<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000 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 shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value, 12,290,406 shares as of May 8, 2000.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C>
Consolidated Balance Sheets,
March 31, 2000 and December 31, 1999---------------------- 3
Consolidated Statements
of Earnings for the Three Months Ended
March 31, 2000 and March 31, 1999------------------------- 4
Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 2000 and March 31, 1999------------------------- 5
Notes to Consolidated
Financial Statements-------------------------------------- 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations--------------------------------------------- 10
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. Other Information----------------------------------------- 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>
March 31, December 31,
2000 1999
(Unaudited) (Note 1)
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,961 $ 7,195
Accounts receivable, less allowance for doubtful accounts
of $2,715 and $2,632 17,407 16,007
Supplies and pharmaceuticals 3,187 3,485
Prepaid expenses and other current assets 5,043 4,778
Due from affiliated physician groups 18,111 16,884
Deferred income taxes 114 114
--------- ---------
TOTAL CURRENT ASSETS 49,823 48,463
Property and equipment, net 4,042 4,222
Deferred charges, less accumulated amortization of $124 and $86 342 380
Management service agreements, less accumulated amortization of
$8,968 and $8,206 65,367 66,113
Other assets 526 467
========= =========
TOTAL ASSETS $ 120,100 $ 119,645
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,625 $ 15,665
Accrued expenses and other liabilities 5,503 5,440
Current portion of notes payable 4,047 3,745
Current portion of capital lease obligations 268 267
--------- ---------
TOTAL CURRENT LIABILITIES 26,443 25,117
Notes payable, less current portion 34,648 35,445
Capital lease obligations, less current portion 512 580
Deferred income taxes 9,802 9,802
Minority interest 1,179 924
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $1.00 par value (aggregate
involuntary liquidation preference $183) authorized 3,000,000
shares; issued and outstanding 16,631 shares at each period end 17 17
Common stock, $.01 par value, authorized 30,000,000 shares; issued and
outstanding 12,290,406 and 12,270,406 shares 123 123
Paid-in capital 102,011 101,979
Accumulated deficit (54,635) (54,342)
--------- ---------
47,516 47,777
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 120,100 $ 119,645
========= =========
</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
-----------------------------
March 31, March 31,
2000 1999
------------ -----------
<S> <C> <C>
NET REVENUE $ 35,586 $ 36,309
COSTS AND EXPENSES
Salaries and benefits 5,513 6,566
Pharmaceuticals and supplies 24,165 20,487
Other operating costs 2,480 3,429
General and administrative 1,474 1,681
Depreciation and amortization 1,135 1,117
Interest 827 863
Provision for doubtful accounts 210 191
------------ -----------
35,804 34,334
------------ -----------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (218) 1,975
Minority owners' share of net earnings 255 112
------------ -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (473) 1,863
Income tax provision (benefit) (180) 708
------------ -----------
NET EARNINGS (LOSS) $ (293) $ 1,155
============ ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.02) $ 0.10
============ ===========
Diluted $ (0.02) $ 0.10
============ ===========
Weighted average number of common shares:
Basic 12,282,139 12,049,331
============ ===========
Diluted 12,282,139 12,085,663
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31, March 31,
2000 1999
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) ($ 293) $ 1,155
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,135 1,117
Provision for doubtful accounts 210 191
Gain on sale of property and equipment (28) --
Minority owners' share of net earnings 255 112
Changes in operating assets and liabilities:
Accounts receivable (1,610) 861
Supplies and pharmaceuticals, prepaid expenses and other current assets 33 643
Deferred charges and other assets (30) 44
Due from affiliated physician groups (1,227) (113)
Accounts payable and accrued expenses 1,023 (1,531)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (532) 2,479
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 33 --
Purchase of equipment (199) (250)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (166) (250)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 32 --
Principal payments on notes payable (501) (198)
Principal payments on capital lease obligations (67) (90)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (536) (288)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,234) 1,941
Cash and cash equivalents at beginning of period 7,195 1,083
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,961 $ 3,024
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
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. Operating results for the three month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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, 1999.
Net Revenue: The Company's net patient service revenue includes charges to
patients, insurers, government programs and other third-party payers for medical
services provided. Such amounts are recorded net of contractual adjustments and
other uncollectible amounts. Contractual adjustments result from the differences
between the amounts charged for services performed and the amounts allowed by
government programs and other public and private insurers. 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' practice. Revenue recorded for these contracts
represents the cost of pharmaceuticals plus a fixed or percentage fee. Clinical
research revenue is recorded based on contracts with various pharmaceutical
manufacturers to provide clinical data regarding the use of their products.
The following table is a summary of net revenue by source for the respective
three month periods ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
March 31,
-----------------------
2000 1999
------- -------
<S> <C> <C>
Net patient services revenue $ 4,633 $ 8,149
Practice management service fees 19,993 17,589
Pharmaceutical sales to physicians 10,781 9,744
Clinical research revenue 179 827
======= =======
$35,586 $36,309
======= =======
</TABLE>
Revenue is recognized when earned. Sales and related cost of sales are generally
recognized upon delivery of goods or performance of services.
