<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996 or
(_) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-15416
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RESPONSE ONCOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1212264
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1775 Moriah Woods Blvd., Memphis, TN 38117
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(Address of principal executive offices) (Zip Code)
(901) 761-7000
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(Registrant's telephone number, including area code)
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 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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 7,378,189 shares as of May 13, 1996.
This filing consists of 12 sequentially numbered pages.
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INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements
of Operations for the Three Months Ended
March 31, 1996 and 1995 4
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1996 and 1995 5
Notes to Condensed Consolidated
Financial Statements -- March 31, 1996 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31,
1996 1995
ASSETS ----------- ------------
CURRENT ASSETS (Unaudited) (Note)
<S> <C> <C>
Cash and cash equivalents $ 483,191 $4,204,558
Short-term investments 361,718 361,718
Accounts receivable, less allowances for doubtful accounts
of $1,899,384 and $2,079,788 15,100,543 13,934,810
Supplies 1,090,643 1,119,671
Prepaid expenses 525,882 550,287
Advances to affiliated physician group 3,112,552 ---
Other current assets 2,089,590 465,738
----------- -----------
TOTAL CURRENT ASSETS 22,764,119 20,636,782
PROPERTY AND EQUIPMENT--at cost, less allowances for
depreciation and amortization of $6,904,986 and $6,235,730 3,695,637 3,822,425
OTHER ASSETS
Deferred charges, less allowances for amortization of $94,222 and $65,807 325,733 186,528
Intangible assets, less allowances for amortization of $66,550 11,656,558 ---
Other assets 176,805 119,436
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12,159,096 306,064
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TOTAL ASSETS $38,618,852 $24,765,271
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,696,496 $3,690,937
Accrued expenses and other liabilities 1,891,482 1,134,688
Notes payable 3,607,711 ---
Capital lease obligations 57,622 58,501
Current portion of long-term note and other liabilities 396,997 ---
----------- -----------
TOTAL CURRENT LIABILITIES 11,650,308 4,884,126
CAPITAL LEASE OBLIGATIONS --- 15,492
LONG-TERM NOTE AND OTHER LIABILITIES 6,265,369 ---
MINORITY INTEREST 261,425 23,056
STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock, $1.00 par value, authorized 3,000,000
shares; issued and outstanding 27,833 at each period end 27,833 27,833
Common Stock, $.01 par value, authorized 30,000,000 shares; issued
and outstanding 7,378,189 and 7,371,589 shares, respectively 73,782 73,716
Paid-in capital 60,137,024 60,054,215
Retained earnings (deficit) (39,796,889) (40,313,167)
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20,441,750 19,842,597
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,618,852 $24,765,271
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
See accompanying notes.
3
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996 March 31, 1995
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<S> <C> <C>
NET REVENUE $13,340,885 $11,200,653
OTHER INCOME--principally interest 16,729 50,714
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13,357,614 11,251,367
COSTS AND EXPENSES
Operating 10,344,781 8,218,471
General and administrative 1,266,840 1,244,190
Depreciation and amortization 570,965 411,544
Interest 192,281 3,850
Provision for doubtful accounts 372,100 545,103
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12,746,967 10,423,158
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EARNINGS BEFORE MINORITY INTEREST $ 610,647 $ 828,209
Minority interest 94,369 ---
----------- -----------
NET EARNINGS $ 516,278 $ 828,209
=========== ===========
NET EARNINGS PER COMMON SHARE $ 0.07 $ 0.12
=========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES 7,669,105 6,966,762
=========== ===========
</TABLE>
See accompanying notes.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996 March 31, 1995
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,656,596 $ 669,802
INVESTING ACTIVITIES
Purchases of equipment (218,095) (308,628)
Advances to affiliated physician group (3,112,552) ---
Acquisition of non-medical assets of affiliated physician group (5,343,750) ---
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (8,674,397) (308,628)
FINANCING ACTIVITIES
Proceeds from the exercise of stock options 82,875 21,875
Net proceeds from line of credit 3,528,345 ---
Principal payments on notes payable (298,415) ---
Principal payments on capital lease obligations (16,371) (61,030)
----------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,296,434 (39,155)
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,721,367) 322,019
Cash and cash equivalents at beginning of period 4,204,558 2,922,266
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 483,191 $3,244,285
=========== ==========
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid for interest was $171,735 and $3,850 for the periods ended March 31,
1996 and 1995, respectively.
Non-Cash Investing and Financing Activities: During the quarter ended March
31, 1996, the Company acquired the assets of, and entered into a long-term
management services agreement with Oncology Hematology Group of South Florida,
P.A. (the "Group"). The total consideration was approximately $12.1 million,
approximately $5.3 million of which was paid in cash, approximately $6.0
million was paid by delivery of the Company's long-term unsecured
interest-bearing amortizing promissory note and the balance being paid over 16
calendar quarters at the rate of $50,000 per quarter.
