<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 June 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
----------- ----------
Commission file number 0-15416
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RESPONSE ONCOLOGY, INC.
-----------------------
(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
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(901) 761-7000
--------------
(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 July 31, 1998.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets,
June 30, 1998 and December 31, 1997------------------------------3
Consolidated Statements
of Earnings for the Three Months Ended
June 30, 1998 and June 30, 1997----------------------------------4
Consolidated Statements of
Earnings for the Six Months Ended
June 30, 1998 and June 30, 1997 ---------------------------------5
Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 1998 and June 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>
ASSETS June 30, 1998 December 31, 1997
(Unaudited) (Note 1)
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,133 $ 2,425
Accounts receivable, less allowance for doubtful accounts
of $2,443 and $3,130 22,886 16,910
Supplies and pharmaceuticals 2,783 2,772
Prepaid expenses and other current assets 6,962 4,219
Due from affiliated physician groups 16,770 14,823
--------- ---------
TOTAL CURRENT ASSETS 50,534 41,149
Property and equipment, less accumulated depreciation and
amortization of $10,425 and $9,727 5,182 3,555
Deferred charges, less accumulated amortization of $525 and $513 383 386
Management service agreements, less accumulated amortization of $5,416
and $4,016 102,884 103,054
Deferred income taxes 2,618 2,618
Other assets 1,081 931
--------- ---------
TOTAL ASSETS $ 162,682 $ 151,693
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 13,718 $ 9,751
Accrued expenses and other liabilities 6,272 4,370
Current portion of notes payable 38,704 8,537
Current portion of capital lease obligations 367 45
--------- ---------
TOTAL CURRENT LIABILITIES 59,061 22,703
Capital lease obligations, less current portion 1,127 44
Notes payable, less current portion 5,393 35,399
Deferred income taxes 26,600 26,162
Minority interest 941 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 12,045,953 and 11,972,358 shares, respectively 120 120
Paid-in capital 101,894 101,402
Accumulated deficit (32,481) (35,201)
--------- ---------
69,560 66,348
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 162,682 $ 151,693
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollar amounts in thousands except for share data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
NET REVENUE $ 32,627 $ 25,642
COSTS AND EXPENSES
Salaries and benefits 6,201 5,210
Pharmaceuticals and supplies 16,367 12,413
Other operating costs 3,617 2,385
General and administrative 1,614 1,109
Depreciation and amortization 1,164 1,149
Interest 721 792
Provision for doubtful accounts 392 423
------------ ------------
30,076 23,481
------------ ------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,551 2,161
Minority owners' share of net earnings (248) (205)
------------ ------------
EARNINGS BEFORE INCOME TAXES 2,303 1,956
Provision for income taxes 875 744
------------ ------------
NET EARNINGS $ 1,428 $ 1,212
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.12 $ 0.10
============ ============
Diluted $ 0.12 $ 0.10
============ ============
Weighted average number of common shares:
Basic 12,040,965 11,968,024
============ ============
Diluted 12,302,259 12,106,641
============ ============
</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>
Six Months Ended
-------------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
NET REVENUE $ 62,222 $ 50,007
COSTS AND EXPENSES:
Salaries and benefits 12,072 10,170
Pharmaceuticals and supplies 31,397 23,476
Other operating costs 6,575 5,246
General and administrative 3,083 2,209
Depreciation and amortization 2,254 2,460
Interest 1,425 1,896
Provision for doubtful accounts 611 799
------------ ------------
57,417 46,256
------------ ------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 4,805 3,751
Minority owners' share of net earnings (418) (397)
------------ ------------
EARNINGS BEFORE INCOME TAXES 4,387 3,354
Provision for income taxes 1,667 1,275
------------ ------------
NET EARNINGS TO COMMON STOCKHOLDERS $ 2,720 $ 2,079
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.23 $ 0.19
============ ============
Diluted $ 0.22 $ 0.19
============ ============
Weighted average number of shares:
Basic 12,030,036 11,033,201
============ ============
Diluted 12,305,067 11,175,955
============ ============
</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>
Six Months Ended
-----------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 2,720 $ 2,079
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 2,254 2,460
Provision for doubtful accounts 611 799
Minority owners' share of net earnings 418 397
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (6,587) (2,595)
Supplies and pharmaceuticals, prepaid expenses and other current assets (2,687) (2,075)
Deferred charges and other assets (270) (367)
Due from affiliated physician groups (1,947) (2,713)
Accounts payable and accrued expenses 5,868 6,670
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 380 4,655
INVESTING ACTIVITIES
Purchase of equipment (886) (388)
Investment in joint venture -- 63
Distribution to joint venture partner (514) --
Acquisition of non-medical assets of affiliated physician groups (525) (238)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,925) (563)
FINANCING ACTIVITIES
Financing costs incurred -- (103)
Proceeds from exercise of stock options 302 --
Proceeds from notes payable 1,000 1,271
Principal payments on notes payable (1,016) (3,212)
Proceeds from note payable to parent -- 1,006
Principal payments on capital lease obligations (33) (40)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 253 (1,078)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,292) 3,014
Cash and cash equivalents at beginning of period 2,425 415
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,133 $ 3,429
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six month periods
ended June 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 six month periods ended June 30, 1998 and 1997. Patient
services revenue is recorded net of contractual allowances and discounts of
$1,212,000 and $1,497,000 for the quarters ended June 30, 1998 and 1997,
respectively and $2,567,000 and $3,198,000 for the six months ended June 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 Six Months Ended
June 30, June 30
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net patient services revenue $10,087 $ 8,514 $18,545 $17,268
Practice management service fees 14,976 11,616 29,037 22,491
Pharmaceutical sales to physicians 6,437 4,526 12,294 8,679
Physician investigator studies 1,127 986 2,346 1,569
======= ======= ======= =======
$32,627 $25,642 $62,222 $50,007
======= ======= ======= =======
</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 six month periods ended
June 30, 1998 and 1997.