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<PAGE> 7
Net Earnings (Loss) Per Common Share: A reconciliation of the basic earnings
(loss) per share and the diluted earnings (loss) per share computation is
presented below for the three month periods ended March 31, 2000 and 1999.
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Weighted average shares outstanding 12,282,139 12,049,331
Net effect of dilutive stock options and
warrants based on the treasury stock
method --(1) 36,332
----------- -----------
Weighted average shares and common stock
Equivalents 12,282,139 12,085,663
=========== ===========
Net earnings (loss) $ (293) $ 1,155
=========== ===========
Diluted per share amount $ (0.02) $ 0.10
=========== ===========
</TABLE>
(1) Stock options and warrants are excluded from the weighted average
number of common shares due to their anti-dilutive effect.
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 Revolving Credit Facility. At March 31, 2000, $36.3 million
aggregate principal was outstanding under the Credit Facility with a current
interest rate of approximately 9.3%. 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 charge
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 3.25%. The Company's obligation for commitment fees
was adjusted from a maximum of .5% to .625% of the unused portion of the
Revolving Credit Facility. 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> 8
On March 30, 2000, the Company and its lenders amended various terms of the
Credit Facility. As a result of this amendment, certain affirmative and negative
covenants were added (including minumum quarterly cash flow requirements through
March 2001), and certain other existing covenants were modified. Additionally,
certain principal repayment terms were modified and certain future and current
compliance with specific covenants was waived. Finally, the maturity date of the
Credit Facility was accelerated to June 2001. The Company expects to have a
longer-term facility in place prior to the June 2001 maturity date, but there
can be no assurances that such facility will in fact be consummated.
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 $16.97.
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 March
31, 2000, 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 due
pursuant to the management service agreements ("Service Agreements"). In
addition, the Company may also fund certain working capital needs of the
affiliated physicians from time to time.
NOTE 6 -- SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different services. The Company has three reportable segments: IMPACT Services,
Physician Practice Management and Cancer Research Services. The IMPACT Services
segment provides stem cell supported high dose chemotherapy and other advanced
cancer treatment services under the direction of practicing oncologists as well
as compounding and dispensing pharmaceuticals to certain medical oncology
practices. The Physician Practice Management segment owns the assets of and
manages oncology practices. The Cancer Research Services segment conducts
clinical cancer research on behalf of pharmaceutical manufacturers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies except that the Company does not
allocate interest expense, taxes or corporate overhead to
-8-
<PAGE> 9
the individual segments. The Company evaluates performance based on profit or
loss from operations before income taxes and unallocated amounts.
<TABLE>
<CAPTION>
(In thousands)
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
For the three months ended March 31, 2000:
Net revenue $15,414 $19,993 $ 179 $ 35,586
Total operating expenses 14,639 17,514 181 32,334
------- ------- ------- --------
Segment contribution (deficit) 775 2,479 (2) 3,252
Depreciation and amortization 93 987 -- 1,080
======= ======= ======= ========
Segment profit (loss) $ 682 $ 1,492 ($ 2) $ 2,172
======= ======= ======= ========
Segment assets $19,494 $87,796 $ 1,241 $108,531
======= ======= ======= ========
Capital expenditures $ 10 $ 172 -- $ 182
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
For the three months ended March 31, 1999:
Net revenue $17,893 $17,589 $ 827 $ 36,309
Total operating expenses 15,268 14,908 516 30,692
------- ------- ------- --------
Segment contribution 2,625 2,681 311 5,617
Depreciation and amortization 146 921 -- 1,067
======= ======= ======= ========
Segment profit $ 2,479 $ 1,760 $ 311 $ 4,550
======= ======= ======= ========
Segment assets $24,855 $89,889 $ 2,818 $117,562
======= ======= ======= ========
Capital expenditures $ 44 $ 179 -- $ 223
======= ======= ======= ========
</TABLE>
Reconciliation of profit (loss):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
--------- --------
<S> <C> <C>
Segment profit $ 2,172 $ 4,550
Unallocated amounts:
Corporate salaries, general and administrative 1,771 1,774
Corporate depreciation and amortization 55 50
Corporate interest expense 819 863
--------- --------
Earnings (loss) before income taxes ($ 473) $ 1,863
========= ========
</TABLE>
Reconciliation of consolidated assets:
<TABLE>
<CAPTION>
As of March 31,
-----------------------
2000 1999
--------- --------
<S> <C> <C>
Segment assets $ 108,531 $117,562
Unallocated amounts:
Cash and cash equivalents 5,961 3,024
Prepaid expenses and other assets 4,763 3,400
Property and equipment, net 845 898
--------- --------
Consolidated assets $ 120,100 $124,884
========= ========
</TABLE>
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Response Oncology, Inc. (the "Company") is a comprehensive cancer management
company. The Company provides advanced cancer treatment services through
outpatient facilities known as IMPACT(R) Centers under the direction of
practicing oncologists; 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 300 medical oncologists
are associated with the Company through these programs. As of March 31, 2000,
the Company's total network included 39 IMPACT Centers located in 21 states and
the District of Columbia. The network consists of 22 wholly owned centers, 14
managed programs, and 3 centers owned and operated in joint venture with a host
hospital.
