<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, 1999 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.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1212264
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(State or Other Jurisdiction (I. R. S. Employer
of Incorporation or Organization) Identification No.)
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, 11,931,731 shares as of April 30, 1999.
.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets,
March 31, 1999 and December 31, 1998 .............................3
Consolidated Statements
of Earnings for the Three Months Ended
March 31, 1999 and March 31, 1998 ................................4
Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1999 and March 31, 1998 ................................5
Notes to Consolidated
Financial Statements .............................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ...................................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...............................................14
Item 2. Changes in Securities and Use of Proceeds .......................14
Item 3. Defaults Upon Senior Securities .................................14
Item 4. Submission of Matters to a Vote of Security Holders .............14
Item 5. Market Information and Related Stockholder Matters...............14
Item 6. Exhibits and Reports on Form 8-K ................................14
Signatures .................................................................15
</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>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Note 1)
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,024 $ 1,083
Accounts receivable, less allowance for doubtful accounts
of $2,775 and $2,772 21,792 22,844
Supplies and pharmaceuticals 3,169 3,406
Prepaid expenses and other current assets 5,581 6,276
Due from affiliated physician groups 17,829 18,630
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TOTAL CURRENT ASSETS 51,395 52,239
Property and equipment, less accumulated depreciation and
amortization of $11,244 and $11,150 5,118 5,273
Deferred charges, less accumulated amortization of $0 and $496 -- 50
Management service agreements, less accumulated amortization of
$6,534 and $5,160 67,278 68,087
Other assets 1,093 1,104
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TOTAL ASSETS $ 124,884 $ 126,753
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 14,850 $ 16,528
Accrued expenses and other liabilities 6,178 7,350
Current portion of notes payable 10,989 11,107
Current portion of capital lease obligations 333 357
Deferred income taxes 473 473
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TOTAL CURRENT LIABILITIES 32,823 35,815
Capital lease obligations, less current portion 955 962
Notes payable, less current portion 32,210 32,290
Deferred income taxes 7,236 7,295
Minority interest 1,093 981
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $1.00 par value (aggregate
involuntary liquidation preference $266) authorized 3,000,000
shares; issued and Outstanding 26,631 shares 27 27
Common stock, $.01 par value, authorized 30,000,000 shares;
issued and Outstanding 12,049,331 and 12,049,038 shares 120 120
Paid-in capital 101,913 101,912
Accumulated deficit (51,493) (52,649)
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50,567 49,410
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 124,884 $ 126,753
========= =========
</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
------------------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
NET REVENUE $ 36,309 $ 29,595
COSTS AND EXPENSES
Salaries and benefits 6,566 5,871
Pharmaceuticals and supplies 20,487 15,030
Other operating costs 3,429 2,958
General and administrative 1,681 1,469
Depreciation and amortization 1,117 1,090
Interest 863 704
Provision for doubtful accounts 191 219
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34,334 27,341
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 1,975 2,254
Minority owners' share of net earnings 112 170
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EARNINGS BEFORE INCOME TAXES 1,863 2,084
Provision for income taxes 708 792
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NET EARNINGS TO COMMON STOCKHOLDERS $ 1,155 $ 1,292
=========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.10 $ 0.11
=========== ===========
Diluted $ 0.10 $ 0.11
=========== ===========
Weighted average number of common shares:
Basic 12,049,331 12,008,254
=========== ===========
Diluted 12,085,663 12,217,188
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
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March 31, March 31,
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net earnings to common stockholders $ 1,155 $ 1,292
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,117 1,090
Provision for doubtful accounts 191 219
Minority owners' share of net earnings 112 170
Changes in operating assets and liabilities net of
effect of acquisitions:
Accounts receivable 861 (3,080)
Supplies and pharmaceuticals, prepaid expenses and other
current assets 643 (2,128)
Deferred charges and other assets 44 (139)
Due from affiliated physician groups (113) (538)
Accounts payable and accrued expenses (1,531) 2,440
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,479 (674)
INVESTING ACTIVITIES
Purchase of equipment (250) (350)
Acquisition of non-medical assets of affiliated
physician groups -- (39)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (250) (389)
FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 300
Distributions to joint venture partners -- (489)
Principal payments on notes payable (198) (685)
Principal payments on capital lease obligations (90) (12)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (288) (886)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,941 (1,949)
Cash and cash equivalents at beginning of period 1,083 2,425
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,024 $ 476
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
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 month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. 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, 1998.
