<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, 1997 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
- ------------ -------------------
(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
--- ---
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,11,967,543 shares as of May 13, 1997.
This filing consists of 12 sequentially numbered pages
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INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets,
March 31, 1997 and December 31, 1996 ................. 3
Condensed Consolidated Statements
of Operations for the Three Months Ended
March 31, 1997 and March 31, 1996 .................... 4
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1997 and March 31, 1996 .................... 5
Notes to Condensed Consolidated
Financial Statements ................................. 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................................ 9
PART II. OTHER INFORMATION
Item 5. Market Information and Related Stockholder Matters.... 11
Item 6. Exhibits and Reports on Form 8-K ..................... 11
Signatures ...................................................... 12
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
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March 31, 1997 December 31, 1996
(Unaudited) (Note 1)
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ --- $ 415
Accounts receivable, less allowance for doubtful accounts
of $2,342 and $1,774 16,831 14,297
Supplies 2,492 2,415
Prepaid expenses and other current assets 2,596 2,168
Due from affiliated physicians 14,131 12,423
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TOTAL CURRENT ASSETS 36,050 31,718
Property and equipment - at cost, less accumulated
depreciation and amortization of $8,745 and $8,160 5,050 5,406
Deferred charges, less accumulated amortization of $252 and $232 359 490
Management Service Agreements, less accumulated amortization of $1,985 and
$1,345 99,233 101,963
Deferred tax asset 3,198 3,267
Other assets 100 106
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TOTAL ASSETS $143,990 $142,950
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 783 $ ---
Accounts payable 4,343 4,863
Accrued expenses and other liabilities 5,425 4,268
Notes payable 1,313 7,847
Capital lease obligations 72 74
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TOTAL CURRENT LIABILITIES 11,936 17,052
Capital lease obligations, less current portion 107 124
Notes payable, less current portion 45,586 62,106
Deferred tax liability 22,696 25,127
Minority interest 566 374
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $1.00 par value, authorized 3,000,000
shares; issued and outstanding 27,233 shares at each period end,
liquidating preference $11.00 per share 27 27
Common Stock, $.01 par value, authorized 30,000,000 shares; issued and
outstanding 11,967,543 and 8,947,018 shares, respectively 120 89
Paid-in capital 101,488 77,454
Accumulated deficit (38,536) (39,403)
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63,099 38,167
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $143,990 $142,950
============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts in thousands except for share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, 1997 March 31, 1996
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<S> <C> <C>
NET REVENUE $ 24,365 $ 13,341
Other income 69 17
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24,434 13,358
COSTS AND EXPENSES
Operating 18,362 10,345
General and administrative 1,683 1,267
Depreciation and amortization 1,311 571
Interest 1,112 192
Provision for doubtful accounts 376 372
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22,844 12,747
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 1,590 611
Minority owners' share of net earnings (192) (95)
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EARNINGS BEFORE INCOME TAXES 1,398 516
Provision for income taxes 531 ---
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NET EARNINGS TO COMMON STOCKHOLDERS $ 867 $ 516
============== ==============
EARNINGS PER COMMON SHARE $ 0.09 $ 0.07
============== ==============
Weighted average number of shares 10,088,098 7,669,105
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
<S> <C> <C>
1997 1996
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OPERATING ACTIVITIES
Net earnings (loss) $ 867 $ 516
Adjustments to reconcile net earnings (loss) from operations:
Depreciation and amortization 1,311 571
Provisions for doubtful accounts 376 372
Minority owners' share of net earnings 192 94
Changes in assets and liabilities net of effect of acquisitions:
Accounts receivable (2,910) (1,537)
Supplies, prepaid expenses, and other current assets (505) (444)
Deferred charges and other assets 54 (77)
Net advances to affiliated physician groups (1,959) (3,113)
Accounts payable and accrued expenses 1,284 2,162
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NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (1,290) (1,456)
INVESTING ACTIVITIES
Purchase of equipment (240) (218)
Acquisition of nonmedical assets of affiliated physician
practices --- (5,344)
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NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES (240) (5,562)
Bank overdraft 783 ---
Financing costs incurred (18) ---
Proceeds from exercise of stock options and warrants --- 83
Principal payments on notes payable (7,784) (298)
Proceeds from notes payable 7,151 ---
Proceeds from note payable to parent 1,005 3,528
Principal payments on capital lease obligations (22) (16)
-------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,115 3,297
DECREASE IN CASH AND CASH
EQUIVALENTS (415) (3,721)
Cash and cash equivalents at beginning of period 415 4,204
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ --- $ 483
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1997
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 amounts have been reclassified for comparative purposes
with no effect on net earnings. Operating results for the three month period
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Response Oncology, Inc. and Subsidiaries' (the "Company's") annual report on
Form 10-K for the year ended December 31, 1996.