In May of 1999, the results of certain breast cancer studies were released at
the meeting of the American Society of Clinical Oncology (ASCO). These studies,
involving the use of high dose chemotherapy, sparked controversy among
oncologists, and, in the aggregate, caused confusion among patients, third-party
payers, 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
business has slowed, as evidenced by a 48% decrease in high dose procedures in
the first quarter of 2000 as compared to the first quarter of 1999. The Company
closed 12 marginal IMPACT Centers in 1999 due to decreased patient volumes and 3
additional IMPACT Centers in the first quarter of 2000.
The Company anticipates that maturity of existing breast cancer data along with
the release of new data will clarify the role of high dose therapies for breast
cancer. On May 20-23, at the 2000 ASCO annual meeting, additional data on
this topic will be presented by affiliates of the Company and other researchers.
If the results of these data are negative, conflicting, or inconclusive, it
could result in a further decrease in high dose referrals and procedures and
adversely affect the financial results of this line of business. In response to
this uncertainty, the Company is evaluating new diseases that could potentially
be managed through the IMPACT Center network. However, there can be no assurance
that other diseases can be identified, implemented, and effectively managed
through the existing network.
During the first quarter of 2000, the Company decided to expand into the
specialty pharmaceutical business and began to put in place certain of the
resources necessary for this expansion. In this move, the Company intends to
leverage its expertise and resources in the delivery of complex pharmaceuticals
to cancer patients into the delivery of specialty drugs to patients with a wide
range of chronic, costly and complex diseases. Specifically, this will include
the distribution of new drugs with special handling requirements, and is
expected to involve the use of the Company's regional network of specialized
pharmaceutical centers. In addition, the Company intends to use its national
network of IMPACT Centers and its highly trained healthcare professionals to
administer the most fragile compounds to the expanded patient population. The
Company has hired an expert consultant to assist in the development of the
business plan and is in the process of recruiting a chief medical officer and
director of managed care. The Company has also engaged in initial discussions
with potential strategic partners. The soft launch of the specialty
pharmaceutical business is expected to occur by the end of third quarter 2000.
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<PAGE> 11
In its practice management relationships, the Company has predominantly used two
models of Service Agreements: (i) an "adjusted net revenue" model; and (ii) a
"net operating income" model. Service Agreements utilizing the adjusted net
revenue model provide for payments out of practice net revenue, in the following
order: (A) physician retainage (i.e. physician compensation, benefits, and
perquisites, including malpractice insurance) equal to a defined percentage of
net revenue ("Physician Expense"); (B) a clinic expense portion of the
management fee (the "Clinic Expense Portion") equal to the aggregate actual
practice operating expenses exclusive of Physician Expense; and (C) a base
service fee portion (the "Base Fee") equal to a defined percentage of net
revenue. In the event that practice net revenue is insufficient to pay all of
the foregoing in full, then the Base Fee is first reduced, followed by the
Clinic Expense Portion of the management fee, and finally, Physician Expense,
therefore effectively shifting all operating risk to the Company. In each
Service Agreement utilizing the adjusted net revenue model, the Company is
entitled to a Performance Fee equal to a percentage of Annual Surplus, defined
as the excess of practice revenue over the sum of Physician Expense, the Clinic
Expense Portion, and the Base Fee.
Service Agreements utilizing the net operating income model provide for a
management fee equal to the sum of a Clinic Expense Portion (see preceding
paragraph) plus a percentage (the "Percentage Portion") of the net operating
income of the practice (defined as net revenue minus practice operating
expenses). Practice operating expenses do not include Physician Expense. In
those practice management relationships utilizing the net operating income model
Service Agreement, the Company and the physician group share the risk of expense
increases and revenue declines, but likewise share the benefits of expense
savings, economies of scale and practice enhancements.
Each Service Agreement contains a liquidated damages provision binding the
physician practice and the principals thereof in the event the Service Agreement
is terminated "for cause" by the Company. The liquidated damages are a declining
amount, equal in the first year to the purchase price paid by the Company for
practice assets and declining over a specified term. Principals are relieved of
their individual obligations for liquidated damages only in the event of death,
disability, or retirement at a predetermined age. Each Service Agreement
provides for the creation of an oversight committee, a majority of whom are
designated by the practice. The oversight committee is responsible for
developing management and administrative policies for the overall operation of
each clinic. However, under each Service Agreement, the affiliated practice
remains obligated to repurchase practice assets, typically including intangible
assets, in the event the Company terminates the Service Agreement for cause.
In February 1999 and April 1999, respectively, the Company announced that it had
terminated its Service Agreements with Knoxville Hematology Oncology Associates,
PLLC, and Southeast Florida Hematology Oncology Group, P.A., two of the
Company's three underperforming net revenue model relationships. Since these
were not "for cause" terminations initiated by the Company, the affiliated
practices were not responsible for liquidated damages. In 1998 the Company
recorded an impairment charge related to the three Service Agreements 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" ("SFAS No. 121"). The structure of these contracts has failed
over time to align the physician and Company incentives, producing deteriorating
returns and/or negative cash flows to the Company. The Company currently has no
plans to terminate the Service Agreement with the third physician group.