Net Revenue: The following table is a summary of net revenue by source for the
respective three month periods ended March 31, 1999 and 1998. Patient services
revenue is recorded net of contractual allowances and discounts of $1,204,000
and $1,355,000 for the quarters ended March 31, 1999 and 1998, 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.
Pharmaceutical sales to physician revenue is recorded based upon the Company's
contracts with physician groups to manage the pharmacy component of the groups'
practice. Revenue recorded for these contracts represents the cost of
pharmaceuticals plus a percentage fee.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
March 31,
--------------------------------
1999 1998
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<S> <C> <C>
Net patient services revenue $ 8,149 $ 8,459
Practice management service fees 17,589 14,060
Pharmaceutical sales to physicians 9,744 5,857
Physician investigator studies 827 1,219
========== ===========
$ 36,309 $ 29,595
========== ===========
</TABLE>
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Net Earnings Per Common Share:
A reconciliation of the basic earnings per share and the diluted earnings per
share computation is presented below for the three month periods ended March 31,
1999 and 1998.
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Weighted average shares outstanding 12,049,331 12,008,254
Net effect of dilutive stock options and
warrants based on the treasury stock method 36,332 208,934
----------- -----------
Weighted average shares and common stock
equivalents 12,085,663 12,217,188
=========== ===========
Net earnings $ 1,155 $ 1,292
=========== ===========
Diluted per share amount $ 0.10 $ 0.11
=========== ===========
</TABLE>
NOTE 2 -- NOTES PAYABLE
The Company has a $45.0 million Credit Facility which matured March 31, 1999, 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
March 31, 1999, $37.8 million aggregate principal was outstanding under the
Credit Facility with a current interest rate of approximately 8.5%. The Company
has received an extension on the maturity of the Credit Facility until June 30,
1999. Under the terms of the extension all outstanding balances will accrue
interest at the lender's Prime rate plus .75% from March 31, 1999 until the new
Line of Credit is in place.
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 March 31, 1999, approximately 40% of the
Company's outstanding principal balance under the Credit Facility was hedged
under the Swap Agreement. The Swap Agreement matured on March 31, 1999 and was
not renewed.
In March 1999 the Company received a commitment for a $30.0 million Line of
Credit which will mature in May 2000 to replace the existing Credit Facility.
The Line of Credit will be collateralized by the assets of the Company and the
common stock of its subsidiaries. The Line of Credit will bear interest at a
variable rate equal to LIBOR plus a spread between 1.375% and 2.5%, depending
upon borrowing levels. The Company is also obligated to a commitment fee of .25%
to .5% of the unused portion of the Line of Credit. The Company will be subject
to certain 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. The
Company is currently in negotiations with respect to the uncommitted portion of
the line of credit and expects to have the Line of Credit in place by May 31,
1999.
The installment notes payable to affiliated physicians and physician practices
were issued as partial consideration for the practice management affiliations.
Principal and interest under the long-term notes may, at
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the election of the holders, be paid in shares of common stock of the Company
based on conversion prices ranging from $11.50 to $17.00. The unpaid principal
amount of the long-term notes was $5.3 million at March 31, 1999 of which $3.3
million is included in current liabilities.
NOTE 3 -- 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 4 -- 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 March
31, 1999, the Company was not aware of any pending professional or general
liability claims that would have a material adverse effect on the Company's
financial condition or results of operations.
