providers acquire drugs at prices that are less than AWP. Accordingly, the reimbursement received from Medicare by providers for dispensing many pharmaceuticals exceeds the cost of the pharmaceuticals themselves. However, there are many other costs of administration, such as supplies, nursing time, storage and preparation of drugs, financial counseling, bad debt, psychological and social services, capital costs, occupancy costs and other costs, that are not covered or not adequately reimbursed by Medicare reimbursement for drug administration. Providers rely on drug reimbursement to be able to fund these other aspects of care for which Medicare reimbursements are substantially less than actual expenses and to support the outpatient cancer care delivery system. During the first nine months of 2003, approximately $1.2 billion in net operating revenue, out of a total of $1.8 billion, was attributable to amounts paid by all payors to US Oncology-affiliated physicians for pharmaceuticals. Approximately 41% of net patient revenue of our PPM practices is derived from Medicare, those practices' largest payor. Under the House bill, physicians would be required either to accept substantially reduced reimbursement from Medicare for oncology drugs or allow drugs to be purchased from third-party vendors, with physicians neither paying for, nor receiving any reimbursement for, oncology drugs under Medicare. The Senate bill mandates a significant reduction in government reimbursement by initially paying at AWP minus 15%, with further reductions to reimbursement based on an approximation of acquisition cost rather than AWP. Each of these bills would result in a significant reduction in the amount that Medicare reimburses cancer care providers for chemotherapy drugs. Although both bills contemplate an assessment by the Centers for Medicare & Medicaid Services (CMS) of what increases in other oncology reimbursement would be required to preserve the oncology delivery system, it is unclear whether these assessments will yield adequate adjustments. Additionally, CMS has announced its intention to adopt new rules that would reduce Medicare reimbursement for cancer drugs. Various reform options have been published by CMS for comment and include reducing Medicare reimbursement to AWP minus 15%, matching Medicare reimbursement to private reimbursements, reimbursing for pharmaceuticals based on government survey measuring prices generally available to providers or requiring drugs to be purchased through third-party vendors. The comment period for the proposals has expired, but we cannot predict when CMS will act to finalize rules, if at all. We believe that any significant reduction in reimbursement for pharmaceuticals without a sufficient increase in rates of reimbursement for other oncology services could significantly compromise the ability of cancer care providers to continue to administer drugs in an outpatient setting. To the extent cancer care providers are able to continue to provide full range medical oncology services in the outpatient setting, such a change could nevertheless have a material adverse effect on the financial results of cancer care providers, which in turn would adversely affect our results of operations, financial condition and prospects. US Oncology, along with the entire cancer-care community, remains engaged in the ongoing debate on cancer reimbursement in Washington. In particular, we have expended considerable resources in trying to educate members of Congress and officials at CMS regarding appropriate analysis of the costs of providing cancer care and the need for balanced reform, as well as the potential impact of the current proposals. We remain committed to providing key decision-makers with the information they need in this regard. Our efforts have included face-to-face meetings, formal comments to CMS proposals and more general public relations and advertising efforts. Although we cannot be certain of their impact, we do believe that these efforts have been successful in communicating our concerns to policymakers. It is impossible to determine at this time what legislation, if any, will ultimately be adopted. The proposed cancer reimbursement changes are part of much larger bills, with numerous factors impacting their likelihood of passage. Several of the fundamental aspects of the bills, such as how third- party vendors will be selected and priced, how average sales price will be determined, or how other reimbursement will increase, also remain largely undefined. These issues apply equally to the CMS proposal. It is also our experience that changes in Medicare reimbursement often lead to corresponding changes in reimbursement from other payors, although it is not possible for us to assess the likelihood and extent of such impact on other, non-governmental payors. Most of our managed care agreements can be terminated by either party with little notice and many refer to AWP-based reimbursement, increasing the likelihood that they will be renegotiated if there is material change in governmental reimbursement. Finally, many of our management services agreements with PPM practices include a clause requiring renegotiation of their terms upon certain materially adverse changes in governmental reimbursement or regulation. In the event such clauses were triggered by any reimbursement change, our network and results of operations would be subject to even greater uncertainty. For these reasons, we cannot at this time assess the likely impact of the pending legislation. However, unless and until legislation or rules are adopted, continued uncertainty surrounding Medicare reimbursement could have an adverse impact on our business operations and markets for our securities. Furthermore, as we have previously stated, there is a possibility that changes that are ultimately adopted could have a material adverse effect on outpatient cancer care in this country and on our financial condition, results of operations and business prospects. Adverse effects could include an inability to maintain or expand our network, additional impairments of service agreements and other long-term assets, inability to access capital, significantly reduced earnings and a significantly depressed share price. A pending Congressional inquiry could harm our business. We have been asked to furnish certain information regarding pharmaceutical purchasing and usage by our network in connection with the House of Representatives' Energy and Commerce Committee's