In the fourth quarter of 1999, the Company terminated its Service Agreement with
one single-physician practice in Florida. This termination was initiated on a
"for cause" basis and the Company is seeking recovery of liquidated damages.
During the same period, the Company began negotiations to terminate another
Service Agreement with a single-physician practice. Since this is not a "for
cause" termination initiated by the Company, the affiliated practice is not
responsible for liquidated damages. The Company experienced deteriorating
returns on this particular Service Agreement and concluded that continuing the
relationship was not economically feasible. At December 31, 1999, the Company
recorded a loss contingency related to the
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<PAGE> 12
Service Agreements and associated assets in accordance with Financial Accounting
Standards Board Statement No. 5 "Accounting for Contingencies". The Company
anticipates that the second Service Agreement will be terminated in the second
quarter of 2000.
RESULTS OF OPERATIONS
Net revenue decreased 2% to $35.6 million for the quarter ended March 31, 2000,
compared to $36.3 million for the quarter ended March 31, 1999. Practice
management service fees were $20.0 million for the first quarter of 2000
compared to $17.6 million for the same period in 1999 for a 14% increase. This
increase is due to growth in utilization of both ancillary and non-ancillary
services, and occurred despite a 13% decrease in the number of physicians under
management agreements between the periods. On a same-physician basis, practice
management service fees increased 28%. Pharmaceutical sales to physicians
increased $1.1 million or 11% from $9.7 million for the first three months of
1999 to $10.8 million in 2000. Additionally, net patient service revenues from
IMPACT services decreased $3.5 million, or 43%, from $8.1 million in the first
quarter of 1999 to $4.6 million in the first quarter of 2000. This decrease in
high dose chemotherapy revenues continues to reflect the confusion and related
pullback in breast cancer related admissions resulting from the high dose
chemotherapy/breast cancer study results presented at ASCO in May 1999.
EBITDA (earnings before interest, taxes, depreciation and amortization)
decreased $2.3 million, or 61%, to $1.5 million for the quarter ended March 31,
2000 in comparison to $3.8 million for the quarter ended March 31, 1999. The
reduction is principally due to the decrease in IMPACT Center and cancer
research volumes as compared to the first quarter of 1999. EBITDA from the
physician practice management division decreased $.2 million primarily due to
increases in pharmaceutical and supply costs, increases in contractual
adjustments, and the termination and modification of certain Service Agreements.
Salaries and benefits costs decreased $1.1 million, or 17%, from $6.6 million
for the first quarter of 1999 to $5.5 million in 2000. The decrease is primarily
due to the termination of certain Service Agreements, the modification of a
Service Agreement which resulted in a change in the manner in which physician
compensation is recorded, the closing of various IMPACT Centers and a reduction
in corporate staffing.
Supplies and pharmaceuticals expense increased $3.7 million, or 18%, from 1999
to 2000. The increase is primarily related to increased volume in pharmaceutical
sales to physicians and greater utilization of new chemotherapy agents with
higher costs in the practice management division. Supplies and pharmaceuticals
expense as a percentage of net revenue was 68% and 56% for the quarters ended
March 31, 2000 and 1999, respectively. The increase as a percentage of net
revenue is due to the lower margin associated with the increased pharmaceutical
sales to physicians as well as general price increases in pharmaceuticals used
in the practice management division.
General and administrative expenses decreased $.2 million, or 13%, from $1.7
million in the first quarter of 1999 to $1.5 million in the first quarter of
2000. The decrease is primarily due to the closure of various IMPACT Centers and
the termination of certain Service Agreements.
Other operating expenses decreased $.9 million, or 26%, from $3.4 million in
1999 to $2.5 million in 2000. Other operating expenses consist primarily of
medical director fees, purchased services related to global case rate contracts,
rent expense, and other operational costs. The decrease is primarily due to the
closure of various IMPACT Centers and lower purchased services and physician
fees as a result of lower IMPACT and cancer research volumes as compared to the
first quarter of 1999.
-12-
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's working capital was $23.4 million with current
assets of $49.8 million and current liabilities of $26.4 million. Cash and cash
equivalents represented $6.0 million of the Company's current assets.
Cash used in operating activities was $.5 million in the first quarter of 2000
compared to cash provided by operating activities of $2.5 million for the same
period in 1999. This decrease is largely attributable to growth in IMPACT
accounts receivable and amounts due from affiliated physician groups resulting
from growth in pharmaceutical sales to physicians and practice management
service fees, coupled with a moderate slowdown in IMPACT collections.
Cash used in investing activities was $.2 million and $.3 million for the
quarters ended March 31, 2000 and 1999, respectively. The decrease is primarily
attributable to a reduction in capital expenditures in the first quarter of 2000
as compared to the first quarter of 1999.
Cash used in financing activities was $.5 million for the first quarter of 2000
and $.3 million for the same period in 1999. The increase in cash used in
financing activities is primarily attributable to additional payments on notes
payable in the first quarter of 2000 as compared to the first quarter of 1999.