NOTE 5 -- 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 6 -- SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different services. The Company has three reportable segments: IMPACT Services,
Physician Practice Management and Cancer Research Services. The IMPACT Services
segment provides stem cell supported high-dose chemotherapy and other advanced
cancer treatment services under the direction of practicing oncologists as well
as compounding and dispensing pharmaceuticals to certain medical oncology
practices. The Physician Practice Management segment owns the assets of and
manages oncology practices. The Cancer Research Services segment conducts
clinical cancer research on behalf of pharmaceutical manufacturers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies except that the Company does not
allocate interest expense, taxes or corporate overhead to the individual
segments. The Company evaluates performance based on profit or loss from
operations before income taxes and unallocated amounts. The totals per the
schedules below will not and should not agree to the consolidated totals. The
difference are due to corporate overhead and other unallocated amounts which are
reflected in the reconciliation to consolidated earnings before income taxes.
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(In thousands)
<TABLE>
<CAPTION>
Physician
IMPACT Practice Cancer Research
Services Management Services Total
---------- ----------- ---------------- --------
<S> <C> <C> <C> <C>
For the three months ended March 31, 1999:
Net revenue $17,893 $17,589 $ 827 $ 36,309
Total operating expenses 15,268 14,908 516 30,692
------- ------- ------ --------
Segment contribution 2,625 2,681 311 5,617
Depreciation and amortization 146 921 -- 1,067
------- ------- ------ --------
Segment profit $ 2,479 1,760 311 4,550
======= ======= ====== ========
Segment assets $24,855 $89,889 $2,818 $117,562
======= ======= ====== ========
Capital expenditures $ 44 $ 179 -- $ 223
======= ======= ====== ========
<CAPTION>
Physician
IMPACT Practice Cancer Research
Services Management Services Total
---------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
For the three months ended March 31, 1998:
Net revenue $14,316 $ 14,060 $1,219 $ 29,595
Total operating expenses 11,284 11,725 547 23,556
------- -------- ------ --------
Segment contribution 3,032 2,335 672 6,039
Depreciation and amortization 233 796 -- 1,029
------- -------- ------ --------
Segment profit $ 2,799 $ 1,539 $ 672 $ 5,010
======= ======== ====== ========
Segment assets $22,831 $120,947 $2,406 $146,184
======= ======== ====== ========
Capital expenditures $ 45 $ 107 $ 2 $ 154
======= ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of profit:
1998 1997
------ --------
<S> <C> <C>
Segment profit $4,550 $5,010
Unallocated amounts:
Corporate general and administrative 1,774 2,161
Corporate depreciation and amortization 50 61
Corporate interest expense 863 704
------ ------
Earnings before income taxes $1,863 $2,084
====== ======
</TABLE>
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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; compounds and dispenses pharmaceuticals to certain
medical oncology practices for a fee; 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 March 31, 1999,
the Company's total network included 53 IMPACT Centers located in 25 states and
the District of Columbia. The network consists of 34 wholly owned centers, 14
managed programs, and 5 centers owned and operated in joint venture with a host
hospital.
During the first quarter of 1999, the Company terminated its service agreement
with one of the Company's three underperforming adjusted net revenue model
relationships. The second of the three underperforming service agreements was
terminated by the Company on April 1, 1999. The Company had established a
reserve against the three service agreements as of December 31, 1998 in
accordance with Financial Accounting Standards Board Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." The Company's physician practice management division currently
includes affiliations with 39 physicians in 10 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 includes 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 revenue increased 23% to $36.3 million for the quarter ended March 31, 1999,
compared to $29.6 million for the quarter ended March 31, 1998. Practice
management service fees from affiliations were $17.6 million for the first
quarter of 1999 compared to $14.1 million for the same period in 1998 for a 25%
increase. Additionally, pharmaceutical sales to physicians increased $3.8
million or 64% from $5.9 million for the first three months of 1998 to $9.7
million in 1999.
