<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, 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
---------------------
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.)
1805 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, 11,968,601 shares as of November 12, 1999.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets,
September 30, 1999 and December 31, 1998--------------------------3
Consolidated Statements
of Earnings for the Three Months Ended
September 30, 1999 and September 30, 1998-------------------------4
Consolidated Statements of Earnings for
the Nine Months Ended September 30, 1999
and September 30, 1998 -------------------------------------------5
Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 1999 and September 30, 1998 ------------------------6
Notes to Consolidated
Financial Statements----------------------------------------------7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations----------------------------------------------------12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk -----------------------------------------------15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings------------------------------------------------16
Item 2. Changes in Securities and Use of Proceeds------------------------16
Item 3. Defaults Upon Senior Securities----------------------------------16
Item 4. Submission of Matters to a Vote of Security Holders--------------16
Item 5. Market Information and Related Stockholder Matters---------------16
Item 6. Exhibits and Reports on Form 8-K --------------------------------16
Signatures -----------------------------------------------------------------17
</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, 1999 December 31, 1998
(Unaudited) (Note 1)
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,076 $ 1,083
Accounts receivable, less allowance for doubtful accounts
of $2,833 and $2,772 18,717 22,844
Supplies and pharmaceuticals 3,143 3,406
Prepaid expenses and other current assets 4,351 6,276
Due from affiliated physician groups 17,852 18,630
--------- ---------
TOTAL CURRENT ASSETS 51,139 52,239
Property and equipment, less accumulated depreciation and
amortization of $11,980 and $11,150 4,477 5,273
Deferred charges, less accumulated amortization of $47 and $496 414 50
Management service agreements, less accumulated amortization of
$7,445 and $5,160 66,886 68,087
Other assets 308 1,104
--------- ---------
TOTAL ASSETS $ 123,224 $ 126,753
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 14,331 $ 16,528
Accrued expenses and other liabilities 6,960 7,350
Current portion of notes payable 8,062 11,107
Current portion of capital lease obligations 291 357
Deferred income taxes 473 473
--------- ---------
TOTAL CURRENT LIABILITIES 30,117 35,815
Capital lease obligations, less current portion 641 962
Notes payable, less current portion 33,618 32,290
Deferred income taxes 7,236 7,295
Minority interest 994 981
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $1.00 par value (aggregate
involuntary liquidation preference $293) 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 11,968,601 and 12,049,331 shares 120 120
Paid-in capital 101,672 101,912
Accumulated deficit (51,201) (52,649)
--------- ---------
50,618 49,410
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 123,224 $ 126,753
========= =========
</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
-----------------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
NET REVENUE $ 32,589 $ 31,858
COSTS AND EXPENSES
Salaries and benefits 6,209 6,291
Pharmaceuticals and supplies 19,600 16,031
Other operating costs 2,787 3,422
General and administrative 1,634 1,478
Depreciation and amortization 1,143 1,538
Interest 799 771
Provision for doubtful accounts 461 198
------------ ------------
32,633 29,729
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES & MINORITY INTEREST (44) 2,129
Minority owners' share of net earnings (220) (264)
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (264) 1,865
Provision (credit) for income taxes (100) 709
------------ ------------
NET EARNINGS (LOSS) TO COMMON STOCKHOLDERS $ (164) $ 1,156
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.01) $ 0.10
============ ============
Diluted $ (0.01) $ 0.10
============ ============
Weighted average number of common shares:
Basic 11,966,597 12,048,501
============ ============
Diluted 11,966,597 12,087,248
============ ============
</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, September 30,
1999 1998
-------------- --------------
<S> <C> <C>
NET REVENUE $ 102,951 $ 94,080
COSTS AND EXPENSES
Salaries and benefits 19,218 18,363
Pharmaceuticals and supplies 59,843 47,428
Other operating costs 8,905 9,997
General and administrative 5,002 4,561
Depreciation and amortization 3,380 3,792
Interest 2,505 2,196
Provision for doubtful accounts 1,156 809
------------ ------------
100,009 87,146
------------ ------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,942 6,934
Minority owners' share of net earnings (606) (682)
------------ ------------
EARNINGS BEFORE INCOME TAXES 2,336 6,252
Provision for income taxes 888 2,376
------------ ------------
NET EARNINGS TO COMMON STOCKHOLDERS $ 1,448 $ 3,876
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.12 $ 0.32
============ ============
Diluted $ 0.12 $ 0.32
============ ============
Weighted average number of common shares:
Basic 11,982,250 12,036,259
============ ============
Diluted 12,006,954 12,225,657
============ ============
</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, September 30,
1999 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings to common stockholders $ 1,448 $ 3,876
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,380 3,792
Provision for doubtful accounts 1,156 809
Minority owners' share of net earnings 606 682
Changes in operating assets and liabilities net of
effect of acquisitions:
Accounts receivable 2,971 (8,070)
Supplies and pharmaceuticals, prepaid expenses and
other current assets 1,899 (2,910)
Deferred charges and other assets 88 (282)
Due from affiliated physician groups (489) (4,338)
Accounts payable, accrued expenses and other liabilities (1,259) 8,267
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,800 1,826
INVESTING ACTIVITIES
Purchase of equipment (596) (1,209)
Acquisition of non-medical assets of affiliated
physician groups -- (525)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (596) (1,734)
FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 322
Distributions to joint venture partners (593) (806)
Financing costs incurred (416) --
Proceeds from notes payable -- 1,000
Principal payments on notes payable (1,978) (1,745)
Principal payments on capital lease obligations (224) (153)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (3,211) (1,382)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,993 (1,290)
Cash and cash equivalents at beginning of period 1,083 2,425
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,076 $ 1,135
======= =======
</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, 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 and nine month
periods ended September 30, 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 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 physicians are recorded based upon the Company's
contracts with physician groups to manage the pharmacy component of the groups'
respective practices. Revenue recorded for these contracts represents the cost
of pharmaceuticals plus a percentage fee.
Revenue from physician investigator studies is recorded based upon the Company's
contracts with certain pharmaceutical companies to manage clinical trials and is
generally measured on a per patient basis for monitoring and collection of data.
The following table is a summary of net revenue by source for the respective
three and nine month periods ended September 30, 1999 and 1998. Patient services
revenue is recorded net of contractual allowances and discounts of $1,129,000
and $1,442,000 for the quarters ended September 30, 1999 and 1998, respectively
and $3,040,000 and $4,010,000 for the nine months ended September 30, 1999 and
1998, respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In Thousands) September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
------- --------- -------- -------
<S> <C> <C> <C> <C>
Net patient services revenue $ 6,778 $ 9,228 $ 22,704 $27,775
Practice management service fees 16,679 14,974 50,981 44,010
Pharmaceutical sales to physicians 8,926 6,836 28,031 19,129
Physician investigator studies 206 820 1,235 3,166
======= ======== ======== =======
$32,589 $ 31,858 $102,951 $94,080
======= ======== ======== =======
</TABLE>
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<PAGE> 8
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 and nine month periods ended
September 30, 1999 and 1998.
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 11,966,597 12,048,501 11,982,250 12,036,259
Net effect of dilutive stock options and
warrants based on the treasury stock method -- 38,747 24,704 189,398
------------ ----------- ----------- -----------
Weighted average shares and common stock
equivalents 11,966,597 12,087,248 12,006,954 12,225,657
============ =========== =========== ===========
Net earnings (loss) $ (164) $ 1,156 $ 1,448 $ 3,876
============ =========== =========== ===========
Diluted per share amount $ (0.01) $ 0.10 $ 0.12 $ 0.32
============ =========== =========== ===========
</TABLE>
NOTE 2 -- NOTES PAYABLE
The Company has a $42.0 million Credit Facility which matures June 2002, to fund
the Company's working capital needs. The Credit Facility, comprised of a $35.0
million Term Loan Facility and a $7.0 million Revolving Credit Facility, is
collateralized by the assets of the Company and the common stock of its
subsidiaries. The Credit Facility bears 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. At September 30, 1999, $37.0 million aggregate
principal was outstanding under the Credit Facility with a current interest rate
of approximately 8.2%. The Company is 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 and minimum net worth.