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 Revolving Credit Facility. At March 31, 2000, $36.3 million
aggregate principal was outstanding under the Credit Facility with a current
interest rate of approximately 9.3%. 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 charge
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 3.25%. The Company's obligation for commitment fees
was adjusted from a maximum of .5% to .625% of the unused portion of the
Revolving Credit Facility. 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.
On March 30, 2000, the Company and its lenders amended various terms of the
Credit Facility. As a result of this amendment, certain affirmative and negative
covenants were added (including minumum quarterly cash flow requirements through
March 2001), and certain other existing covenants were modified. Additionally,
certain principal repayment terms were modified and certain future and current
compliance with specific
-13-
<PAGE> 14
covenants was waived. Finally, the maturity date of the Credit Facility was
accelerated to June 2001. The Company expects to have a longer-term facility in
place prior to the June 2001 maturity date, but there can be no assurances that
such facility will in fact be consummated. Furthermore, in light of the
uncertainty surrounding the clinical data relative to the treatment of breast
cancer with high dose chemotherapy, there can be no assurance that the Company
will remain in compliance with the terms of the Credit Facility, as amended. In
such event, the Company would be required to obtain waivers relative to the
covenant violations or renegotiate certain terms of the Credit Facility.
Long-term unsecured amortizing promissory notes bearing interest at rates from
4% to 9% were issued as partial consideration for the practice management
affiliations consummated in 1996. Principal and interest under the long-term
notes may, at the election of the holders, be paid in shares of common stock of
the Company based upon conversion rates ranging from $11.50 to $16.97. The
unpaid principal amount of the long-term notes was $2.4 million at March 31,
2000.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA"), required that standards be developed for the privacy and protection
of individually identifiable health information. As directed by HIPAA, the
federal government recently proposed detailed regulations to protect individual
health information that is maintained or transmitted electronically from
improper access, alteration or loss. Final regulations are expected sometime
this year. The Company expects that health care organizations will be required
to comply with the new standards 24 months after the date of adoption. The
Company expects to begin to address HIPAA issues during fiscal year 2000.
Because the HIPAA regulations have not been finalized, the Company has not been
able to determine the impact of the new standards on its financial position or
results. The Company does expect to incur costs to evaluate and implement the
rules, and will be actively evaluating such costs and their impact on financial
position and operations.
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. The Company developed a
Year 2000 Plan to address all of its Year 2000 issues. The Company's primary
focus was 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 not experienced any significant disruptions to its financial or
operating systems caused by failure of computerized systems resulting from Year
2000 issues. Furthermore, the Company does not expect Year 2000 issues to have a
material adverse effect on the Company's operations or financial results in
2000. Although the Company has no information that indicates any significant
Year 2000 issues, management recognizes and is attentive to future financial and
operational risk associated with Year 2000 computer system failures. The actual
costs incurred by the Company relative to the Year 2000 issue were approximately
$125,000, which were in-line with Company estimates. The Company does not expect
to incur any additional costs related to the Year 2000 issue.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
filing are forward-looking statements that involve a number of risks and
uncertainties. The actual future results of the Company could differ
-14-
<PAGE> 15
significantly from those statements. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to:
(i) a continued decline in high dose chemotherapy referrals due to the high dose
chemotherapy breast cancer results; (ii) difficulty in transitioning operating
responsibilities to new members of senior management; (iii) continued decline in
margins for cancer drugs; (iv) reductions in third-party reimbursement from
managed care plans and private insurance resulting from stricter utilization and
reimbursement standards; (v) the inability of the Company to recover all or a
portion of the carrying amounts of the cost of service agreements, resulting in
an additional charge to earnings; (vi) the Company's dependence upon its
affiliations with physician practices, given that there can be no assurance that
the practices will remain successful or that key members of a particular
practice will remain actively employed; (vii) changes in government regulations;
(viii) risk of professional malpractice and other similar claims inherent in the
provision of medical services; (ix) the Company's dependence on the ability and
experience of its executive officers; (x) the Company's inability to raise
additional capital or refinance existing debt; and (xi) potential volatility in
the market price of the Company's common stock. The Company cautions that any
forward-looking statement reflects only the beliefs of the Company or its
management at the time the statement is made. The Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement was made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 borrowing costs by selecting favorable interest periods for
traunches of the Credit Facility 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") with an affiliate of one of the Company's lenders 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. As of March 31, 2000, approximately 50% of the Company's
outstanding principal balance under the Credit Facility was hedged under the
Swap Agreement. The Swap Agreement matures in July 2000. The Company does not
enter into derivative or interest rate transactions for speculative purposes.
At March 31, 2000, $36.3 million aggregate principal was outstanding under the
Credit Facility with a current interest rate of approximately 9.3%. The Company
does not have any other material market-sensitive financial instruments.
-15-
<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. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10(s) Second Amendment to Credit Agreement dated March 30, 2000,
between Registrant, AmSouth Bank, Union Planters Bank, N.A.
and Bank of America, N.A.
