<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 September 30, 1998 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.
-----------------------
(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.)
1805 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, 12,049,038 shares as of October 6, 1998.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets,
September 30, 1998 and December 31, 1997........................ 3
Consolidated Statements
of Earnings for the Three Months Ended
September 30, 1998 and September 30, 1997....................... 4
Consolidated Statements of
Earnings for the Nine Months Ended
September 30, 1998 and September 30, 1997....................... 5
Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 1998 and September 30, 1997....................... 6
Notes to Consolidated
Financial Statements............................................ 7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................................. 10
PART II. OTHER INFORMATION
Item 5. Market Information and Related Stockholder Matters............. 13
Item 6. Exhibits and Reports on Form 8-K .............................. 13
Signatures ............................................................... 14
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
ASSETS (Unaudited) (Note 1)
---------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,135 $ 2, 425
Accounts receivable, less allowance for doubtful accounts
of $2,495 and $3,130 24,172 16,910
Supplies and pharmaceuticals 3,074 2,772
Prepaid expenses and other current assets 6,894 4,219
Due from affiliated physician groups 19,161 14,823
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TOTAL CURRENT ASSETS 54,436 41,149
Property and equipment, less accumulated depreciation and
amortization of $10,747 and $9,727 5,183 3,555
Deferred charges, less accumulated amortization of $645 and $513 289 386
Management service agreements, less accumulated amortization of
$6,534 and $4,016 101,802 103,054
Deferred income taxes 2,618 2,618
Other assets 1,087 931
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TOTAL ASSETS $ 165,415 $ 151,693
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,208 $ 9,751
Accrued expenses and other liabilities 6,180 4,370
Current portion of notes payable 38,602 8,537
Current portion of capital lease obligations 339 45
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TOTAL CURRENT LIABILITIES 61,329 22,703
Capital lease obligations, less current portion 1,036 44
Notes payable, less current portion 4,766 35,399
Deferred income taxes 26,636 26,162
Minority interest 913 1,037
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $1.00 par value, authorized 3,000,000
shares; issued and outstanding 26,631 and 27,233 shares, respectively,
liquidating preference $11.00 per share 27 27
Common Stock, $.01 par value, authorized 30,000,000 shares; issued and
outstanding 12,049,038 and 11,972,358 shares, respectively 120 120
Paid-in capital 101,913 101,402
Accumulated deficit (31,325) (35,201)
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70,735 66,348
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 165,415 $ 151,693
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollar amounts in thousands except for share data)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
September 30, September 30,
1998 1997
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<S> <C> <C>
NET REVENUE $ 31,858 $ 25,710
COSTS AND EXPENSES
Salaries and benefits 6,291 5,541
Pharmaceuticals and supplies 16,031 12,320
Other operating costs 3,422 3,030
General and administrative 1,478 1,158
Depreciation and amortization 1,538 1,030
Interest 771 570
Provision for doubtful accounts 198 356
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29,729 24,005
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,129 1,705
Minority owners' share of net earnings (264) (19)
------------ ------------
EARNINGS BEFORE INCOME TAXES 1,865 1,686
Provision for income taxes 709 641
------------ ------------
NET EARNINGS TO COMMON STOCKHOLDERS $ 1,156 $ 1,045
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.10 $ 0.09
============ ============
Diluted $ 0.10 $ 0.09
============ ============
Weighted average number of common shares:
Basic 12,048,501 11,970,078
============ ============
Diluted 12,087,248 12,228,231
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollar amounts in thousands except for share data)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
NET REVENUE $ 94,080 $ 75,710
COSTS AND EXPENSES:
Salaries and benefits 18,363 15,711
Pharmaceuticals and supplies 47,428 36,041
Other operating costs 9,997 7,987
General and administrative 4,561 3,403
Depreciation and amortization 3,792 3,490
Interest 2,196 2,466
Provision for doubtful accounts 809 1,156
------------ ------------
87,146 70,254
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 6,934 5,456
Minority owners' share of net earnings (682) (416)
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EARNINGS BEFORE INCOME TAXES 6,252 5,040
Provision for income taxes 2,376 1,915
------------ ------------
NET EARNINGS TO COMMON STOCKHOLDERS $ 3,876 $ 3,125