See accompanying notes.
5
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Response Oncology, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1996
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of Management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Certain 1995 amounts have been reclassified for comparative
purposes with no effect on net earnings. Operating results for the three month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Response Oncology, Inc. and Subsidiaries' annual report on
Form 10-K for the year ended December 31, 1995.
NET REVENUE: The following table is a summary of net revenue by source for the
respective periods ended March 31. Patient services revenue is recorded net of
contractual allowances and discounts. Practice management service fees from
the Company's first practice management affiliation are paid pursuant to a
management services agreement with the affiliated practice and are comprised of
the clinic expense portion (which is aggregate practice expenses prior to
physician expenses) and a fixed portion.
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Patient Services Revenue $ 8,115,085 $ 8,564,501
Pharmaceutical Sales to Physicians 3,222,145 2,367,153
Practice Management Service Fees 1,630,155 ---
Physician Investigator Studies 373,500 268,999
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$13,340,885 $11,200,653
</TABLE>
AMORTIZATION Intangible assets consist of the costs of purchasing management
services agreements with physician practices. These costs are amortized over
the initial noncancelable 40-year terms of the related management services
agreements. The agreements are noncancelable except for performance defaults.
In the event a practice breaches the agreement, of if the Company terminates
with cause, the practice is required to purchase all tangible assets at fair
market value and pay substantial liquidating damages. The carrying value of
the management services agreements is reviewed for impairment at the end of
each reporting period.
NET EARNINGS PER COMMON SHARE: Net earnings per common share for the quarters
ended March 31, 1996 and 1995 have been computed by dividing net earnings by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the respective periods. Shares issuable
pursuant to the conversion of the long-term note delivered by the Company in
its first practice management affiliation would have been antidilutive in the
period ended March 31, 1996. The weighted average number of common shares and
net earnings per share for the period ended March 31, 1995 have been restated
to reflect a one-for-five reverse split effected November 1, 1995.
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Note 2 - Parent Company
Response Oncology, Inc. is a subsidiary of Seafield Capital Corporation
("Seafield").
On February 10, 1995, Seafield announced its retention of a financial advisor
to evaluate and recommend steps to enhance the value of Seafield to its
shareholders. Any transaction pursued by Seafield will be likely to result in
a significant change in the Company's ownership.
Note 3 - Acquisition
On January 2, 1996, the Company acquired certain assets of, and entered into a
long-term management services agreement with Oncology Hematology Group of South
Florida, P.A. (the "Group"). The total consideration was approximately $12.1
million, approximately $5.3 million of which was paid in cash, approximately
$6.0 million was paid by delivery of the Company's long-term unsecured
interest-bearing amortizing promissory note and the balance being paid over 16
calendar quarters at the rate of $50,000 per quarter. The Group, consisting of
nine physicians, is located on the campus of Baptist Hospital in Miami,
Florida. Under the management services agreement, the Company receives a
management fee to manage the non-medical aspects of the practice and to
coordinate practice enhancement opportunities with the physicians.
Note 4 - Advances to Affiliated Physician Groups
Pursuant to the management services agreement between the Company and the
Group, the Company receives a management fee to manage the non-medical aspects
of the Group's practice. The management fee earned during the quarter was
included in Advances to Affiliated Physician Groups at March 31, 1996. In
addition, the Company funded certain working capital needs of the Group which
comprised the balance of the amount due from the Group at March 31, 1996. The
Group repaid approximately $2,500,000 of the advances by May 1996.
Note 5 - Notes Payable
As of March 31, 1996, the Company had a $5,000,000 revolving bank line of
credit, secured by eligible accounts receivable, bearing interest at the bank's
prime rate plus one percent. Borrowings of $3,528,000 were outstanding under
the line at March 31, 1996 at an interest rate of 9.25%. The current line
expires June 1, 1996 and is subject to renewal at the bank's discretion.
Note 6 - Long-term Note and Other Liabilities
Long-term notes payable and other liabilities primarily consists of the
Company's long-term unsecured amortizing promissory note bearing interest at 9%
issued as partial consideration for the acquisition of certain assets of the
Group. The quarterly payments of interest and principal under the long-term
note may, at the election of the holders, be paid in shares of common stock of
the Company based on a conversion price in excess of the market price at the
closing date of the acquisition, or $17.50. The unpaid principal amount of the
long-term note was $5,912,366 at March 31, 1996. The remaining balance is
attributable to other acquisition related liabilities.