In June 1999, the Company entered into a LIBOR based interest rate swap
agreement ("Swap Agreement") effective July 1, 1999 with the Company's lender as
required by the terms of the Credit Facility. Amounts hedged under the Swap
Agreement accrue interest at the difference between 5.93% and the ninety-day
LIBOR rate and are settled quarterly. The Company is committed to hedge $18.0
million under the terms of the Swap Agreement. The Swap Agreement matures on
July 1, 2000.
In November 1999, the Company and its lenders amended certain terms of the
Credit Facility. As a result of this amendment, the Revolving Credit Facility
was reduced from $7.0 million to $6.0 million and the interest rate was adjusted
to LIBOR plus a spread of 1.375% to 3.25%, depending on borrowing levels. The
Company's obligation for commitment fees was adjusted from a maximum of .5% to
.625% of the unused portion of the Line of Credit. Repayment of the January 1,
2000 quarterly installment was accelerated. In addition, certain affirmative and
negative covenants were added or modified, including minimum EBITDA requirements
for the fourth quarter of 1999 and the first quarter of 2000. Certain covenants
were also waived for the quarters ending September 30, 1999 and December 31,
1999.
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<PAGE> 9
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 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 $4.5 million at September 30, 1999, of which $2.8 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, 2000, 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, 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 in the Company's annual audited
consolidated financial statements except that the Company does not allocate
corporate 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
differences 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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<PAGE> 10
(In thousands)
<TABLE>
<CAPTION>
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
For the three months ended September 30, 1999:
Net revenue $15,704 $ 16,679 $ 206 $ 32,589
Total operating expenses 13,898 14,707 440 29,045
------- -------- ------- --------
Segment contribution (loss) 1,806 1,972 (234) 3,544
Depreciation and amortization 134 955 -- 1,089
------- -------- ------- --------
Segment profit (loss) $ 1,672 $ 1,017 $ (234) $ 2,455
======= ======== ======= ========
Segment assets $21,098 $ 89,112 $ 2,054 $112,264
======= ======== ======= ========
Capital expenditures -- $ 300 -- $ 300
======= ======== ======= ========
<CAPTION>
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
For the three months ended September 30, 1998:
Net revenue $16,065 $ 14,973 $ 820 $ 31,858
Total operating expenses 12,937 13,232 378 26,547
------- -------- ------- --------
Segment contribution 3,128 1,741 442 5,311
Depreciation and amortization 201 1,292 -- 1,493
------- -------- ------- --------
Segment profit $ 2,927 $ 449 $ 442 $ 3,818
======= ======== ======= ========
Segment assets $27,350 $125,725 $ 2,555 $155,630
======= ======== ======= ========
Capital expenditures $ 57 $ 244 -- $ 301
======= ======== ======= ========
</TABLE>
Reconciliation of profit:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Segment profit $ 2,455 $ 3,818
Unallocated amounts:
Corporate general and administrative 1,922 1,306
Corporate depreciation and amortization 54 45
Corporate interest expense 743 602
-------- --------
Earnings before income taxes $ (264) $ 1,865
======== ========
</TABLE>
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<PAGE> 11
(In thousands)
<TABLE>
<CAPTION>
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
For the nine months ended September 30, 1999:
Net revenue $50,736 $ 50,980 $ 1,235 $102,951
Total operating expenses 44,146 43,897 1,219 89,262
------- -------- ------- --------
Segment contribution 6,590 7,083 16 13,589
Depreciation and amortization 415 2,810 -- 3,225
------- -------- ------- --------
Segment profit $ 6,175 $ 4,273 $ 16 $ 10,464
======= ======== ======= ========
Segment assets $21,098 $ 89,112 $ 2,054 $112,264
======= ======== ======= ========
Capital expenditures $ 146 $ 353 $ 4 $ 503
======= ======== ======= ========
<CAPTION>
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
For the nine months ended September 30, 1998:
Net revenue $46,904 $ 44,010 $ 3,166 $ 94,080
Total operating expenses 37,311 37,613 1,572 76,496
------- -------- ------- --------
Segment contribution 9,593 6,397 1,594 17,584
Depreciation and amortization 593 2,916 -- 3,509
------- -------- ------- --------
Segment profit $ 9,000 $ 3,481 $ 1,594 $ 14,075
======= ======== ======= ========
Segment assets $27,350 $125,725 $ 2,555 $155,630
======= ======== ======= ========
Capital expenditures $ 126 $ 1,972 $ 9 $ 2,107
======= ======== ======= ========
</TABLE>
Reconciliation of profit:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Segment profit $ 10,464 $ 14,075
Unallocated amounts:
Corporate general and administrative 5,579 5,667
Corporate depreciation and amortization 155 283
Corporate interest expense 2,394 1,873
-------- --------
Earnings before income taxes $ 2,336 $ 6,252
======== ========
</TABLE>
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<PAGE> 12
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 400 medical oncologists
are associated with the Company through these programs.
In May of 1999, the results of certain breast cancer studies were released at
the meeting of the American Society of Clinical Oncology. These studies
involving the use of high dose chemotherapy sparked controversy among
oncologists, and, in the aggregate, caused confusion among patients and
physicians about the role of high dose chemotherapy in the treatment of breast
cancer. Since the release of these data, the Company's high dose chemotherapy
IMPACT Center business has slowed, as evidenced by the number of procedures in
the second quarter at 256, as compared with 333 in the second quarter of 1998.
The Company performed 194 procedures in the third quarter of 1999 as compared
with 312 in the third quarter of 1998. In response to the declining demand for
high dose chemotherapy in general, the Company closed seven of its centers in
the second quarter and four in the third quarter of 1999. The assets from the
closed centers will go into inventory and be used in other centers as needed. As
of September 30, 1999, the Company's total network included 44 IMPACT Centers
located in 23 states and the District of Columbia. The network consists of 26
wholly owned centers, 14 managed programs, and 4 centers owned and operated in
joint venture with a host hospital.
The Company expects that the decline in procedures will continue to adversely
affect profitability in the fourth quarter of 1999, and there could be further
erosion in this line of business beyond 1999. In response to the release of the
data the Company has developed new protocols for metastatic breast cancer,
adjuvant breast cancer, and lymphoma utilizing therapies to follow high dose
chemotherapy in an attempt to reduce the risk of disease recurrence. Full
deployment of these protocols will take place over the next several quarters.
However, there can be no assurance that these new protocols and therapies will
be accepted by the medical oncology community or that, after appropriate trials,
these protocols and therapies will prove to be effective.
During the first quarter of 1999, the Company terminated its service agreement
with one of the Company's three underperforming adjusted net revenue model
physician practice management relationships. The second of the three
underperforming service agreements was terminated by the Company in the second
quarter of 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 currently has
no plans to terminate the service agreement with the third physician group. The
Company's physician practice management division currently includes affiliations
with 40 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.
-12-
<PAGE> 13
RESULTS OF OPERATIONS
Net revenue increased 2% to $32.6 million for the quarter ended September 30,
1999, compared to $31.9 million for the quarter ended September 30, 1998. The
$2.5 million or 27% decrease in IMPACT Center revenue and $.6 million or 75%
decrease in revenue from physician investigator studies was offset by a $2.1
million or 31% increase in pharmaceutical sales to physicians and a $1.7 million
or 11% increase in practice management service fees. The increase in practice
management service fees was 32%, excluding the two terminated agreements from
the quarter ended September 30, 1998.
Net revenue was $103.0 million for the nine months ended September 30, 1999,
compared to $94.1 million for the same period in 1998. IMPACT Center revenue
decreased by $5.1 million or 18% and revenue from physician investigator studies
decreased by $1.9 million or 61%. Pharmaceutical sales to physicians increased
$8.9 million or 47% while practice management service fees increased $7.0
million or 16%.
Pharmaceuticals and supplies expense increased $3.6 million, or 22% and $12.4
million or 26% for the quarter and nine months ended September 30, 1999 over the
same periods in 1998, respectively. 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
thus causing a decrease in the overall operating margin.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's working capital was $21.0 million with
current assets of $51.1 million and current liabilities of $30.1 million. Cash
and cash equivalents represented $7.1 million of the Company's current assets.
Cash provided by operating activities was $9.8 million in the first nine months
of 1999 compared to $1.8 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 $.6 million and $1.7 million for the nine months ended September
30, 1999 and 1998, respectively. Cash used in financing activities was $3.2
million for the nine months ended September 30, 1999 and $1.4 million for the
same period in 1998.