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.32 $ 0.28
============ ============
Diluted $ 0.32 $ 0.27
============ ============
Weighted average number of shares:
Basic 12,036,259 11,348,925
============ ============
Diluted 12,225,657 11,538,441
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings to common stockholders $ 3,876 $ 3,125
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 3,792 3,490
Provision for doubtful accounts 809 1,156
Minority owners' share of net earnings 682 416
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (8,070) (2,978)
Supplies and pharmaceuticals, prepaid expenses and other current assets (2,910) (1,972)
Deferred charges and other assets (282) (405)
Due from affiliated physician groups (4,338) (2,780)
Accounts payable and accrued expenses 8,267 5,870
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,826 5,922
INVESTING ACTIVITIES
Purchase of equipment (1,209) (692)
Investment in joint venture -- 73
Acquisition of non-medical assets of affiliated physician groups (525) (787)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,734) (1,406)
FINANCING ACTIVITIES
Financing costs incurred -- (103)
Distributions to joint venture partner (806) --
Proceeds from exercise of stock options 322 26
Proceeds from notes payable 1,000 1,271
Principal payments on notes payable (1,745) (5,567)
Proceeds from note payable to parent -- 1,006
Principal payments on capital lease obligations (153) (59)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,382) (3,426)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,290) 1,090
Cash and cash equivalents at beginning of period 2,425 415
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,135 $ 1,505
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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 for complete financial statements by generally accepted accounting
principles. 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 and nine month
periods ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. 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, 1997.
Net Revenue: The following table is a summary of net revenue by source for the
respective three and nine month periods ended September 30, 1998 and 1997.
Patient services revenue is recorded net of contractual allowances and discounts
of $1,442,000 and $1,629,000 for the quarters ended September 30, 1998 and 1997,
respectively and $4,010,000 and $4,827,000 for the nine months ended September
30, 1998 and 1997, respectively.
The Company's revenue from practice management affiliations includes a fee equal
to practice operating expenses incurred by the Company (which excludes expenses
that are the obligation of the physicians, such as physician salaries and
benefits) 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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net patient services revenue $ 9,228 $ 8,578 $27,775 $25,803
Practice management service fees 14,974 11,496 44,010 34,023
Pharmaceutical sales to physicians 6,836 4,843 19,129 13,522
Physician investigator studies 820 793 3,166 2,362
------- ------- ------- -------
$31,858 $25,710 $94,080 $75,710
======= ======= ======= =======
</TABLE>
Net Earnings Per Common Share: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), which changes the computation and presentation
of earnings per share. SFAS 128 requires the presentation of basic and diluted
earnings per share, replacing primary and fully diluted earnings per share
previously required. Earnings per share for all prior years presented have been
presented in accordance with SFAS 128.
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<PAGE> 8
A reconciliation of the basic earnings per share and the diluted earnings per
share computation is presented below for the three and nine month periods ended
September 30, 1998 and 1997.
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding 12,048,501 11,970,078 12,036,259 11,348,925
Net effect of dilutive stock options and
Warrants based on the treasury stock method 38,747 258,153 189,398 189,516
----------- ----------- ----------- -----------
Weighted average shares and common stock
equivalents 12,087,248 12,228,231 12,225,657 11,538,441
=========== =========== =========== ===========
Net earnings $ 1,156 $ 1,045 $ 3,876 $ 3,125
=========== =========== =========== ===========
Diluted per share amount $ 0.10 $ 0.09 $ 0.32 $ 0.27
=========== =========== =========== ===========
</TABLE>
NOTE 2 -- PARENT COMPANY
Prior to July 25, 1997 Response Oncology was a subsidiary of Seafield Capital
Corporation ("Seafield"). On July 1, 1997, Seafield's Board of Directors
declared a dividend to Seafield's shareholders of all shares of common stock of
Response owned by Seafield. For each shareholder of record on July 11, 1997,
1.2447625 shares of Response common stock were distributed on July 25, 1997 for
each share of Seafield common stock outstanding. The distribution of all shares
of Response stock held by Seafield to Seafield's shareholders was effected as a
dividend. The Seafield shareholders paid no consideration for any shares of
Response stock received in the distribution.