investigation into reimbursement of oncology pharmaceuticals under the Medicaid program. We have furnished certain information and continue to assist the committee. The committee's inquiry does not constitute a formal allegation of illegality or wrongdoing by us. We understand that the inquiry is part of a broader inquiry of pharmaceutical practices under Medicaid generally and that requests for information have been sent to numerous pharmaceutical companies, oncology-based group purchasing organizations, distributors and state governors, as well as US Oncology. The investigation deals with Medicaid reimbursements, which constitute less than 3% of our network's net patient revenue. However, we cannot assure investors as to what course the investigation may ultimately take, or whether its scope will be expanded or its focus narrowed. New rules regarding electronic submissions of claims could adversely impact the timeliness of collections in the near-term. On October 16, 2003, new rules under the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") went into effect mandating national standards for electronic data submissions and code sets relating to certain health care transactions. Although we believe that our systems are substantially compliant with the new rules, delays in our claims or delays of other covered entities relating to systems implementation and conversion could adversely affect the timeliness of payments for our practices' submitted claims. It is not possible to assess the magnitude of any such delays or disruptions, but we would expect them to be temporary. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to service agreements, accounts receivable, cancer centers, reimbursement, pharmaceutical rebates, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. In addition, as circumstances change, we may revise the basis of our estimates accordingly. For example, in the past we have recorded unusual charges to reflect revisions in our valuations of accounts receivable as a result of actual collections patterns or a sale of accounts receivable. We maintain decentralized billing systems and continue to upgrade and modify those systems. We take this into account as we continue to evaluate receivables and record appropriate reserves, based upon the risks of collection inherent in such a structure. In the event subsequent collections are higher or lower than our estimates, results of operations in subsequent periods could be either positively or negatively impacted as a result of such prior estimates. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated condensed financial statements. These critical accounting policies include our policy of non-consolidation, revenue recognition (including calculation of physician compensation), general estimates of accruals, including accruals relating to accounts receivable, and intangible asset amortization and impairment. Please refer to the "Critical Accounting Policies" section of our Annual Report on Form 10-K for the year ended December 31, 2002 for a more detailed discussion of such policies. Discussion of Non-GAAP Information In this report, we use certain measurements of our performance that are not calculated in accordance with Generally Accepted Accounting Principles ("GAAP"). These non-GAAP measures are derived from relevant items in our GAAP financials. A reconciliation of the non-GAAP measures to our income statement is included in this report. Management believes that the non-GAAP measures we use are useful to investors, since they can provide investors with additional information that is not directly available in a GAAP presentation. In all events, these non- GAAP measures are not intended to be a substitute for GAAP measures, and investors are advised to review such non-GAAP measures in conjunction with GAAP information provided by us. The following is a discussion of these non- GAAP measures. "Net operating revenue" is our revenue, plus amounts retained by our affiliated physicians under the PPM model. We believe net operating revenue is useful to investors as an indicator of the overall performance of our network, since it represents the total revenue of all of our PPM practices, without taking into account what portion of that is retained as physician compensation. In addition, by comparing trends in net operating revenue to trends in our revenue, investors are able to assess the impact of trends in physician compensation on our overall performance. "Net patient revenue" is the net revenue of our affiliated practices under the PPM model for services rendered to patients by those affiliated practices. Net patient revenue is the largest component (92.7% in the first nine months of 2003) of net operating revenue. It is a useful measure because it gives investors a sense of the overall operations of our PPM network and other business lines in which our revenue is derived from payments for medical services to patients and in which we are responsible for billing and collecting such amounts. "EBITDA" is earnings before taxes, interest, depreciation and amortization and loss on early extinguishment of debt and impairment, restructuring and other charges. We believe EBITDA is a commonly applied measurement of financial performance. We believe EBITDA is useful to investors because it gives a measure of operational performance without taking into account items that we do not believe relate directly to operations -- such as depreciation and amortization, which are typically based on predetermined asset lives, and thus not indicative of operational performance, or that are subject to variations that are not caused by operational performance -- such as tax rates or interest rates. EBITDA is a key tool used by management in assessing our business performance both as a whole and with respect to individual sites or product lines. "Field EBITDA" is EBITDA plus physician compensation and corporate general and administrative expenses. Like net operating revenue, Field EBITDA provides an indication of our overall network operational performance, without taking into account the effect of physician compensation and corporate general and administrative expense. FIRST ADD -- ADDITIONAL TEXT AND TABLES -- TO FOLLOW DATASOURCE: US Oncology, Inc. CONTACT: Bruce Broussard, Investor Relations, +1-832-601-6103, or , or Steve Sievert, Public Relations, +1-832-601-6193, or , both of US Oncology, Inc. Web site: http://www.usoncology.com/

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