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 of $1,140,000 and $1,167,000 for the
quarters ended March 31, 1997 and 1996, respectively.
The Company's revenue from practice management affiliations includes practice
operating expenses (other than amounts retained by physicians) and a management
fee either fixed in amount or equal to a percentage of each affiliated oncology
group's adjusted net revenue or net operating income. In certain affiliations,
the Company may also be entitled to a performance fee if certain financial
criteria are satisfied.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended March 31,
1997 1996
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<S> <C> <C>
Net patient services revenue $9,894 $9,282
Practice management service fees 10,875 1,630
Pharmaceutical sales to physicians 4,153 3,222
Physician investigator studies 583 374
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$25,505 $14,508
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</TABLE>
Management Service Agreements: Costs of obtaining Service Agreements are
amortized using the straight-line method over the 40-year terms of the
agreements. Certain purchase accounting adjustments were made during the first
quarter of 1997 which reduced management service agreements, net of accumulated
amortization by $2,090,000, primarily due to a change in estimated deferred tax
liability.
Net Earnings (Loss) Per Common Share: Net earnings (loss) per common share for
the three months ended March 31, 1997 and 1996 has been computed based upon 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 notes delivered by the Company in its management
affiliations are excluded since they would have been anti-dilutive in the three
months ended March 31, 1997 and 1996. Fully diluted earnings per share are not
disclosed as the effect of assuming the conversion of the preferred stock is
clearly immaterial.
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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 - NOTES PAYABLE
In May 1996, the Company entered into a $27.5 million Credit Facility with
NationsBank and Union Planters to fund the Company's acquisition and working
capital needs and to repay its existing facility with Union Planters. The
Credit Facility, comprised of a $22.0 million Acquisition Facility and a $5.5
million Working Capital Facility, is collateralized by the common stock of the
Company's subsidiaries. The Acquisition Facility bears interest at a variable
rate equal to LIBOR plus a spread between 1.5% and 2.625%, depending upon
borrowing levels. The Working Capital Facility bears interest at a variable
rate equal to LIBOR plus a spread between 1.875% and 2.375%. At March 31,
1997, $27.1 million aggregate principal was outstanding under the Credit
Facility with a current interest rate of approximately 7.7%. The Company's
available credit under the Credit Facility at March 31, 1997 was $.4 million.
The Credit Facility contains affirmative and negative covenants which, among
other things, require the Company to maintain certain financial ratios,
including minimum fixed charges coverage, funded debt to EBITDA, net worth and
current ratio.
In April 1997 the Credit Facility was amended to increase the maximum available
borrowings to $45.0 million and to extend the maturity date to March 1999.
In October 1996, the Company procured a $23.5 million credit facility from
Seafield (the "Seafield Facility") to finance acquisitions and for working
capital. On February 26, 1997, the $23.5 million loan and accrued interest of
$.7 million was exchanged for 3,020,536 shares of the Company's common stock at
a rate of $8 per share (which exchange rate was above the quoted market price
of the common stock at the date of conversion). In connection with the
conversion of the Seafield Facility, $82,000 of unamortized financing costs
were charged to paid-in capital. Simultaneous with the conversion, Seafield
announced its intention to consider a distribution to its shareholders in 1997
of Seafield's shares of the Company's common stock.
NOTE 4 - INCOME TAXES
Upon the consummation of the physician practice management affiliations, the
Company recognized deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of purchased assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
During the period ended March 31, 1997 the Company recognized income tax
expense due to the exhaustion of net operating loss carryovers for the year.
The Company had utilized net operating losses to fully offset income tax
expense during 1996. These net operating losses had not previously been
recognized in the financial statements as deferred tax assets due to doubts of
their recoverability. Therefore, no deferred tax expense was recognized upon
the utilization thereof.
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NOTE 5 - 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, 1997, 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 $10,000,000 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, 1997, the Company was not aware of any pending professional or
general liability claims.
NOTE 6 - DUE FROM AFFILIATED PHYSICIANS
Due from affiliated physicians consists of management fees earned and payable
pursuant to the management service agreements ("Service Agreements"). In
addition, the Company may also fund certain working capital needs of the
affiliated physicians from time to time.