NOTE 3 -- NOTES PAYABLE
The Company has a $45.0 million Credit Facility to fund the Company's
acquisition and working capital needs. The Credit Facility, comprised of a $35.0
million Acquisition Facility and a $10.0 million Working Capital Facility, is
collateralized by the common stock of the Company's subsidiaries. The Credit
Facility bears interest at a variable rate equal to LIBOR plus a spread between
1.5% and 2.125%, depending upon borrowing levels, and expires in March 1999. At
September 30, 1998, $30.2 million aggregate principal was outstanding under the
Credit Facility with a current interest rate of approximately 8.2%. The Credit
Facility contains affirmative and negative covenants which, among other things,
require that the Company maintain certain financial ratios, including minimum
fixed charges coverage, funded debt to EBITDA, net worth and current ratio. On
March 31, 1998, the Credit Facility was modified and amended, effective April
21, 1997, to provide for redefinitions of certain restrictive covenants.
In May 1997, the Company entered into a LIBOR based interest rate swap agreement
("Swap Agreement") with an affiliate of the Company's primary lender as required
by the terms of the Credit Facility. Amounts hedged under the Swap Agreement
accrue interest at the difference between 6.42% and the thirty-day LIBOR rate
and are settled monthly. As of September 30, 1998, approximately 50% of the
Company's outstanding principal balance under the Credit Facility was hedged
under the Swap Agreement. The Swap Agreement matures in March 1999 and is
cancelable at the lender's option after July 1998.
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<PAGE> 9
Additionally, long-term unsecured amortizing promissory notes bearing interest
at rates from 4% to 9% were issued as partial consideration for the practice
management affiliations. Principal and interest under the long-term notes may,
at the election of the holders, be paid in shares of common stock of the Company
based upon conversion rates ranging from $13.75 to $17.50. The unpaid principal
amount of the long-term notes was $13.0 million at September 30, 1998.
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.
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, 1999, 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 professional and general liability claims. Since inception, the
Company has incurred no professional or general liability losses and as of
September 30, 1998, the Company was not aware of any pending professional or
general liability claims.
The Company has a commitment to lease medical equipment under 54 month capital
leases. Annual rentals under this commitment approximate $560,000.
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
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or shareholder's equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that the Company
report financial and descriptive information about its reportable segments.
Financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. This statement also requires that the Company report
descriptive information about the way the operating segments were determined,
the products and services provided by the operating segments, differences
between the measurements used in reporting segment information and those used in
the Company's financial statements, and changes in the measurement of segment
amounts from period to period. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The adoption of this
statement will provide additional disclosures in the financial statements for
the year ended December 31, 1998.
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<PAGE> 10
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 research on behalf of pharmaceutical
manufacturers. Approximately 475 medical oncologists are associated with the
Company through these programs. As of September 30, 1998, the Company's total
network includes 53 IMPACT Centers located in 26 states and the District of
Columbia. The network consists of 31 wholly owned centers, 15 managed programs,
and 7 centers owned and operated in joint venture with a host hospital.
In January 1996, the Company implemented a diversification strategy into
physician practice management. As of September 30, 1998 the practice management
division included affiliations with 47 physicians in 12 medical oncology
practices in Florida and Tennessee. The Company has sought deep geographic
penetration in its 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 revenue
from Service Agreements include a fee equal to practice operating expenses
incurred by the Company and a management fee either fixed in amount or equal to
a percentage of each affiliated practice'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
Net income for the third quarter 1998 increased 11% to $1,156,000 from the
$1,045,000 reported for the third quarter 1997. Diluted earnings per share
increased to $0.10 as compared to $0.09 reported for the third quarter 1997. For
the nine months ended September 30, 1998, net income increased 24% to 3,876,000,
or $0.32 per diluted share, from the $3,125,000, or $0.27 per diluted share
reported for the first nine months of 1997. Earnings before income taxes for the
quarter and nine months ended September 30, 1998 were $1,865,000 and $6,252,000
compared to $1,686,000 and $5,040,000 for the same periods of 1997.