The Company has a $42.0 million Credit Facility which matures June 2002, to fund
the Company's working capital needs. The Credit Facility, comprised of a $35.0
million Term Loan Facility and a $7.0 million Revolving Credit Facility, is
collateralized by the assets of the Company and the common stock of its
subsidiaries. The Credit Facility bears 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. At September 30, 1999, $37.0 million aggregate
principal was outstanding under the Credit Facility with a current interest rate
of approximately 8.2%. The Company is 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 and minimum net worth.
In June 1999, the Company entered into a LIBOR based interest rate swap
agreement ("Swap Agreement") effective July 1, 1999 with the Company's lender as
required by the terms of the Credit Facility. Amounts hedged under the Swap
Agreement accrue interest at the difference between 5.93% and the ninety-day
LIBOR rate and are settled quarterly. The Company is committed to hedge $18.0
million under the terms of the Swap Agreement. The Swap Agreement matures on
July 1, 2000.
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<PAGE> 14
In November 1999, the Company and its lenders amended certain terms of the
Credit Facility. As a result of this amendment, the Revolving Credit Facility
was reduced from $7.0 million to $6.0 million and the interest rate was adjusted
to LIBOR plus a spread of 1.375% to 3.25%, depending on borrowing levels. The
Company's obligation for commitment fees was adjusted from a maximum of .5% to
.625% of the unused portion of the Line of Credit. Repayment of the January 1,
2000 quarterly installment was accelerated. In addition, certain affirmative and
negative covenants were added or modified, including minimum EBITDA requirements
for the fourth quarter of 1999 and the first quarter of 2000. Certain covenants
were also waived for the quarters ending September 30, 1999 and December 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 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 $4.5 million at September 30, 1999, of which $2.8 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 95% 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 November 30, 1999, although
complications arising from unanticipated acquisitions might cause some delay.
The Company has also assessed the potential for Year 2000 problems with the
information systems of its payors and vendors. 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 $75,000 to $100,000. 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 implementation of the
Company's contingency plan. In addition, the availability and cost of
consultants and
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<PAGE> 15
other personnel trained in this area and unanticipated acquisitions might
materially affect the estimated costs.
The effects of the 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 has established a contingency plan to address unavoidable Year 2000
risks with internal information technology systems and with customers, vendors
and other third parties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure is to changes in interest rates
obtainable on its Credit Facility. The Company's interest rate risk objective is
to limit the impact of interest rate fluctuations on earnings and cash flows and
to lower its overall borrowings by selecting interest periods for traunches of
the Credit Facility that are more favorable to the Company based on the current
market interest rates. The Company has the option of fixing current interest
rates for interest periods of 1, 2, 3 or 6 months.
The Company is also a party to a LIBOR based interest rate swap agreement ("Swap
Agreement"), effective date July 1, 1999, with the Company's lender as required
by the terms of the Credit Facility. Amounts hedged under the Swap Agreement
accrue interest at the difference between 5.93% and the ninety day LIBOR rate
and are settled quarterly. The Company is committed to hedge $18.0 million under
the terms of the Swap Agreement. The Swap Agreement matures July 1, 2000. The
Company does not enter into derivative or interest rate transactions for
speculative purposes.
At September 30, 1999, $37.0 million aggregate principal was outstanding under
the Credit Facility with a current interest rate of approximately 8.2%. The
Company does not have any other material market-sensitive financial instruments.
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<PAGE> 16
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
10(q) Employment Agreement between Registrant and Anthony M. LaMacchia
27 Financial Data Schedule (for SEC use only)
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<PAGE> 17
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 15, 1999
By: /s/ Peter A. Stark
-----------------------------------
Peter A. Stark
Controller
Date: November 15, 1999
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<PAGE> 1
EXHIBIT 10q
EMPLOYMENT AGREEMENT
AGREEMENT effective as of November 1, 1999, by and between Response
Oncology, Inc., a Tennessee corporation (the "Company"), and Anthony LaMacchia
(the "Executive").
WITNESSETH:
WHEREAS, the Company desires to employ the Executive to serve as the
Chief Executive Officer of the Company; and
WHEREAS, the Company and the Executive each deem it necessary and
desirable to execute a written document setting forth the terms and conditions
of said relationship.
NOW, THEREFORE, in consideration of the premises and mutual obligations
hereinafter set forth the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms shall
have the following definitions:
"1996 PLAN" means the Company's 1996 Stock Incentive Plan.
"ADDITIONAL AMOUNT" means the amount the Company shall pay to the
Executive in order to indemnify the Executive against all claims, losses,
damages, penalties, expenses, interest, and Excise Taxes (including additional
taxes on such Additional Amount) incurred by Executive as a result of Executive
receiving Change of Control Benefits as further described in SECTION 9(e) of
this Agreement.
"ARBITRATORS" means the arbitrators selected to conduct any arbitration
proceeding in connection with any disputes arising out of or relating to this
Agreement.
"AWARD PLANS" has the meaning set forth in SECTION 4(c) of this
Agreement.
"BASE SALARY" means the annual salary to be paid to Executive as set
forth in Section 4(a) of this Agreement.
"BENEFIT PLANS" has the meaning set forth in Section 4(d) of this
Agreement.
"BOARD" means the Board of Directors of the Company.
"CHANGE OF CONTROL" means any of the following events which occur
during the Term of this Agreement:
<PAGE> 2
(i) any "person", as that term is used in Section 13(d) and Section
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), becomes, is discovered to be, or files a report on
Schedule 13D or 14D-1 (or any successor schedule, form or report)
disclosing that such person is a beneficial owner (as defined in Rule
13d-3 under the Exchange Act or any successor rule or regulation),
directly or indirectly, of securities of the Company representing 25%
or more of the combined voting power of the Company's then outstanding
securities entitled to vote generally in the election of directors,
regardless of whether or not the Board shall have approved the
acquisition of such securities by the acquiring person;
(ii) individuals who, as of the effective date of this Agreement,
constitute the Board of Directors of the Company cease for any reason
to constitute at least a majority of the Board of Directors of the
Company, unless any such change is approved by the vote of at least 80%
of the members of the Board of Directors of the Company in office
immediately prior to such cessation;
(iii) the Company is merged, consolidated or reorganized into or with
another corporation or other legal person, or securities of the Company
are exchanged for securities of another corporation or other legal
person, and immediately after such merger, consolidation,
reorganization or exchange less than 80% of the combined voting power
of the then-outstanding securities of such corporation or person
immediately after such transaction are held, directly or indirectly, in
the aggregate by the holders of securities entitled to vote generally
in the election of directors of the Company immediately prior to such
transaction;
(iv) the Company in any transaction or series of related transactions,
sells all or substantially all of its assets to any other corporation
or other legal person and less than a majority of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such sale or sales are held, directly or indirectly,
in the aggregate by the holders of securities entitled to vote
generally in the election of directors of the Company immediately prior
to such sale;
(v) the Company and its affiliates shall sell or transfer (in a single
transaction or series of related transactions) to a non-affiliate
business operations or assets that generated at least two-thirds of the
consolidated revenues (determined on the basis of the Company's four
most recently completed fiscal quarters for which reports have been
filed under the Exchange Act) of the Company and its subsidiaries
immediately prior thereto;
(vi) the Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K (or any successor, form or report or item therein)
that a change in control of the Company has occurred;
(vii) the shareholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
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<PAGE> 3
(viii) any other transaction or series of related transactions occur
that have substantially the effect of the transactions specified in any
of the preceding clauses in this sentence.
"CHANGE OF CONTROL BENEFITS" means the Termination Payment and all
other payments, benefits or compensation (except for the Additional Amount)
which the Executive receives or has the right to receive from the Company or any
of its affiliates solely as a result of Executive's Change of Control
Termination.
"CHANGE OF CONTROL TERMINATION" means (i) a Termination Without Cause
of the Executive's employment by the Company, in anticipation of, on, or within
eighteen (18) months after a Change of Control, (ii) the Executive's resignation
for Good Reason on or within eighteen (18) months after a Change of Control, or
(iii) Executive's giving of a Termination Notice of Voluntary Termination during
the thirty days immediately following the Change of Control or during the thirty
days immediately following the one year anniversary of the Change of Control.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMENCEMENT LOAN" means a loan by the Company to the Executive in the
amount of $40,000, evidenced by a promissory note to be delivered by the
Executive concurrent with the funding of such loan. This loan shall be
unsecured, bear interest at the applicable federal rate, and shall be due and
payable on January 31, 2000; provided, however, that if there shall not have
been a Termination With Cause of the Executive by January 31, 2000, then the
Company shall forgive the entire outstanding balance of such loan, including
accrued interest, on January 31, 2000.