NOTE 7 - NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), Earnings per Share, and Statement of
Financial Accounting Standards No. 129 (SFAS 129), Disclosure of Information
about Capital Structure. SFAS 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock. SFAS 129 establishes standards for disclosing information about an
entity's capital structure and applies to all entities. Management believes
that the Company's adoption of these standards, when effective, will not have a
significant impact on the Company's financial statements.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Response Oncology, Inc. ("The Company"), is a comprehensive cancer
management company. The Company provides advanced cancer treatment services
through outpatient facilities known as IMPACT(R) Centers under the direction of
practicing oncologists; owns the assets of and manages the nonmedical aspects
of oncology practices; and conducts clinical cancer research on behalf of
pharmaceutical manufacturers. Approximately 350 medical oncologists are
associated with the Company through these programs.
At March 31, 1997, the Company's network consisted of 47 IMPACT(R)
Centers, including 24 wholly owned, 12 managed programs, and 11 owned and
operated in joint venture with a host hospital. In January 1996 the Company
commenced execution of a diversification strategy into practice management.
Such diversification included the affiliation during 1996 with 38 physicians in
10 medical oncology practices in Florida and Tennessee. The Company has sought
deep geographic penetration in those markets believing that significant market
share is crucial to achieving efficiencies, revenue enhancements, and marketing
of complete cancer services to diverse payors including managed care. Pursuant
to Service Agreements, the Company provides management services that extend to
all nonmedical aspects of the operations of the affiliated practices. The
Company is responsible for providing facilities, equipment, supplies, support
personnel, and management and financial advisory services. The Company's
resulting fees from Service Agreements includes practice operating expenses and
a management fee either fixed in amount or equal to a percentage of each
affiliated oncology group's adjusted net revenue or operating income. In
certain affiliations, the Company may also be entitled to a performance fee if
certain financial criteria are satisfied.
RESULTS OF OPERATIONS
The Company recorded net earnings for the quarter ended March 31, 1997 of
$867,000 or $.09 per share, compared to net earnings of $516,000 or $.07 per
share, for the same period in 1996. Earnings before income taxes for the first
quarter of 1997 were $1,398,000 compared to $516,000 for the first quarter of
1996. The Company utilized net operating loss carryforwards in 1996 to fully
offset its income tax provision.
Net revenue for the first quarter of 1997 increased 83% to $24.4 million
compared to $13.3 million for the corresponding period in 1996. The increase
is primarily due to an additional nine practice management affiliations made
after March 31, 1996 which were not included in net revenue for the first
quarter of 1996.
EBITDA (earnings before interest, taxes, depreciation and amortization)
increased $2.5 million or 192% to $3.8 million for the quarter ended March 31,
1997, in comparison to $1.3 million for the quarter ended March 31, 1996.
EBITDA is not intended to represent net income, cash flow, or any other measure
of performance in accordance with generally accepted accounting principles, but
is included because the Company believes it is useful for measuring and
identifying trends with respect to the Company's operating performance and
creditworthiness. The increase in EBITDA is primarily due to the increase in
revenues related to Service Agreements with affiliated physicians.
Operating expenses increased $8.1 million, or 79%, from $10.3 million in
the first quarter of 1996 to $18.4 million in 1997. This increase is primarily
due to expenses related to the additional nine practice management affiliations
commenced subsequent to March 31, 1996. Operating expenses consist primarily
of payroll costs, pharmaceutical and laboratory expenses, medical director
fees, rent expense, and other operational costs. Operating expenses as a
percentage of net revenue were 75% and 77% for the quarters ended March 31,
1997 and 1996, respectively.
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<PAGE> 10
General and administrative costs increased $.4 million, or 31%, from $1.3
million in for the first quarter of 1996 to $1.7 million for the same period in
1997, primarily due to additional overhead expenses resulting from the practice
management diversification.
Depreciation and amortization increased $.7 million from $.6 million in
for the quarter ended March 31, 1996 to $1.3 million for the same period in
1997. The increase is primarily attributable to the amortization of the
Service Agreements purchased in practice management affiliations consummated
during 1996.
Interest expense was $1.1 million for the first quarter of 1997 as
compared to $.2 million for the first quarter of 1996, an increase of $.9
million. The increase is related to borrowings under the Company's Credit
Facility and debt assumed and/or issued in connection with practice management
affiliations.