Net revenue for the quarter ended September 30, 1998 was $31,858,000 compared to
$25,710,000 for the quarter ended September 30, 1997, an increase of $6,148,000
or 24%. Growth in net revenue for the quarter ended September 30, 1998 was
driven by an increase in revenue from the practice management division,
increased pharmaceutical sales to physicians and increased revenues from the
IMPACT Centers. For the third quarter of 1998, practice management fees
increased by 30%, from $11,496,000 in 1997 to $14,974,000 in 1998. The number of
physicians in practice management relationships with the Company increased from
41 on September 30, 1997 to 47 on September 30, 1998. Pharmaceutical sales to
physicians increased $1,993,000 or 41% from the third quarter of 1997 to the
third quarter of 1998. Revenue from the IMPACT division increased 8% from the
three month period ended September 30, 1997 to the three month period ended
September 30, 1998 for an increase of $650,000.
Net revenue for the nine months ended September 30, 1998 was $94,080,000
compared to $75,710,000 for the nine months ended September 30, 1997, an
increase of $18,370,000 or 24%. For the nine months ended September 30, 1998,
practice management fees increased by 29%, from $34,023,000 in 1997 to
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<PAGE> 11
$44,010,000 in 1998. Pharmaceutical sales to physicians increased $5,607,000 or
41% from the first nine months of 1997 to the same period of 1998.
While salaries and benefits expense increased $750,000 and $2,652,000 for the
quarter and nine months ended September 30, 1998 over the same periods in 1997,
the expense as a percentage of net revenue decreased from 22% for the three
period ended September 30, 1997 and 21% for the nine month period ended
September 30, 1997 to 20% for the same periods in 1998.
Pharmaceuticals and supplies expense increased by $3,711,000 or 30% and
$11,387,000 or 32% for the quarter and nine months ended September 30, 1998,
respectively over the corresponding periods in 1997. The Company attributes the
increase primarily to growth in the practice management division as well as a
significant increase in pharmaceutical sales to physicians.
Interest expense was $2,196,000 for the nine months ended September 30, 1998 as
compared to $2,466,000 for the nine months ended September 30, 1997, a decrease
of $270,000 principally due to the conversion of the note payable to Seafield to
shares of the Company's common stock during the first quarter of 1997.
Based on recent guidance from the Securities and Exchange Commission, the
Company announced a change in the amortization period on Service Agreements
acquired in practice management affiliations to 25 years from 40 years beginning
July 1, 1998. The Company estimates the change, based upon current agreements,
will decrease its diluted earnings per share by approximately $0.02 per quarter
beginning in the third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's working capital was $(6.9) million with
current assets of $54.4 million and current liabilities of $61.3 million. Cash
and cash equivalents represented $1.1 million of the Company's current assets.
Current liabilities includes the entire principal balance under the Company's
Credit Facility which is due in March 1999. Management expects that upon
maturity of the Credit Facility, it will be refinanced under similar terms and
conditions as those currently in place.
Cash provided by operating activities was $1.8 million in the first nine months
of 1998 compared to cash provided by operating activities of $5.9 million for
the same period in 1997. The decrease in cash provided by operating activities
is largely due to a recent change in patient contracting for the IMPACT
division. The Company expects that once the change is stabilized the cash flow
will return to a more positive level. Cash used in investing activities was $1.7
million and $1.4 million for the nine months ended September 30, 1998 and 1997,
respectively. Cash used in financing activities was $1.4 million for the first
nine months of 1998 compared to $3.4 million for the same period in 1997.
The Company has a $45.0 million Credit Facility to fund the Company's
acquisition and working capital needs. The Credit Facility, comprised of a $35.0
million Acquisition Facility and a $10.0 million Working Capital Facility, is
collateralized by the common stock of the Company's subsidiaries. The Credit
Facility bears interest at a variable rate equal to LIBOR plus a spread between
1.5% and 2.125%, depending upon borrowing levels. At June 30, 1998, $30.2
million aggregate principal was outstanding under the Credit Facility with a
current interest rate of approximately 8.2%. The Credit Facility contains
affirmative and negative covenants which, among other things, require that the
Company maintain certain financial ratios, including minimum fixed charges
coverage, funded debt to EBITDA, net worth and current ratio. On June 30, 1998,
the Credit Facility was modified and amended, effective April 21, 1997, to
provide for redefinitions of certain restrictive covenants.