"COMPANY" means Response Oncology, Inc., a Tennessee corporation, and
any successor to its business and/or assets which assumes and agrees to perform
this Agreement by operation of law, or otherwise.
"COMPANY SHARES" means the shares of common stock of the Company or any
securities of a successor company which shall have replaced such common stock.
"COMPETING ACTIVITY" means either (i) employment by U.S. Oncology, Inc.
or OnCare, Inc., or any successor to either such corporation, or (ii) ownership,
directly or indirectly, for the Executive's own account or for the account of
others, either as a shareholder, partner, member, proprietor or other owner, or
otherwise participating in the capacity of employee, director, officer, adviser,
consultant, agent or in any other capacity, in the business of any company or
entity which provides high-dose chemotherapy with autologous stem cell support
or manages oncology practices within fifty (50) miles of any IMPACT(R) Center or
oncology practice managed by the Company that shall have produced more than one
percent (1%) of the Company's consolidated revenue for any of the three (3)
years immediately preceding the year such activity commences. Notwithstanding
the foregoing, the term "Competing Activity" shall not include passive ownership
of less than five percent (5%) of the voting common stock of any company whose
shares are traded on a national securities exchange or in the Nasdaq Stock
Market's National Market and shall not include serving in the capacity of
employee, director, officer, adviser, consultant, agent or in any other capacity
for a company or entity (including
3
<PAGE> 4
non-profit entities) that derives less than five percent (5%) of its revenue
from high-dose chemotherapy with autologous stem cell support or management of
oncology practices so long as the Executive has no direct managerial
responsibility with respect to the high-dose chemotherapy program or the
oncology practice management function of any such company or entity.
"COMPENSATION COMMITTEE" means the compensation committee of the Board.
"EXCESS PARACHUTE PAYMENTS" has the meaning set forth in section 280G
of the Code.
"EXCISE TAX" means a tax on Excess Parachute Payments imposed pursuant
to Code section 4999 and any tax under any similar provision of any applicable
state income tax law.
"EXECUTIVE" means the person identified in the preamble paragraph of
this Agreement.
"FAIR MARKET VALUE" means, on any give date, the reported last sale
price of the common stock of the Company on the Nasdaq Stock Market's National
Market on such date, or, if the Nasdaq Stock Market's National Market shall be
closed on such date, the next preceding date on which such market shall have
been open.
"GOOD REASON" means any of the following:
(i) a change in the Executive's status, position or responsibilities
(including reporting responsibilities) which, in the Executive's
reasonable judgment and without Executive's consent, represents a
reduction in or demotion of the Executive's status, position or
responsibilities as in effect immediately prior such change; the
assignment to the Executive of any duties or responsibilities which, in
the Executive's reasonable judgment, are inconsistent with such status,
position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect the Executive to any of such positions,
except in connection with a Termination with Cause, as a result of the
Executive's death or Permanent Disability or by Voluntary Termination;
(ii) a reduction in the Executive's Base Salary as in effect on the
date hereof or as the same may be increased from time to time or
modifying, suspending, discontinuing, or terminating any Award Plan or
Benefit Plan in a manner which treats Executive differently than other
similarly situated employees or singles out or discriminates against
Executive;
(iii) the relocation of the Company's principal executive offices to a
location outside a thirty-mile radius of Memphis, Tennessee or the
Company's requiring the Executive to be based at any place other than a
location within a thirty-mile radius of Memphis, Tennessee without the
Executive's consent, except for reasonably required travel on the
Company's business;
(iv) the failure by the Company to continue to provide the Executive
with compensation and benefits provided for under this Agreement or
benefits substantially similar to those provided to the Executive under
any of the employee benefit plans in which the
4
<PAGE> 5
Executive is or becomes a participant, or the taking of any action by
the Company which would directly or indirectly materially reduce any
of such benefits or deprive the Executive of any material fringe
benefit enjoyed by the Executive at the time of the Change of Control;
(v) any material breach by the Company of any provision of this
Agreement;
(vi) any purported termination of Executive's employment by the Company
which is not effected pursuant to the procedures set forth in
SECTION 3; or
(vii) the Company's failure to obtain an agreement reasonably
satisfactory to Executive from any successor or assign of the Company
to assume and agree to perform this Agreement.
"GUARANTEED BONUS" means an amount equal to $70,000 for the 2000
calendar year, payable in accordance with the first paragraph of SECTION 4(b)
below, or the pro-rated portion thereof payable in the event of any Voluntary
Termination or Termination With Cause prior to payment of such amount in the
year 2000.
"MARKET PRICE" means the closing price of the Company Shares on the
Nasdaq Stock Market's National Market, or, if the Company Shares shall be traded
on a national securities exchange, the closing price of the Company Shares on
such national securities exchange, or, if the Company Shares shall be traded in
an over-the-counter or other dealer market, the closing bid price in such
over-the-counter or dealer market.
"OPTION(S)" means any options issued pursuant to the 1996 Plan or any
other stock option plan adopted by the Company, or any option granted under the
plan of any successor company that replaces or assumes the Company's Options.
"PERMANENT DISABILITY" means a complete physical or mental inability,
confirmed by a licensed physician, to perform the services described in SECTION
2 of the Agreement that continues for a period of six (6) consecutive months.
"RELOCATION EQUITY LOAN" means a loan by the Company to the Executive
in the amount of $100,000, evidenced by a promissory note to be delivered by the
Executive at the time the loan is funded, which loan shall be evidenced by the
Relocation Equity Note and shall be secured by a second mortgage on any
residence purchased by the Executive in Memphis, Tennessee, having a maturity
date of five (5) years after funding or the date the Executive's residence in
California shall be sold, bearing interest at the applicable federal rate, which
loan is to be funded on the date the Executive closes the purchase of a new
residence in Memphis, Tennessee.
"RELOCATION EQUITY NOTE" means a promissory note evidencing the
Relocation Equity Loan.
"RELOCATION PAYMENT" means an amount of cash equal to $40,000 if the
Executive shall indicate in the Sale Notice that he intends to sell his
residence in California.
5
<PAGE> 6
"SALE NOTICE" means a written notice from the Executive to the Company
in which the Executive shall notify the Company of his good faith intent whether
he will or will not sell his residence in California. Such notice shall be given
on or after January 1, 2000, and no later that January 31, 2000. In the event
that the Executive shall not give the Company any notice by January 31, 2000, of
his intent whether to sell his California residence, the Executive shall be
deemed to have given the Company notice indicating that he intends to sell his
California residence and such notice shall be deemed to have been given on
January 31, 2000.
"STOCK PURCHASE LOAN" means a loan by the Company to the Executive in
the principal amount of $300,000 for the purpose of acquiring Company Shares,
which loan shall be payable in full on the fifth anniversary of the loan, shall
bear interest at the applicable federal mid-term rate (as defined in Section
1274 of the Code and published in the Internal Revenue Bulletin) in effect on
the date such loan is made payable annually in arrears, which shall be subject
to demand and acceleration of the payment of the outstanding principal amount
thereof in the event the Executive experiences a Termination With Cause,
Voluntary Termination or Change of Control Termination, which will be subject to
demand and acceleration of the payment of one-half (1/2) the outstanding
principal amount thereof, with the other half being forgiven, in the event the
Executive experiences a Termination Without Cause, and which loan shall be
evidenced by an unsecured promissory note that may be prepaid without penalty at
any time. Notwithstanding any acceleration in the payment of outstanding
principal under the Stock Purchase Loan, the maturity of the Stock Purchase Loan
shall in no event be earlier than January 1, 2000.
"STOCK PURCHASE NOTE" means a promissory note evidencing the Stock
Purchase Loan.
"TERM" has the meaning assigned to it in SECTION 3 of this Agreement.