The increase in income tax expense resulted from the exhaustion of net
operating loss carryovers for the year. The Company had utilized net operating
losses to fully offset tax expense during 1996. These net operating losses had
never been recognized in the financial statements as deferred tax assets due to
doubts of their recoverability. Therefore, no deferred tax expense was
recognized upon utilization thereof.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's working capital was $24.1 million with
current assets of $36.0 million and current liabilities of $11.9 million. The
current portion of notes payable decreased from December 31, 1996 due to a
maturity of a short term note to physicians which was financed through the note
payable to the Company's parent.
In May 1996, the Company entered into a $27.5 million Credit Facility with
NationsBank and Union Planters to fund the Company's acquisition and working
capital needs and to repay its existing facility with Union Planters. The
Credit Facility, comprised of a $22.0 million Acquisition Facility and a $5.5
million Working Capital Facility, is collateralized by the common stock of the
Company's subsidiaries. The Acquisition Facility bears interest at a variable
rate equal to LIBOR plus a spread between 1.5% and 2.625%, depending upon
borrowing levels. The Working Capital Facility bears interest at a variable
rate equal to LIBOR plus a spread between 1.875% and 2.375%. At March 31,
1997, $27.1 million aggregate principal was outstanding under the Credit
Facility with a current interest rate of approximately 7.7%. The Company's
available credit under the Credit Facility at March 31, 1997 was $.4 million.
The Credit Facility contains affirmative and negative covenants which, among
other things, require the Company to maintain certain financial ratios,
including minimum fixed charges coverage, funded debt to EBITDA, net worth and
current ratio.
In April 1997, the Credit Facility was amended to increase the maximum
available borrowings to $45 million and to extend the maturity date to March
1999.
In October 1996, the Company procured a $23.5 million credit facility from
Seafield (the "Seafield Facility") to finance acquisitions and for working
capital. On February 26, 1997, the $23.5 million loan and accrued interest of
$.7 million was exchanged for 3,020,536 shares of the Company's common stock at
a rate of $8 per share (which exchange rate was above the quoted market price
of the common stock at the date of conversion). Simultaneous with the
conversion, Seafield announced its intention to consider a distribution to its
shareholders in 1997 of Seafield's shares of the Company's common stock.
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<PAGE> 11
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), Earnings per Share, and Statement of
Financial Accounting Standards No. 129 (SFAS 129), Disclosure of Information
about Capital Structure. SFAS 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock. SFAS 129 establishes standards for disclosing information about an
entity's capital structure and applies to all entities. Management believes
that the Company's adoption of these standards, when effective, will not have a
significant impact on the Company's financial statements.
PART II - OTHER INFORMATION
ITEM 5. MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS
Securities Issued to Controlling Shareholder
In October 1996, the Registrant obtained a $23.5 million credit facility
from Seafield to be used to finance practice affiliations and for working
capital. The facility was evidenced by a convertible note payable upon the
earlier of the closing of an equity offering or August 1, 1998. The note
provided for interest at a rate of 8% escalating at certain points during the
term of the note, was unsecured and was convertible at the election of Seafield
Capital Corporation into shares of the Company's common stock at a conversion
price equal to the market price of the common stock at the date of conversion;
provided, however, that after December 31, 1996, the conversion price would be
the lower of market or $11.00 per share. The entire credit facility, as well as
$.7 million of accrued interest was exchanged for 3,020,536 shares of Common
Stock during February 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule (for SEC use only)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Response
Oncology, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESPONSE ONCOLOGY, INC.
By: /s/ Mary E. Clements
---------------------------------
Mary E. Clements
Executive Vice President, Finance
and Principal Financial Officer
Date: May 13, 1997
By: /s/ Dena L. Mullen
---------------------------------
Dena L. Mullen
Director of Finance
Date: May 13, 1997
By: /s/ Peter A. Stark
---------------------------------
Peter A. Stark
Controller
Date: May 13, 1997
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 19,173
<ALLOWANCES> (2,342)
<INVENTORY> 2,492
<CURRENT-ASSETS> 36,050
<PP&E> 13,795
<DEPRECIATION> 8,745
<TOTAL-ASSETS> 143,990
<CURRENT-LIABILITIES> 11,936
<BONDS> 45,586
0
27
<COMMON> 120
<OTHER-SE> 62,952
<TOTAL-LIABILITY-AND-EQUITY> 143,990
<SALES> 24,365
<TOTAL-REVENUES> 24,434
<CGS> 18,362
<TOTAL-COSTS> 21,356
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 376
<INTEREST-EXPENSE> 1,112
<INCOME-PRETAX> 1,398
<INCOME-TAX> 531
<INCOME-CONTINUING> 867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 867
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