27 Financial Data Schedule (for SEC use only)
-16-
<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/ Peter A. Stark
----------------------------------------
Peter A. Stark
Vice President, Finance
and Principal Accounting Officer
Date: May 15, 2000
By: /s/ Anthony M. LaMacchia
----------------------------------------
Anthony M. LaMacchia
President and Chief Executive Officer
Date: May 15, 2000
-17-
<PAGE> 1
EXHIBIT 10(s)
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of March 30, 2000
("this Amendment") is entered into by RESPONSE ONCOLOGY, INC., a Tennessee
corporation ("Response"), RESPONSE ONCOLOGY MANAGEMENT OF SOUTH FLORIDA, INC., a
Tennessee corporation ("Management"), RESPONSE ONCOLOGY OF TAMARAC, INC., a
Florida corporation ("Tamarac") and RESPONSE ONCOLOGY OF FORT LAUDERDALE, INC.,
a Florida corporation ("Fort Lauderdale"; Response, Management, Tamarac and Fort
Lauderdale are sometimes together referred to as the "Borrowers"), AMSOUTH BANK,
an Alabama banking corporation ("AmSouth"), UNION PLANTERS BANK, NATIONAL
ASSOCIATION, a national banking association ("UP"), and BANK OF AMERICA, N.A., a
national banking association and formerly known as NationsBank, N.A.
(collectively, the "Lenders"), and AMSOUTH BANK, an Alabama banking corporation,
as agent for the Lenders (the "Agent").
RECITALS
A. The Borrowers, the Agent and the Lenders are parties to that certain
Credit Agreement dated as of June 10, 1999 as amended by a First Amendment
thereto dated as of September 30, 1999 (as amended, the "Agreement") pursuant to
which the Lenders have made available to the Borrowers (i) a revolving credit
facility in an aggregate principal amount outstanding not to exceed $7,000,000,
which has been reduced to $6,000,000, and (ii) a term loan facility in the
principal amount of $35,000,000.
B. The Borrowers have applied to the Lenders for modifications to
certain provisions of the Agreement.
C. The Lenders are willing to make such modification as requested only
if, among other things, the Borrowers enter into this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals, the
Borrowers, the Lenders and the Agent hereby agree as follows:
1. Capitalized terms used in this Amendment and not otherwise defined
herein have the respective meanings attributed thereto in the Agreement.
<PAGE> 2
2. The following definition is hereby added to Section 1.1 of the
Agreement and shall read as follows:
"EQUITY ISSUANCE" means (i) the issuance, sale or other disposition
by any Borrower or any of their Subsidiaries of their capital stock,
any rights, warrants or options to purchase or acquire any shares of
their capital stock, or any other security or instrument representing,
convertible into or exchangeable for an equity interest in the
Borrowers or any of their Subsidiaries, and (ii) the receipt by the
Borrowers or any of their Subsidiaries of any capital contribution
(whether or not evidenced by any security or instrument).
3. The following definition is hereby added to Section 1.1 of the
Agreement:
"EXCESS CASH FLOW" for any fiscal quarter means Consolidated EBITDA
for such fiscal quarter less the sum of (i) Capital Expenditures that
are not financed with Purchase Money Debt, (ii) cash tax obligations,
(iii) CMLTD, (iv) Interest Expense and (v) any increase in net Working
Capital for such fiscal quarter (any decreases in Working Capital shall
be subtracted).
4. The defined term of "EBITDA" set forth in Section 1.1 of the
Agreement is hereby amended to read, in its entirety, as follows:
"EBITDA" means the sum of net income before extraordinary items plus
Interest Expense and expenses for taxes, depreciation and amortization,
determined according to GAAP, with no adjustments for extraordinary
gains or losses. With respect to a Practice disposed of by any Borrower
during a fiscal quarter, retroactive effect will be given for such
dispositions of Practices by such Borrower by excluding all cash flows
for such Practices that are disposed of in determining EBITDA at any
time after the date of disposition, in each case calculated as if the
Practice had been disposed effective as of the beginning of the
relevant fiscal quarter.
5. The defined term of "FIXED CHARGE COVERAGE RATIO" set forth in
Section 1.1 of the Agreement is hereby amended to read, in its entirety, as
follows:
"FIXED CHARGE COVERAGE RATIO" means for any fiscal quarter (i)
Consolidated EBITDA for such quarter divided by (ii) the sum of
Interest Expense paid in cash during such quarter plus CMLTD paid in
cash (excluding Subordinated Debt). With respect to a Practice disposed
of by any Borrower during a fiscal quarter, retroactive effect will be
given for such dispositions of Practices by such Borrower by excluding
from the denominator of that calculation all Interest Expense paid in
cash and CMLTD paid in cash with respect to the Practice(s) disposed
of, in each case calculated as if the Practice had been disposed
effective as of the beginning of the relevant fiscal quarter.
2
<PAGE> 3
6. The defined term "MATURITY DATE" set forth in Section 1.1 of the
Agreement is hereby amended to read, in its entirety, as follows:
"MATURITY DATE" means June 30, 2001.
7. The defined term "PERMITTED ACQUISITION" set forth in Section 1.1 of
the Agreement is hereby amended by deleting the following proviso from subclause
(c) thereof:
;provided, however, an acquisition by Response of a Practice
employing two physicians or less where proceeds of such Acquisition are
$2,000,000 or less, will not require approval of the Agent or the
Lenders.