"TERMINATION DATE" means the date employment of Executive is
terminated, which date shall be (i) in the case of Executive's Permanent
Disability, 30 days after a Termination Notice is given and Executive does not
return to the full-time performance of his duties within such 30 day period,
(ii) in all other instances not involving a Change of Control, the date
specified as the Termination Date in the Termination Notice, which date shall
not be less than thirty nor more than sixty days from the date the Termination
Notice is given, and (iii) in the case of a Change of Control Termination, the
actual effective date of such Change of Control Termination.
"TERMINATION NOTICE" means a written notice of termination of
employment by Executive or the Company.
"TERMINATION PAYMENT" has the meaning set forth in SECTION 9(b)(i) of
this Agreement.
"TERMINATION WITH CAUSE" means the termination of the Executive's
employment by act of the Board for any of the following reasons:
(i) the Executive's conviction for a felony;
(ii) the Executive's theft, embezzlement, misappropriation of or
intentional infliction of
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<PAGE> 7
material damage to the Company's property or business opportunity;
(iii) the Executive's intentional breach of the noncompetition
provisions contained in SECTION 10 of this Agreement; or
(iv) the Executive's ongoing willful neglect of or failure to perform
his duties hereunder or his ongoing willful failure or refusal to
follow any reasonable, unambiguous duly adopted written direction of
the Board or any duly constituted committee thereof that is not
inconsistent with the description of the Executive's duties set forth
in SECTION 2, if such willful neglect or failure is materially damaging
or materially detrimental to the business and operations of the
Company; provided that Executive shall have received written notice of
such failure and shall have continued to engage in such failure after
30 days following receipt of such notice from the Board, which notice
specifically identifies the manner in which the Board believes that
Executive has engaged in such failure.
For purposes of this subsection, no act, or failure to act, shall be deemed
"willful" unless done, or omitted to be done, by Executive not in good faith,
and without reasonable belief that such action or omission was in the best
interest of the Company. Executive shall not be deemed to have been terminated
for Cause unless and until there shall have been delivered to Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice to Executive and an
opportunity for Executive, together with his counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, Executive was
guilty of misconduct as set forth above, and of continuing such misconduct after
notice from the Board.
"TERMINATION WITHOUT CAUSE" means the termination of the Executive's
employment by the Company for any reason other than Termination With Cause, or
termination by the Company due to Executive's death or Permanent Disability.
"UNIFORM ARBITRATION ACT" means the Uniform Arbitration Act, Tennessee
Code Annotated ss. 29-5-391 et seq., as amended.
"VOLUNTARY TERMINATION" means the Executive's voluntary termination of
his employment hereunder for any reason other than Good Reason. If the Executive
gives a Termination Notice of Voluntary Termination and, prior to the
Termination Date, the Executive voluntarily refuses or fails to provide
substantially all the services described in SECTION 2 hereof for a period
greater than two consecutive weeks, the Voluntary Termination shall be deemed to
be effective as of the date on which the Executive so ceases to carry out his
duties. Voluntary refusal to perform services shall not include taking vacation
otherwise permitted in accordance with SECTION 4 hereof, the Executive's failure
to perform services on account of his illness or the illness of a member of his
immediate family, provided such illness is adequately substantiated at the
reasonable request of the Company, or any other absence from service with the
written consent of the Board.
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<PAGE> 8
2. EMPLOYMENT; SERVICES. The Company shall employ the Executive, and
the Executive agrees to be so employed, in the capacity of Chief Executive
Officer of the Company to serve for the Term hereof, subject to earlier
termination as hereinafter provided. The Executive shall devote such amount of
his time and attention to the Company's affairs as are necessary to perform his
duties to the Company in his capacity as Chief Executive Officer. The Executive
shall have authority and responsibility with respect to the day-to-day
management of the Company, consistent with direction from the Company's Board.
3. TERM; TERMINATION.
(a) The term of the Executive's employment hereunder shall be
two years and shall commence on November 1, 1999 and on November 1,
2000 shall be extended automatically, for so long as the Executive
remains employed by the Company hereunder, the first day of each month
beginning December 1, 2000 for an additional one-month period (such
period, as it may be extended from time to time, being herein referred
to as the "Term"), unless terminated earlier in accordance with the
terms of this Agreement, to the effect that after November 1, 2000 on
the first day of each month, the remaining term of this Agreement and
the Executive's employment hereunder shall be one year.
(b) Any purported termination of employment by Executive or
the Company shall be communicated by a Termination Notice. The
Termination Notice shall indicate the specific termination provision in
this Agreement relied upon and set forth the facts and circumstances
claimed to provide a basis for termination. If the party receiving the
Termination Notice notifies the other party prior to the Termination
Date that a dispute exists concerning the termination, the Termination
Date shall be extended until the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration
award, or by a final judgment, order or decree of a court of competent
jurisdiction. The Termination Date shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving
such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the
Company will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given and Executive
shall continue as a participant in all Award Plans and Benefit Plans in
which Executive participated when the Termination Notice giving rise to
the dispute was given, until the dispute is finally resolved in
accordance with this subsection. Amounts paid under this subsection are
in addition to all other amounts due under this Agreement and shall not
be offset against or reduce any other amounts due under this Agreement.
4. COMPENSATION.
(a) Base Salary. During the Term, the Company shall pay the
Executive for his services a Base Salary of $315,000.00, to be paid in
such installments as corresponds to the Company's payroll cycle for all
employees, such Base Salary being subject to any increases approved by
the Compensation Committee or the Board, as the case may be.
8
<PAGE> 9
(b) Bonus Compensation. During the Term, the Compensation
Committee shall annually adopt an incentive bonus program for the
Executive which will provide for an incentive bonus (the "Base Bonus")
of up to fifty percent (50%) of the Executive's base salary, with the
amount to be determined by the Compensation Committee based on
objective criteria fixed by the Compensation Committee in consultation
with the Executive. Any such Base Bonus will be payable not later than
January 31 of the year following the year in which such Bonus is
computed. Notwithstanding the foregoing, the Executive's Base Bonus for
the year ending December 31, 2000, shall be not less than the
Guaranteed Bonus, which shall be paid in all events on or before
December 31, 2000, except a Voluntary Termination or Termination for
Cause, in which case an amount equal to the Guaranteed Bonus shall be
subject to pro-ration and paid as hereinafter provided.
In addition, if at any time during the first five (5) year's of the
Executive's employment the performance targets set forth below shall be
achieved, then the Company shall pay up to $300,000 in cash bonus (the
"Supplemental Bonus") no later than the business day after such targets shall
have been met, as follows:
(A) If the Executive shall have been employed for at least
one (1) year and, thereafter, the Company Shares shall have
a Market Price of more than $3.00 for 10 consecutive trading
days, then the Company shall pay the Executive Supplemental
Bonus of $100,000.
(B) If the Executive shall have been employed for at least
one (1) year and, thereafter, the Company Shares shall have
a Market Price of more than $8.00 for 10 consecutive trading
days, then the Company shall pay the Executive additional
Supplemental Bonus of $100,000.
(C) If the Executive shall have been employed for at least
two (2) years and, thereafter, the Company Shares shall have
a Market Price of more than $12.00 for 10 consecutive
trading days, then the Company shall pay the Executive
additional Supplemental Bonus of $100,000.
(D) If the Executive shall have been employed for at least
one (1) year and, thereafter, the Company Shares shall have
a Market Price of more than $15.00 for 10 consecutive
trading days, or a merger, sale of the Company,
recapitalization, or other liquidity event occurs that
provides at least $15.00 per share of value to the holders
of the Company Shares, then the Company shall pay the
Executive a Supplemental Bonus of $300,000.
For purposes of the foregoing subparagraphs, the Market Price shall be adjusted
appropriately in the event of any stock split, reverse stock split, stock
dividend, reclassification, recapitalization, merger, share exchange or other
event affecting the outstanding Common Shares at the time of such event.
Any Supplemental Bonus may, at the option of the Company, be offset against the
outstanding principal amount of any loan owed by or any other indebtedness or
account payable by the
9
<PAGE> 10
Executive to the Company. Any such offset shall be pursuant to written notice
provided to the Executive at least thirty (30) days prior to such offset.