Salaries and benefits costs increased $.7 million, or 12%, from $5.9 million for
the first quarter of 1998 to $6.6 million in 1999. The increase is primarily due
to the addition of employed physicians and their support personnel in the
practice management division and general increases in salaries and benefits
Supplies and pharmaceuticals expense increased $5.5 million, or 37%, from 1998
to 1999. The increase is primarily related to increased volume in pharmaceutical
sales to physicians and greater utilization of new chemotherapy agents with
higher costs in the practice management division. Supplies and pharmaceuticals
expense as a percentage of net revenue was 56% and 51% for the quarters ended
March 31, 1999 and 1998, respectively. The increase as a percentage of net
revenue is due to the lower margin associated with the
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increased pharmaceutical sales to physicians as well as general price increases
in pharmaceuticals used in the practice management division.
Other operating expenses increased $.4 million, or 13%, from $3.0 million in
1998 to $3.4 million in 1999. Other operating expenses consist primarily of
medical director fees, purchased services related to global case rate contracts,
rent expense, and other operational costs.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's working capital was $18.6 million with current
assets of $51.4 million and current liabilities of $32.8 million. Cash and cash
equivalents represented $3.0 million of the Company's current assets. Current
liabilities includes the uncommitted portion ($7.8 million) of the principal
balance under the Company's Acquisition facility which expired on March 31,
1999.
Cash provided by operating activities was $2.5 million in the first quarter of
1999 compared to cash used in operating activities of $.7 million for the same
period in 1998. This increase is largely attributable to improved accounts
receivable collections in both the IMPACT and Physician Practice Management
divisions. Cash used in investing activities was $.3 million and $.4 million for
the quarters ended March 31, 1999 and 1998, respectively. Cash used in financing
activities was $.3 million for the first quarter of 1999 and $.9 million for the
same period in 1998.
The Company has a $45.0 million Credit Facility which matured March 31, 1999, 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
March 31, 1999, $37.8 million aggregate principal was outstanding under the
Credit Facility with a current interest rate of approximately 8.5%. The Company
has received an extension on the maturity of the Credit Facility until June 30,
1999. Under the terms of the extension all outstanding balances will accrue
interest at the lender's Prime rate plus .75% from March 31, 1999 until the new
Line of Credit is in place.
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 March 31, 1999, approximately 40% of the
Company's outstanding principal balance under the Credit Facility was hedged
under the Swap Agreement. The Swap Agreement matured on March 31, 1999 and was
not renewed.
In March 1999 the Company received a commitment for a $30.0 million Line of
Credit which will mature in May 2000 to replace the existing Credit Facility.
The Line of Credit will be collateralized by the assets of the Company and the
common stock of its subsidiaries. The Line of Credit will bear interest at a
variable rate equal to LIBOR plus a spread between 1.375% and 2.5%, depending
upon borrowing levels. The Company is also obligated to a commitment fee of .25%
to .5% of the unused portion of the Line of Credit. The Company will be subject
to certain 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. The
Company is currently in negotiations with respect to the uncommitted portion of
the line of credit and expects to have the Line of Credit in place by May 31,
1999.
The installment notes payable to affiliated physicians and physician practices
were issued as partial consideration for the practice management affiliations.
Principal and interest under the long-term notes may, at
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the election of the holders, be paid in shares of common stock of the Company
based on conversion prices ranging from $11.50 to $17.00. The unpaid principal
amount of the long-term notes was $5.3 million at March 31, 1999 of which $3.3
million is included in current liabilities.
IMPACT OF YEAR 2000
The Year 2000 Issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
occurs, computer programs, computers and embedded microprocessors controlling
equipment with date-sensitive systems may recognize Year 2000 as 1900 or not at
all. This inability to recognize or properly treat Year 2000 may result in
computer system failures or miscalculations of critical financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. In addition, there are two other related issues,
which could also lead to miscalculations or failures: (i) some older systems'
programming assigns special meaning to certain dates, such as 9/9/99 and (ii)
the Year 2000 is a leap year.