Note 7 - Commitments and Contingencies
With respect to professional and general liability risks, the Company currently
maintains an insurance policy that provides coverage during the policy period
ending August 1, 1996, on a claims-made basis, for $1,000,000 per claim in
excess of the Company retaining $25,000 per claim, and $3,000,000 in the
aggregate. Costs of defending claims are in addition to the limit of
liability. In addition, the Company maintains a $50,000,000 umbrella policy
with respect to potential general liability claims. Since inception, the
Company has incurred no professional or general liability losses and as of
March 31,
7
<PAGE> 8
1996, the Company was not aware of any material pending professional or general
liability claims.
Note 8 - Subsequent Events
Subsequent to March 31, 1996, the Company announced the completion of its
second practice management affiliation with Knoxville Hematology Oncology
Associates, a medical oncology and hematology practice in Knoxville, Tennessee.
In addition, two non-binding letters of intent for practice management
affiliations have been signed.
The Company also announced subsequent to March 31, 1996 that it had procured a
$10 million loan from Seafield to be used to finance the practice management
affiliation with Knoxville Hematology Oncology Associates. The loan has a
maturity date of December 31, 1996, bears interest at the rate of prime plus
1%, is unsecured and, after August 1, 1996, is convertible at the option of
Seafield into shares of Response common stock at a conversion price equal to
the market price of the common stock at the time of conversion.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Response Oncology is a comprehensive cancer management company which owns
and/or operates a network of outpatient treatment centers or IMPACT(R)
(IMPlementing Advanced Cancer Treatments) Centers, which provide stem cell
supported high-dose chemotherapy and other advanced cancer treatment services
under the direction of practicing oncologists; owns the assets of and manages
oncology practices; and conducts clinical cancer research on behalf of
pharmaceutical manufacturers.
As of March 31, 1996, the Company owned or operated in joint ventures with
hospitals 43 IMPACT(R) Centers in 21 states, providing advanced treatment
capabilities and facilities to over 300 medical oncologists.
On January 2, 1996, the Company acquired the assets of, and entered into a
long-term management services agreement with Oncology Hematology Group of South
Florida, P.A. (the "Group"). The Group, consisting of nine physicians, is
located on the campus of Baptist Hospital in Miami, Florida. Under the
management services agreement, the Company receives a management fee to manage
the non-medical aspects of the practice and to coordinate practice enhancement
opportunities with the physicians. The Company will seek improvements in the
operating results of the Group through a professional focus on management and
managed care relationships, economies of scale, and the addition of new
services.
The Company completed its second practice management affiliation in April 1996
and has entered into two additional letters of intent for practice management
affiliations, furthering the Company's movement into the business of managing
oncology practices.
Results of Operations
The Company reported net earnings for the first quarter of 1996 of $516,000, or
$.07 per share, compared to net earnings of $828,000, or $.12 per share, for
the comparable period last year.
Net revenue for the first quarter of 1996 was $13,341,000, an increase of
$2,140,000, or 19%, when
8
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compared to the first quarter of 1995. The increase is primarily attributable
to revenue from the first practice management affiliation, newly established
high-dose chemotherapy centers in joint venture with host hospitals and
increased pharmaceutical sales to physicians.
Patient services revenue decreased $449,000, or 5%, between the quarters ended
March 31, 1996 and 1995 due primarily to an unacceptable utilization level at
the IMPACT Center in Hampton Roads, Virginia. The Company closed the Center in
April 1996.
Operating expenses increased $2,126,000 or 26% between the quarters ended March
31, 1996 and 1995. These expenses consist of payroll costs, pharmaceutical and
laboratory expenses, medical director fees, rent expense and other operational
expenses, and display a high degree of variability in proportion to patient
services revenue. Operating expenses as a percent of net revenue were 78%
compared to 73% for the comparable period of 1995. This increase is primarily
attributable to an increase in lower margin revenue from practice management
affiliations and sales of pharmaceuticals to physicians. In addition, expenses
were incurred related to network development in South Florida and the
implementation of the practice management division, both of which the Company
believes to be strategically required to accommodate future growth.
General and administrative costs increased $23,000 or 2% between the quarters
ended March 31, 1996 and 1995. As a percentage of net revenue, general and
administrative costs were 9% compared to 11% for the comparable period of 1995.
Depreciation and amortization expense increased by $159,000 or 39% when
compared to the first quarter of 1995. The increase is attributable to the
amortization of the excess of cost over net acquired assets in the Company's
first practice management affiliation over the management services agreement
period, or 40 years.
Interest expense increased by $188,000 when compared to the first quarter of
1995. The increase is attributable to an increase in the average borrowings
outstanding under the line of credit between the periods ended March 31, 1996
and 1995.