8. The following definitions are hereby added to Section 1.1 of the
Agreement and shall read as follows:
"CURRENT ASSETS" means assets that, in accordance with GAAP, are
current assets.
"CURRENT LIABILITIES" means, as of the date of determination, all
Liabilities maturing on demand or within one year from, and that are
not renewable at the option of the obligor to a date later than one
year after, the date as of which such determination is made and all
other items (including taxes accrued as estimated) that, in accordance
with GAAP, would be included as current liabilities.
"PERMITTED BUSINESS" means a business activity, all aspects of which
require the initial approval of the Lenders, including, but not limited
to, creation, financing, funding, management personnel and execution.
As to all such aspects, the Lenders must determine in their reasonable
opinion and in their reasonable discretion, that such business activity
will not now, or in the future, adversely affect the current and future
cash flow of the Borrowers or otherwise adversely affect the Borrowers'
finances or business. The determination of whether or not a particular
proposed business activity will be approved by the Lenders as a
Permitted Business shall be made under the following procedures and
conditions:
(a) Response shall deliver to Agent, prior to each initial Equity
Issuance or other method of raising funds for each proposed
business activity and prior to the Borrowers engaging in such
activity, a written description of the proposed business
activity and a request that the Lenders determine the such
proposed activity constitutes a Permitted Business. Response
shall include with such request, unaudited pro forma financial
statements demonstrating the effect of the proposed business
activity upon the Borrowers' cash flows, operations and
financial status, all in such detail as the Agent shall
request and shall provide the Agent with any other information
requested by the Agent on behalf of the Lenders.
3
<PAGE> 4
(b) Agent and the Lenders shall review such information and shall
make a determination, in their reasonable discretion, of
whether or not such proposed business activity constitutes a
Permitted Business. The Agent shall notify Response (within
fifteen (15) Business Days after receipt of the request
described in (a) immediately-above) of either: (i) the
Required Lenders' determination of whether the proposed
business activity is a Permitted Business or not or (ii) their
request for additional information. If the Agent requests
additional information, the Agent shall notify Response within
fifteen (15) Business Days after receipt of the additional
information of the Lenders' determination of whether the
proposed business activity is a Permitted Business or not. The
failure of the Agent to notify Response of any of the
foregoing within the stated fifteen (15) Business Days, shall
be deemed to be a determination by the Lenders that the
proposed business activity is NOT a Permitted Business.
(c) Borrowers shall not engage in any initial Equity Issuance
intended to be used to fund such business activity or engage
in any such activity until Agent shall have issued its written
determination that such proposed activity is a Permitted
Business.
(d) Any Permitted Business that is created as a separate legal
entity from the Borrowers shall become a Participating Entity
pursuant to the requirements of Section 3.3.
The Lenders agree that in connection with arriving at their
opinions and determinations through the exercise of their discretion
pursuant to the foregoing provisions, the Lenders will not exercise
such discretion in an unreasonable manner. If the Lenders determine
that a proposed business activity is not a Permitted Business in their
opinion and the Borrowers dispute whether the Lenders were reasonable
in making such determination, the Borrowers' sole remedy shall be to
request that the reasonableness of such determination by the Lenders be
reviewed by an outside entity chosen as described below and the
Borrowers hereby waive and disclaim any and all rights that they may
have to seek redress in a court of law or equity for monetary damages
or other relief in connection with the Lenders' determination that a
proposed business is or is not a Permitted Business. Instead, the
Borrowers agree that their sole legal and equitable remedy shall be to
seek an injunction (subject to the provisions of Sections 10.24,
10.24.1 and 10.24.2) against the Lenders and Agent if the Lenders and
Agent refuse to abide by the determination of a United States
accounting firm made in compliance with the following procedures: (i)
the Borrowers shall notify the Agent in writing within two (2) Business
Days after receipt of the Lenders' determination (or the Lenders'
deemed determination) that the Borrowers dispute the reasonableness of
such determination and shall propose a United States accounting firm of
national standing to review the decision; (ii) the Lenders shall either
accept the firm proposed by the Borrowers or shall propose
4
<PAGE> 5
an alternative United States accounting firm of national standing to
review the decision within five (5) Business Days; (iii) if the Lenders
propose an alternative United States accounting firm of national
standing to review the decision, the Borrowers shall advise the Agent
within (2) Business Days that it either accepts the Lenders' proposed
firm or not; (iv) if the Borrowers do not accept the Lenders' proposed
firm, then the two named accounting firms shall together, within five
(5) Business Days select a third United States accounting firm of
national standing and such firm shall be the firm that shall determine
whether or not the determination made by the Lenders was reasonable or
not. Once selected the accounting firm shall render an opinion within
twenty (20) Business Days. The determination by the chosen accounting
firm shall be final and binding upon the parties. The fees, costs and
expenses associated with the employment of any and all of the
accounting firms pursuant to the provisions hereof shall be borne by
the Borrowers.