(c) Award Plans. During the Term, the Executive shall also be
eligible for additional compensation in the form of a cash bonus, shares of
stock in the Company or Options, and shall be eligible to participate the 1996
Plan and any other stock option, incentive compensation, profit participation,
bonus or extra compensation plan that is adopted by the Company and in which the
Company's executive officers generally participate (collectively, "Award
Plans"); provided, however, that all such compensation or awards will be
granted, if at all, solely in the discretion of the Board based upon the
recommendation of the Compensation Committee.
(d) Benefit Plans. During the Term, Executive shall be entitled to
participate in, and to all rights and benefits provided by, each and every
health, life, medical, dental, disability, insurance and welfare plan maintained
by the Company including, without limitation, the benefits contemplated by
SECTION 5 of this Agreement, that are maintained from time to time by the
Company for the benefit of Executive, the executives of the Company generally or
for the Company's employees generally, provided that Executive is eligible to
participate in such plan under the eligibility provisions thereof that are
generally applicable to the participants thereof (collectively, "Benefit
Plans").
(e) Vacation. The Executive shall be entitled each calendar year
to vacation time, during which time his compensation shall be paid in full. The
time allotted for such vacation shall be five (5) weeks.
(f) Continuation of Welfare Benefits. If Executive's employment is
terminated due to Executive's Permanent Disability, Termination Without Cause,
or termination for Good Reason, the Company will continue to provide all
benefits pursuant to Benefit Plans for a period of one (1) year following the
Termination Date, and if Executive is no longer eligible to participate in one
or more of the Benefit Plans because of such termination, Executive shall be
entitled to, and the Company shall provide to Executive, benefits substantially
equivalent to those Benefit Plans to which Executive was entitled immediately
prior to such termination for one (1) year after the Termination Date. If
Executive's employment is terminated due to a Change of Control Termination, the
Company will continue to provide all benefits pursuant to Benefit Plans for a
period of three (3) years following the Termination Date, and if Executive is no
longer eligible to participate in one or more of the Benefit Plans because of
such termination, Executive shall be entitled to, and the Company shall provide
to Executive, benefits substantially equivalent to those Benefit Plans to which
Executive was entitled immediately prior to such termination for three (3) years
after the Termination Date. The Company shall bear all costs related to the
continuation of benefits pursuant to this paragraph (f) except for such portion
of said costs that the Executive was responsible for prior to such Termination
Date.
(g) Overall Qualification. Nothing in this Agreement shall be
construed as preventing the Company from modifying, suspending, discontinuing or
terminating any of the Company Benefit Plans or Award Plans without notice or
liability to Executive so long as (i) the modification, suspension,
discontinuation or termination of any such plan is authorized by and performed
in accordance with the specific provisions of such plan and (ii) such
modification,
10
<PAGE> 11
suspension, discontinuation or termination is taken generally with respect to
all similarly situated employees of the Company and does not single out or
discriminate against Executive.
5. EXPENSES. The Company recognizes that the Executive will incur certain
out-of-pocket expenses, including but not limited to travel expenses, related to
his services and the Company's business and the Company agrees to reimburse the
Executive for all reasonable expenses necessarily incurred by him in the
performance of his duties upon presentation of a voucher or documentation
indicating the amount and business purposes of any such expenses, including, but
not limited to, expenses incurred in connection with the operation of
Executive's aircraft in the course of conducting the Company's business;
provided that Executive complies with the Company's policies and procedures
regarding business expenses.
6. VOLUNTARY TERMINATION; TERMINATION WITH CAUSE. Except as otherwise
provided in SECTION 9 of this Agreement, if (i) the Executive shall cease being
an employee of the Company on account of a Voluntary Termination or (ii) there
shall be a Termination With Cause, the Executive shall not be entitled to any
compensation after the Termination Date of such Voluntary Termination or
Termination With Cause (except Base Salary and vacation accrued but unpaid on
the Termination Date of such event, and the amount of Guaranteed Bonus pro-rated
to the Termination Date). Notwithstanding the foregoing, after any Voluntary
Termination or Termination With Cause, all vested Options shall continue to be
exercisable for a period of three (3) months after such event. In the event of a
Voluntary Termination or Termination With Cause, the Executive shall continue to
be subject to the noncompetition covenant contained in Section 10 hereof for the
remainder of the Term.
7. DEATH OR DISABILITY. In the event of the Executive's Permanent
Disability, the Company may elect to terminate Executive's employment with the
Company. Upon termination of Executive's employment due to Executive's death or
Permanent Disability, the Company shall continue to pay the Executive or his
heirs, devisees, executors, legatees or personal representatives, as
appropriate, the semi-monthly payments of the Base Salary then in effect for one
year from the Termination Date. The Company shall also pay any amounts due
pursuant to the terms of any Benefit Plans and Award Plans in which Executive
was a participant, including, without limitation, the Guaranteed Bonus or the
pro rata amount of any bonus to be paid to Executive for the fiscal year in
which Executive's employment by the Company was terminated, as applicable. In
addition, upon termination of Executive's employment on account of Permanent
Disability Executive shall be permitted to participate in, and have all rights
and benefits provided by, all Benefit Plans which Executive was eligible to
participate in immediately prior to the Termination Date (to the extent such
participation is possible under the laws then pertaining to such Benefit Plans),
for a minimum of one (1) year following the Termination Date.
8. TERMINATION WITHOUT CAUSE. RESIGNATION FOR GOOD REASON. The Company may
terminate Executive for any reason, or no reason at all, at any time and
Executive may terminate this Agreement at any time for Good Reason, provided
that, upon termination of this Agreement by the Executive for Good Reason or in
the event of a Termination Without Cause, except as otherwise provided in
SECTION 9 of this Agreement, the Company shall provide the compensation and
benefits set forth in this SECTION 8. Executive may terminate this Agreement for
Good Reason notwithstanding any incapacity due to physical or mental illness.
Executive's continued
11
<PAGE> 12
employment shall not constitute consent to, or a waiver of, rights with respect
to any circumstances constituting Good Reason hereunder.
(a) Base Salary, Benefit and Award Plans. The Company shall
continue to pay the Executive the semi-monthly payments of the Base Salary then
in effect for a period equal to the greater of the remaining Term of this
Agreement or one year after the Termination Date in respect of any Termination
Without Cause or Resignation for Good Reason. The Company shall also pay on such
Termination Date any amounts due pursuant to the terms of any Benefit Plans and
Award Plans in which Executive shall have been a participant, including, without
limitation, the Guaranteed Bonus or the pro rata amount of any bonus to be paid
to Executive for the fiscal year in which Executive's employment shall be so
terminated, as applicable. In addition, Executive shall be permitted to
participate in, and have all rights and benefits provided by, all Benefit Plans
which Executive shall have been eligible to participate in immediately prior to
the Termination Date (to the extent such participation is possible under the
laws then pertaining to such Benefit Plans), for a minimum of one year following
the Termination Date.
(b) Stock Options. All Options granted to Executive shall become
fully vested and immediately exercisable at the Termination Date in respect of
any Termination Without Cause or Resignation for Good Reason; provided, however,
that the acceleration of exercisability or issuance shall be subject to the
imposition of such restrictions on transferability of the subject Company Shares
as may be necessary to permit Company Shares issued upon exercise of such
Options to continue to qualify for the exception from Section 16(b) of the
Securities Exchange Act of 1934, as amended, provided by Rule 16b-3 thereunder.
The Company represents and warrants that such vesting is not prohibited by the
1996 Plan. Any written grant of Options to the Executive shall contain the
foregoing vesting provision. In lieu of Company Shares issuable upon exercise of
any outstanding and unexercised Options granted to Executive, Executive may, at
Executive's option, receive an amount in cash equal to the product of (i) the
Fair Market Value of Company Shares on the Termination Date over the per share
exercise price of each Option held by Executive, times (ii) the number of
Company Shares covered by each such Option. In the event Executive does not
elect to receive a cash payment for any outstanding and unexercised Options
granted to Executive, notwithstanding the terms of the 1996 Plan, any other
option or stock plan, or any agreement pre-dating this Agreement, Executive
shall have the right to exercise such Options in accordance with the terms and
conditions provided in the applicable stock option plans as if Executive had
continued his employment with the Company, notwithstanding Executive's
termination.
(c) Legal Fees. The Company shall also pay to Executive all legal
fees and expenses incurred by Executive as a result of a Termination Without
Cause or Executive's resignation for Good Reason (including all such fees and
expenses, if any, incurred in contesting or disputing any such termination or in
seeking to obtain or enforce any right or benefit provided by this Agreement).