The provision for doubtful accounts decreased $173,000 or 32% between the
quarters ended March 31, 1996 and 1995. The provision as a percentage of net
revenue was 3% and 5% for the quarters ended March 31, 1996 and 1995,
respectively. The decrease is attributable to a higher proportion of
contracted patient accounts, improved collections performance and an increase
in revenues from practice management affiliation, pharmaceutical sales to
physicians, hospital management fees, and contract research for which
collection is more certain.
Minority interest of $94,000 was recorded during the period ended March 31,
1996 related to the operations of the Company's majority-owned or controlled
Centers in joint venture with hospitals. The Centers were not operational
during the comparable period in 1995.
9
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Liquidity and Capital Resources
As of March 31, 1996, the Company's working capital was $11,114,000 with
current assets of $22,764,000 and current liabilities of $11,650,000. Cash and
cash equivalents and short-term investments represent $845,000 of the Company's
current assets.
Net cash provided by operating activities increased $987,000 between the
quarters ended March 31, 1996 and 1995. The increase is primarily attributable
to an increase in accounts payable and accrued expenses due in part to the
increased operating expenses from the Company's first practice management
affiliation.
As of March 31, 1996, the Company had a $5,000,000 revolving bank line of
credit secured by eligible accounts receivable bearing interest at the bank's
prime rate plus one percent. Borrowings of $3,528,000 were outstanding under
the line at March 31, 1996 at an interest rate of 9.25%.
On January 2, 1996, the Company acquired the assets of, and entered into a
long-term management services agreement with the Group. The total
consideration was approximately $12.1 million, approximately $5.3 million of
which was paid in cash, approximately $6.0 million was paid by delivery of the
Company's long-term unsecured interest-bearing amortizing promissory note and
the balance being paid over 16 calendar quarters at the rate of $50,000 per
quarter.
The practice management affiliation with the Group resulted in net increases of
$1.2 million in other receivables, $.2 million in equipment, $11.7 in intangible
assets, and $.6 million in accounts payable and accrued expenses.
Subsequent to March 31, 1996, the Company announced the completion of its
second practice management affiliation with Knoxville Hematology Oncology
Associates, a medical oncology and hematology practice in Knoxville, Tennessee.
In addition, two additional non-binding letters of intent for practice
management affiliations have been signed.
The Company also announced subsequent to March 31, 1996 that it had procured a
$10 million loan from Seafield to be used to finance the practice management
affiliation with Knoxville Hematology Oncology Associates. The loan has a
maturity date of December 31, 1996, bears interest at the rate of prime plus
1%, is unsecured and, after August 1, 1996, is convertible at the option of
Seafield into shares of Response common stock at a conversion price equal to
the market price of the common stock at the time of conversion.
The Company is currently evaluating means of optimally financing anticipated
acquisitions, and it is contemplated that such acquisitions will be financed
through combinations of debt and equity.
New Accounting Standards
No recently issued accounting standards presently exist which will require
adoption in future periods by the Company.
10
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PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 --- Financial Data Schedule --- as filed
electronically by the Registrant
b. Reports on Form 8-K
Form 8-K dated January 2, 1996
Item 2. Acquisitions
Registrant announced that it had acquired the assets of, and
entered into a long-term management services agreement with
Oncology Hematology Group of South Florida, P.A.
Form 8-K dated January 2, 1996
Item 5. Other Events
Press release announcing appointment of new director and
other executive management changes.
Form 8-K/A dated January 2, 1996
Item 2. Acquisitions
Pro forma financial information filed pursuant to
acquisition of Oncology Hematology Group of South Florida,
P.A.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Response Oncology, Inc.
Date: May 15, 1996 By: /s/ Daryl P. Johnson
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Daryl P. Johnson
Chief Financial Officer
(signed on behalf of the
registrant and as principal
financial officer)
Date: May 15, 1996 By: /s/ Debbie K. Elliott
------------ ------------------------------
Debbie K. Elliott
Controller
(principal accounting officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q
FOR THE PERIOD ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 483
<SECURITIES> 362
<RECEIVABLES> 17,000
<ALLOWANCES> 1,899
<INVENTORY> 0
<CURRENT-ASSETS> 22,764
<PP&E> 10,601
<DEPRECIATION> 6,905
<TOTAL-ASSETS> 38,619
<CURRENT-LIABILITIES> 11,650
<BONDS> 0
0
74
<COMMON> 28
<OTHER-SE> 20,340
<TOTAL-LIABILITY-AND-EQUITY> 38,619
<SALES> 0
<TOTAL-REVENUES> 13,340
<CGS> 0
<TOTAL-COSTS> 10,345
<OTHER-EXPENSES> 1,838
<LOSS-PROVISION> 372
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 516
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