In May 1997, the Company entered into a LIBOR based interest rate swap agreement
("Swap Agreement") with an affiliate of the Company's primary lender as required
by the terms of the Credit Facility. Amounts hedged
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<PAGE> 12
under the Swap Agreement accrue interest at the difference between 6.42% and the
thirty-day LIBOR rate and are settled monthly. As of June 30, 1998,
approximately 50% of the Company's outstanding principal balance under the
Credit Facility was hedged under the Swap Agreement. The Swap Agreement matures
in March 1999 and is cancelable at the lender's option after July 1998.
Additionally, long-term unsecured amortizing promissory notes bearing interest
at rates from 4% to 9% were issued as partial consideration for the practice
management affiliations. Principal and interest under promissory notes may, at
the election of the holders, be paid in shares of common stock of the Company
based upon conversion rates ranging from $13.75 to $17.50. The unpaid principal
amount of the promissory notes was $13.0 million at September 30, 1998.
In October 1996, the Company procured a $23.5 million credit facility from
Seafield (the "Seafield Facility") to finance acquisitions and for working
capital. At December 31, 1996, $22.5 million was outstanding under the Seafield
Facility at an interest rate of 8%. On February 26, 1997, the $23.5 million loan
and accrued interest of $.6 million was converted into 3,020,536 shares of the
Company's common stock at a rate of $8 per share.
The Company has a commitment to lease medical equipment in 1998 under 54 month
capital leases. Annual rentals under this commitment approximate $560,000.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer program that
has date sensitive software may recognize a date using "00" as the year 1900
rather than as the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has recently assessed its internally developed computer systems and
commercially purchased software and believes that the majority of current
systems used will properly utilize dates beyond December 31, 1999. The
Company's principal patient accounting system is not currently capable of
processing year 2000; however the vendor is expected to deliver an update to
the software during the fourth quarter of 1998 to make the system operational
for the year 2000. The costs to make the current patient accounting system
operational are estimated to be less than $125,000.
The Company has also addressed the year 2000 implications as they relate to its
medical equipment used in its centers and does not anticipate that material
costs will be incurred to make equipment affected by the year 2000 operational.
The Company cannot control the internal year 2000 compliancy plans of its
third-party payors, including The Health Care Financing Administration, the
Federal agency responsible for administering the Medicare program. The Company's
cash flow is largely dependent on the ability of its third-party payors to
timely and effectively process claims for services as submitted. If the payment
of claims by third-party payors is disrupted for any reason, including the year
2000 issue, the Company's financial position and results of operations could be
materially affected.
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<PAGE> 13
PART II - OTHER INFORMATION
ITEM 5 MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule (for SEC use only)
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<PAGE> 14
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
Chief Financial Officer
and Principal Accounting Officer
Date: November 13, 1998
By: /s/ Dena L. Mullen
-----------------------------------
Dena L. Mullen
Director of Finance
Date: November 13, 1998
By: /s/ Peter A. Stark
-----------------------------------
Peter A. Stark
Controller
Date: November 13, 1998
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,135
<SECURITIES> 0
<RECEIVABLES> 26,667
<ALLOWANCES> 2,495
<INVENTORY> 3,074
<CURRENT-ASSETS> 54,436
<PP&E> 15,930
<DEPRECIATION> 10,747
<TOTAL-ASSETS> 165,415
<CURRENT-LIABILITIES> 61,329
<BONDS> 44,743
0
27
<COMMON> 120
<OTHER-SE> 70,588
<TOTAL-LIABILITY-AND-EQUITY> 165,415
<SALES> 31,858
<TOTAL-REVENUES> 31,858
<CGS> 16,031
<TOTAL-COSTS> 3,422
<OTHER-EXPENSES> 9,307
<LOSS-PROVISION> 198
<INTEREST-EXPENSE> 771
<INCOME-PRETAX> 1,865
<INCOME-TAX> 709
<INCOME-CONTINUING> 1,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,156
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
<F1>Form 10Q for the period ended September 30, 1998
</FN>
</TABLE>