(a)
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<PAGE> 13
9. CHANGE OF CONTROL.
(a) Termination in Connection with a Change of Control. Notwithstanding
any other provision in this Agreement or any other agreement pre-dating this
Agreement between the Company and Executive, in the event of a Change of Control
Termination, the Company shall, on the Termination Date in respect of such
Change of Control Termination, pay the Executive, in addition to any Base Salary
earned but not paid through the Termination Date and any amounts due pursuant to
Award Plans and Benefit Plans including, without limitation, the Guaranteed
Bonus or the pro rata amount of Executive's anticipated bonus for the fiscal
year in which Executive's employment is so terminated, as applicable, the
compensation and benefits set forth in Section 9(b).
(b) Compensation and Benefits.
(i) A Termination Payment shall be paid which is equal to the sum of two
(2) times the Executive's annual base salary in effect on the Termination
Date plus two (2) times the average annual cash bonus paid to the Executive
for the previous two fiscal years (or, if the Change of Control Termination
occurs prior to January 1, 2001, the sum of $140,000, which is two (2)
times the Guaranteed Bonus), under this Agreement or otherwise
("Termination Payment"). Notwithstanding Section 9(a), the Termination
Payment shall be calculated and paid immediately prior to the closing of
the transactions constituting a Change of Control if the Executive receives
notice prior to the Change of Control that his employment will be
terminated on or after the Change of Control.
(ii) Executive shall be permitted to participate in, and have all rights
and benefits provided by, all Benefit Plans which Executive was eligible to
participate in immediately prior to the Termination Date (to the extent
such participation is possible under the laws then pertaining to such
Benefit Plans), for a minimum of two years following the Termination Date.
(iii) All Options granted to Executive shall become fully vested and
immediately exercisable at the time of a Change in Control Termination;
provided, however, that the acceleration of exercisability or issuance
shall be subject to the imposition of such restrictions on transferability
of the subject Company Shares as may be necessary to permit Company Shares
issued upon exercise of such Options to continue to qualify for the
exception from Section 16(b) of the Securities Exchange Act of 1934, as
amended, provided by Rule 16b-3 thereunder. The Company represents and
warrants that such vesting is not prohibited by the 1996 Plan. Any written
grant of Options to the Executive shall contain the foregoing vesting
provision. In lieu of Company Shares issuable upon exercise of any
outstanding and unexercised Options granted to Executive, Executive may, at
Executive's option, receive an amount in cash equal to the product of (i)
the excess of the higher of the Fair Market Value of Company Shares on the
Termination Date, or the highest per share price for Company Shares
actually paid in connection with any Change of Control of the Company, over
the per share exercise price of each Option held by Executive, times (ii)
the number of Company Shares covered by each such Option. In the event
Executive does not elect to receive a cash payment for any outstanding and
unexercised Options granted to
13
<PAGE> 14
Executive, Executive shall have the right to exercise such Options in
accordance with the terms and conditions provided in the applicable stock
option plans.
(iv) The Company shall also pay to Executive all legal fees and
expenses incurred by Executive as a result of a termination described in
SECTION 9(a) of this Agreement (including all such fees and expenses, if
any, incurred in contesting or disputing any such termination or in seeking
to obtain or enforce any right or benefit provided by this Agreement or in
connection with any tax audit or proceeding to the extent attributable to
the application of Section 4999 of the Code to any payment or benefit
provided hereunder). In addition, the Executive shall be entitled to
one-on-one outplacement counseling provided by an external consultant, plus
office space and secretarial support paid for by the Company until the
Executive finds a position comparable to the position he held prior to the
Termination Date or until the first anniversary of the Termination Date,
whichever is earlier. Moreover, the Executive shall be entitled to
reimbursement by the Company, upon demand and presentation of appropriate
evidence of the expenses, for expenses related to searching for employment,
including travel and lodging, in an amount not to exceed $5,000.
(c) Certain Transactions. Notwithstanding the provisions of
subparagraphs (i) or (vi) in the definition of change of control, unless
otherwise determined in a specific case by majority vote of the Board, a Change
of Control shall not be deemed to have occurred for purposes of this Agreement
solely because (i) an entity in which the Company directly or indirectly
beneficially owns 50% or more of the voting securities or (ii) any
Company-sponsored employee stock ownership plan, or any other employee benefit
plan of the Company, either files or becomes obligated to file a report or a
proxy statement under or in response to Schedule 13D, Schedule 14D-l, Form 8-K
or Schedule 14A (or any successor schedule, form or report or item thereon)
under the Exchange Act, disclosing beneficial ownership by it of shares of stock
of the Company, or because the Company reports that a Change of Control of the
Company has or may have occurred or will or may occur in the future by reason of
such beneficial ownership.
(d) Escrow Arrangement. If within thirty (30) days after the
effective date of a Change of Control Executive's employment has not been
terminated, the Company shall deposit with an escrow agent, pursuant to an
escrow agreement between the Company and such escrow agent, a sum of money, or
other property permitted by such escrow agreement, which is substantially
sufficient in the opinion of the Company's management to fund the amounts due to
Executive set forth in SECTION 9(b) of this Agreement. The escrow agreement
shall provide that such agreement may not be terminated until the earlier of (i)
Executive's employment has terminated and all amounts due to Executive as set
forth in this Agreement have been paid to Executive or (ii) three (3) years
after the effective date of the Change of Control.
(e) Tax Matters. If the Excise Tax on Excess Parachute Payments
will be imposed on the Executive under Code section 4999 as a result of the
Executive's receipt of the Change of Control Benefits, the Company shall
indemnify the Executive and hold him harmless against all claims, losses,
damages, penalties, expenses, interest, and Excise Taxes. To effect this
indemnification, the Company shall pay to the Executive the Additional Amount
which is sufficient to indemnify and hold the Executive harmless from the
application of Code sections 280G and 4999, including the amount of (i) the
Excise Tax that will be imposed on the Executive
14
<PAGE> 15
under section 4999 of the Code with respect to the Change of Control Benefits;
(ii) the additional (A) Excise Tax under section 4999 of the Code, (B) hospital
insurance tax under section 3111(b) of the Code and (C) federal, state and local
income taxes for which the Executive is or will be liable on account of the
payment of the amount described in subitem (i); and (iii) the further excise,
hospital insurance and income taxes for which the Executive is or will be liable
on account of the payment of the amount described in subitem (ii) and this
subitem (iii) and any other indemnification payment under this SECTION 9(e). The
Additional Amount shall be calculated and paid to the Executive at the time that
the Termination Payment is paid to the Executive. In calculating the Additional
Amount, the highest marginal rates of federal and applicable state and local
income taxes applicable to individuals and in effect for the year in which the
Change of Control occurs shall be used. Nothing in this paragraph shall give the
Executive the right to receive indemnification from the Company for federal,
state or local income taxes or hospital insurance taxes payable solely as a
result of the Executive's receipt of (a) the Change in Control Benefits, or (b)
any additional payment, benefit or compensation other than the Additional
Amount. As specified in items (ii) and (iii), above, all income, hospital
insurance and additional Excise Taxes resulting from additional compensation in
the form of the Excise Tax payment specified in item (i), above, shall be paid
to the Executive.
The provisions of this SECTION 9(E) are illustrated by the following
example:
Assume that the Termination Payment and all other Change of Control
Benefits result in a total federal, state and local income tax and hospital
insurance tax liability of $180,000; and an Excise Tax liability under Code
section 4999 of $70,000. Under such circumstances, the Executive is solely
responsible for the $180,000 income and hospital insurance tax liability; and
the Company must pay to the Executive $70,000, plus an amount necessary to
indemnify the Executive for all federal, state and local income taxes, hospital
insurance taxes, and Excise Taxes that will result from the $70,000 payment to
the Executive and from all further indemnification to the Executive of taxes
attributable to the initial $70,000 payment.
10. NONCOMPETITION. During the Term, the Executive shall not, other than
through the Company or affiliates of the Company, participate in a Competing
Activity. For a period of two (2) years following any termination of employment
except a Termination Without Cause or Resignation for Good Reason (unless such
termination shall be a Change of Control Termination, in which event the
restrictive covenant set forth in this paragraph shall continue to apply),
Executive shall not participate in any Competing Activity.