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 12,040,965 11,968,024 12,030,036 11,033,201
Net effect of dilutive stock options and
warrants based on the treasury stock method 261,294 138,617 275,031 142,754
----------- ----------- ----------- -----------
Weighted average shares and common stock
equivalents 12,302,259 12,106,641 12,305,067 11,175,955
=========== =========== =========== ===========
Net earnings $ 1,428 $ 1,212 $ 2,720 $ 2,079
=========== =========== =========== ===========
Diluted per share amount $ 0.12 $ 0.10 $ 0.22 $ 0.19
=========== =========== =========== ===========
</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
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
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 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.
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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 $13.9 million at June 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 June
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 400 medical oncologists are associated with the
Company through these programs. As of June 30, 1998, the Company's total network
includes 52 IMPACT Centers located in 26 states and the District of Columbia.
The network consists of 28 wholly owned centers, 15 managed programs, and 9
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 June 30, 1998 the practice management
division included affiliations with 45 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 second quarter 1998 increased 18% to $1,428,000 from the
$1,212,000 reported for the second quarter 1997. Diluted earnings per share
increased to $0.12 as compared to $0.10 reported for the second quarter 1997.
For the six months ended June 30, 1998, net income increased 31% to 2,720,000,
or $0.22 per diluted share, from the $2,079,000, 0r $0.19 per diluted share
reported for the first six months of 1997. Earnings before income taxes for the
quarter and six months ended June 30, 1998 were $2,303,000 and $4,387,000
compared to $1,956,000 and $3,354,000 for the same periods of 1997.
Net revenue for the quarter ended June 30, 1998 was $32,627,000 compared to
$25,642,000 for the quarter ended June 30, 1997, an increase of $6,985,000 or
27%. Growth in net revenue for the quarter ended June 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 second quarter of 1998, practice management fees increased by
29%, from $11,616,000 in 1997 to $14,976,000 in 1998. The number of physicians
in practice management relationships with the Company increased from 39 on June
30, 1997 to 45 on June 30, 1998. Pharmaceutical sales to physicians increased
$1,911,000 or 42% from the second quarter of 1997 to the second quarter of 1998.
Revenue from the IMPACT division increased 18% from the three month period ended
June 30, 1997 to the three month period ended June 30, 1998 for an increase of
$1,573,000.
Net revenue for the six months ended June 30, 1998 was $62,222,000 compared to
$50,007,000 for the six months ended June 30, 1997, an increase of $12,215,000
or 24%. For the six months ended June 30, 1998, practice management fees
increased by 29%, from $22,491,000 in 1997 to $29,037,000 in 1998.
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<PAGE> 11
Pharmaceutical sales to physicians increased $3,615,000 or 42% from the first
six months of 1997 to the same period of 1998.
While salaries and benefits expense increased $991,000 and $1,902,000 for the
quarter and six months ended June 30, 1998 over the same periods in 1997, the
expense as a percentage of net revenue decreased from 20% for the three and six
month periods ended June 30, 1997 to 19% for the same periods in 1998.
Pharmaceuticals and supplies expense increased by $3,954,000 or 32% and
$7,921,000 or 34% for the quarter and six months ended June 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 $1,425,000 for the six months ended June 30, 1998 as
compared to $1,896,000 for the six months ended June 30, 1997, a decrease of
$471,000 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.
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 June 30, 1998, the Company's working capital was $(8.5) million with current
assets of $50.5 million and current liabilities of $59.0 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 $.4 million in the first six months of
1998 compared to cash provided by operating activities of $4.7 million for the
same period in 1997. Cash used in investing activities was $1.9 million and $.6
million for the six months ended June 30, 1998 and 1997, respectively. Cash
provided by financing activities was $.3 million for the first six months of
1998 compared to cash used of $1.1 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 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
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<PAGE> 12
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 $13.9 million at June 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 internal computer systems and believes
that the current systems used will properly utilize dates beyond December 31,
1999. The Company has been informed that their outside software vendors are in
the process of studying the year 2000 issue. Upon completion of the vendors'
studies which are expected in late 1998, the Company will determine the extent
to which it is vulnerable to the third parties' failure to remediate their own
year 2000 issues and the costs associated with resolving this issue.
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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: August 11, 1998
By: /s/ Dena L. Mullen
-------------------------------------
Dena L. Mullen
Director of Finance
Date: August 11, 1998
By: /s/ Peter A. Stark
-------------------------------------
Peter A. Stark
Controller
Date: August 11, 1998
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RESPONSE ONCOLOGY, INC. FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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0
27
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