The Company started to formulate a plan to address the Year 2000 Issue in the
second quarter of 1998. To date the Company's primary focus has been on its own
internal information technology systems, including all types of systems in use
by the Company in its operations, finance and human resources departments, and
to deal with the most critical systems first. The Company has developed a Year
2000 Plan to address all of its Year 2000 issues. The Year 2000 plan involves
the following phases: awareness, assessment, renovation, testing and
implementation. The Company has completed an assessment of its internal
information technology systems and has established a timetable for the
renovation phase of the systems. The Company has already completed the
renovation of approximately 75% of its information technology systems, including
modifying and upgrading software and purchasing new software, and continues to
renovate the remaining portions of the systems. The Company's goal is to
complete the testing and implementation phases by June 30, 1999, although
complications arising from unanticipated acquisitions might cause some delay.
The Company has also begun to assess the potential for Year 2000 problems with
the information systems of its payors and vendors. The Company expects to
complete the assessment with respect to such parties by April 30, 1999. The
Company has been provided an estimated timetable for completion of renovation
and testing that such vendors with which the Company has a material relationship
will undertake. The Company has estimated the costs that it may incur to remedy
the Year 2000 issues relating to such parties at $85,000. The Company's
diagnostic imaging equipment used to provide imaging services have computer
systems and applications, and in some cases embedded microprocessors, that could
be affected by Year 2000 issues. The Company has assessed the impact on its
diagnostic imaging equipment by contacting the vendors of such equipment. The
vendors with respect to the majority of the equipment used by the Company have
informed the Company that such equipment is Year 2000 compliant.
The Company has made an assessment of the potential for Year 2000 problems with
the embedded microprocessors in its other equipment, facilities and corporate
and regional offices, including telecommunications systems, utilities and
security systems. The Company estimates, on a preliminary basis, that the cost
of assessment, renovation, testing and implementation of its internal systems
will range from approximately $15,000 to $30,000. The major components of these
costs are: consultants, programming new software and hardware, software upgrades
and travel expenses. The company expects that such costs will be funded through
operating cash flows. This estimate, based on currently available information,
will be updated as the Company proceeds with renovation, testing and
implementation, and may be adjusted upon receipt of more information from the
Company's vendors and other third parties and upon the design and implementation
of the Company's contingency plan. In addition, the availability and cost of
consultants and other personnel trained in this area and unanticipated
acquisitions might materially affect the estimated costs. The effects of the
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aforementioned costs have had no material impact on the Company's progress as it
relates to other information system projects and implementation.
The Company's Year 2000 issue involves significant risks. There can be no
assurance that the Company will succeed in implementing the Year 2000 Plan it is
developing. The following describes the Company's most reasonably likely
worst-case scenario, given current uncertainties. If the Company's renovated or
replaced internal information technology systems fail the testing phase, or any
software application or embedded microprocessors central to the Company's
operations are overlooked in the assessment or implementation phases,
significant problems, including delays, may be incurred in billing the Company's
major customers (Medicare, HMO's or private insurance carriers) for services
performed. If its major customers' systems do not become Year 2000 compliant on
a timely basis, the company will have problems and incur delays in receiving and
processing correct reimbursements. If the computer systems of third parties
(including hospitals) with which the Company's systems exchange data do not
become Year 2000 compliant both on a timely basis and in a manner compatible
with continued data exchange with the Company's systems, significant problems
may be incurred in billing and reimbursement. If the systems on the diagnostic
imaging equipment utilized by the Company are not Year 2000 compliant, the
Company may not be able to provide imaging services to patients. If the
Company's vendors or suppliers of the Company's necessary supplies and power,
telecommunications and financial services fail to provide the Company with
services, the Company will be unable to provide services to its patients. If any
of these uncertainties were to occur, the Company's business, financial
condition and results of operations would be adversely affected. The Company is
unable to assess the likelihood of such events occurring or the extent of the
effect on the Company.
The Company is establishing a contingency plan to address unavoidable Year 2000
risks with internal information technology systems and with customers, vendors
and other third parties; and expects to finalize such a plan by June 30, 1999.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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)
-14-
<PAGE> 15
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: May 14, 1999
By: /s/ Dena L. Mullen
-----------------------------------
Dena L. Mullen
Director of Finance
Date: May 14, 1999
By: /s/ Peter A. Stark
-----------------------------------
Peter A. Stark
Controller
Date: May 14, 1999
-15-
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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0
27
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