The Executive agrees that damages at law for violation of the restrictive
covenant contained herein would not be an adequate or proper remedy to the
Company, and that should the Executive violate or threaten to violate any of the
provisions of such covenant, the Company, its successors or assigns, shall be
entitled to obtain a temporary or permanent injunction, as appropriate, against
the Executive in any court having jurisdiction over the person and the subject
matter, prohibiting any further violation of any such covenants. The injunctive
relief provided herein shall be in addition to any award of damages,
compensatory, exemplary or otherwise, payable by reason of such violation.
Furthermore, the Executive acknowledges that this Agreement has been
negotiated at arms'
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<PAGE> 16
length by the parties, neither being under any compulsion to enter into this
Agreement, and that the foregoing restrictive covenant does not in any respect
inhibit his ability to earn a livelihood in his chosen profession without
violating the restrictive covenant contained herein. The Company by these
presents has attempted to limit the Executive's right to compete only to the
extent necessary to protect the Company from unfair competition. The Company
recognizes, however, that reasonable people may differ in making such a
determination. Consequently, the Company agrees that if the scope or
enforceability of the restricted covenant contained herein is in any way
disputed at any time, a court or other trier of fact may modify and enforce the
covenant to the extent that it believes to be reasonable under the circumstances
existing at the time.
11. EMPLOYMENT STATUS. The parties acknowledge and agree that Executive is
an employee of the Company, not an independent contractor. Any payments made to
Executive by the Company pursuant to this Agreement shall be treated for federal
and state payroll tax purposes as payments made to a Company employee,
irrespective of whether such payments are made subsequent to the Termination
Date.
12. NOTICES. All notices or deliveries authorized or required pursuant to
this Agreement shall be deemed to have been given when in writing and personally
delivered or when deposited in the U.S. mail, certified, return receipt
requested, postage prepaid, addressed to the parties at the following addresses
or to such other addresses as either may designate in writing to the other
party:
To the Company: 1805 Moriah Woods Blvd.
Memphis, TN 38117
Attn: Chief Financial Officer
To the Executive: ________________________
13. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between the parties hereto with respect to the subject matter hereof and shall
not be modified in any manner except by instrument in writing signed, by or on
behalf of, the parties hereto; provided, however, that any amendment or
termination of the covenant of noncompetition in SECTION 10 must be approved by
a majority of the Directors of the Company other than the Executive, if the
Executive is then a director of the Company. This Agreement shall be binding
upon and inure to the benefit of the heirs, successors and assigns of the
parties hereto.
14. ARBITRATION. Any controversy concerning or claim arising out of or
relating to this Agreement shall be settled by final and binding arbitration in
Memphis, Shelby County, Tennessee at a location specified by the party seeking
such arbitration.
(a) The Arbitrators. Any arbitration proceeding shall be conducted
by three (3) Arbitrators and the decision of the Arbitrators shall be binding on
all parties. Each Arbitrator shall have substantial experience and expert
competence in the matters being arbitrated. The party desiring to submit any
matter relating to this Agreement to arbitration shall do so by written notice
to the other party, which notice shall set forth the items to be arbitrated,
such party's choice of Arbitrator, and such party's substantive position in the
arbitration. The party
16
<PAGE> 17
receiving such notice shall, within fifteen (15) days after receipt of such
notice, appoint an Arbitrator and notify the other party of its appointment and
of its substantive position. The Arbitrators appointed by the parties to the
Arbitration shall select an additional Arbitrator meeting the aforedescribed
criteria. The Arbitrators shall be required to render a decision in accordance
with the procedures set forth in Subparagraph (b) below within thirty (30) days
after being notified of their selection. The fees of the Arbitrators shall be
equally divided amongst the parties to the arbitration.
(b) Arbitration Procedures. Arbitration shall be conducted in
accordance with the Uniform Arbitration Act, except to the extent the provisions
of such Act are modified by this Agreement or the subsequent mutual agreement of
the parties. Judgment upon the award rendered by the Arbitrator(s) may be
entered in any court having jurisdiction thereof. Any party hereto may bring an
action, including a summary or expedited proceeding, to compel arbitration of
any controversy or claim to which this provision applies in any court having
jurisdiction over such action in Shelby County, Tennessee, and the parties agree
that jurisdiction and venue in Shelby County, Tennessee are appropriate and
approved by such parties.
15. APPLICABLE LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Tennessee.
16. ASSIGNMENT. The Executive acknowledges that his services are unique and
personal. Accordingly, the Executive may not assign his rights or delegate his
duties or obligations under this Agreement, except with respect to certain
rights to receive payments as described in Section 7.
17. HEADINGS. Headings in this Agreement are for convenience only and shall
not be used to interpret or construe its provisions.
18. SUCCESSORS; BINDING AGREEMENT. The Company will require any successor
to all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle Executive to compensation from the Company in
the same amount and on the same terms as Executive would be entitled to
hereunder if Executive terminates his employment for Good Reason; provided,
however, that nothing in this paragraph shall in any way be construed to
diminish the amount of any payment to the Executive upon a Change in Control
Termination, and the right of the Executive to receive such a payment shall be
independent of the rights provided herein. The Company's rights and obligations
under this Agreement shall inure to the benefit of and shall be binding upon the
Company's successors and assigns.
19. FURTHER COVENANTS. At the times specified below, the parties shall
perform the following acts:
(a) On the date the Board approves this Agreement, the Company shall
grant to the
17
<PAGE> 18
Executive Options pursuant to the 1996 Plan to purchase 500,000 Company Shares
at a price equal to the Fair Market Value of the Common Shares on the earlier of
the date this Agreement shall be signed by both parties or the date the Board
shall approve the terms and conditions of this Agreement, which Options shall be
characterized as Incentive Stock Options pursuant to Section 422 of the Code to
the fullest extent permitted by said Section and shall be granted to the
Executive pursuant to the Company's standard form of Option Grant agreement, and
which Options shall vest and be exercisable as follows: (i) 170,000 Company
Shares on the date the Executive's employment commences, (ii) 110,000 Company
shares per year on each of the three (3) anniversaries of the Executive's
employment immediately succeeding the commencement of such employment. The
Company represents and warrants to the Executive that the offer and sale of, and
the resale of, shares issuable upon the exercise of the Options that will be
granted pursuant to this subparagraph have been duly registered with the
Securities and Exchange Commission;
(b) On the day the Board approves this Agreement, the Company
shall sell 300,000 Company Shares to the Executive for an aggregate price of
$300,000, and the Executive shall execute and deliver the Stock Purchase Note to
the Company;
(c) The Company shall pay the Relocation Payment to the Executive
within five (5) business days after the Executive shall give the Company the
Sale Notice indicating that the Executive intends to sell his California
residence;
(d) The Company shall fund the Relocation Equity Loan at the time
specified in the definition of the Relocation Equity Loan, and at such time, the
Executive shall execute and deliver the Relocation Equity Note to the Company.
(e) The Company shall fund the Commencement Loan within five (5)
days of the commencement of the term of this Agreement, whereupon the Executive
shall execute and deliver to the Company a promissory note evidencing such loan.
(f) The parties shall execute such additional documents and
instruments consistent with this Agreement to effect the purposes and intention
of this Agreement.
[The remainder of this page is intentionally left blank.]
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<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
RESPONSE ONCOLOGY, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
EXECUTIVE:
------------------------------------
Anthony LaMacchia
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RESPONSE ONCOLOGY, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,076
<SECURITIES> 0
<RECEIVABLES> 21,550
<ALLOWANCES> 2,833
<INVENTORY> 3,143
<CURRENT-ASSETS> 51,139
<PP&E> 16,457
<DEPRECIATION> 11,980
<TOTAL-ASSETS> 123,224
<CURRENT-LIABILITIES> 30,117
<BONDS> 0
0
27
<COMMON> 120
<OTHER-SE> 50,471
<TOTAL-LIABILITY-AND-EQUITY> 123,224
<SALES> 102,951
<TOTAL-REVENUES> 102,951
<CGS> 59,843
<TOTAL-COSTS> 100,009
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,156
<INTEREST-EXPENSE> 2,505
<INCOME-PRETAX> 2,336
<INCOME-TAX> 888
<INCOME-CONTINUING> 1,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,448
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