"WORKING CAPITAL" means (A) the aggregate amount of all Current
Assets, less (B) the aggregate amount of all Current Liabilities.
9. The definitions of "APPLICABLE COMMITMENT FEE," "APPLICABLE LIBO
RATE MARGIN," and "APPLICABLE PRIME RATE MARGIN" shall be further amended to
read, in their entirety, as follows:
"APPLICABLE COMMITMENT FEE," "APPLICABLE LIBO RATE MARGIN," and
"APPLICABLE PRIME RATE MARGIN" mean, with respect to any Loan and the
commitment fee respecting the Revolving Credit Loan, during any
Effective Period, the percentage rates per annum set forth opposite the
appropriate test in the pricing grid below (ratio values shall be
rounded to the nearest one-hundredth, with any value of .005 rounded
upward):
<TABLE>
<CAPTION>
Total Funded Debt to Prime Rate LIBOR
Consolidated EBITDA Margin Margin Commitment Fee
<S> <C> <C> <C>
Tier 1 - Less than or equal to 2.00 0% 1.375% .25%
Tier 2 - Greater than or equal to .25% 1.75% .375%
2.01 and less than or equal to 2.50
Tier 3 - Greater than or equal to .625% 2.125% .375%
2.51 and less than or equal to 3.0
Tier 4 - Greater than 3.01 1.00% 3.25% .625%
</TABLE>
The Total Funded Debt to Consolidated EBITDA ratio shall be established
by Agent on the basis of the consolidated quarterly financial
statements of and schedules prepared by
5
<PAGE> 6
Response delivered to Agent pursuant to this Agreement and shall be
calculated as set forth in Section 7.3 hereof. The Borrowers must
maintain a Total Funded Debt to Consolidated EBITDA ratio for two
consecutive fiscal quarters at a Tier level other than Tier 4 in order
for the Pricing Values to be maintained at a Tier level below Tier 4.
If the Borrowers have complied with the foregoing, then as long as the
Borrowers have not returned to the Tier 4 level for the ratio of Total
Funded Debt to Consolidated EBITDA, then the Tier level for the Pricing
Values shall be determined on the basis of each fiscal quarter.
Notwithstanding the foregoing, at the end of any Effective Period, and
during any period of time for which Pricing Values may be set by Agent
pursuant to Section 8.1.5 hereof, the Pricing Values with respect to
the Loans shall automatically become the highest values provided for in
the applicable pricing grid set forth above. From March 31, 2000 until
the date the Borrowers achieve the Pricing Values for Tier 1 or Tier 2
or Tier 3 for two consecutive fiscal quarters, the Pricing Values shall
be Tier 4.
10. The repayment grid set forth in Section 2.10 of the Agreement is
hereby further amended to read, in its entirety, as follows:
<TABLE>
<CAPTION>
Date Payment
---- -------
<S> <C>
April 1, 2000 $ 250,000
May 1, 2000 250,000
June 1, 2000 250,000
July 1, 2000 250,000
August 1, 2000 250,000
September 1, 2000 250,000
October 1, 2000 250,000
November 1, 2000 250,000
December 1, 2000 250,000
January 1, 2001 250,000
February 1, 2001 250,000
March 1, 2001 250,000
April 1, 2001 1,500,000
June 30, 2001 Balance Due in Full
</TABLE>
11. The following paragraphs are hereby added to the end of Section
2.10 of the Agreement and shall read as follows:
In the event the Borrowers have Excess Cash Flow in any fiscal
quarter (beginning with the fiscal quarter ending June 30, 2000), the
Borrowers on or before the 30th day after the end of each fiscal
quarter must make a mandatory prepayment of the Loans by an amount
equal to seventy-five percent (75%) of said Excess Cash Flow up to a
ceiling of $750,000. All of such prepayment shall be applied to the
Term Loans.
6
<PAGE> 7
Promptly upon (and in any event not later than two (2) Business Days
after) their receipt thereof of Net Proceeds from any Equity Issuance,
the Borrowers will make a prepayment on the Loans to be applied, first,
to prepay the outstanding principal amount of the Term Loans, second,
upon payment in full of the Term Loans, to prepay the outstanding
principal amount of the Swing Line Loans, and third, after payment in
full of the Swing Line Loans, to prepay the outstanding principal
amount of the Revolving Credit Loans (to be applied as more
particularly set forth above in this Section 2.10). The Borrowers shall
prepay the Loans in an amount equal to a percentage of the Net
Proceeds, which percentage shall be based on the percentage set forth
opposite the appropriate test in the grid below:
<TABLE>
<CAPTION>
Percentage Prepaid
Total Funded Debt of Net Proceeds
to Consolidated EBITDA from any Equity Issuance
---------------------- ------------------------
<S> <C>
Tier 1 - Less than or equal to 1.0 50%
Tier 2 - Greater than or equal to 1.01 75%
and less than or equal to 1.5
Tier 3 - Greater than 1.51 100%
</TABLE>
If the Borrowers achieve the ratio described in either Tier 1 or
Tier 2 above and retain a portion of Net Proceeds from any Equity
Issuance due to having obtained such ratios, the applicable ratio
achieved will automatically be the test for all future fiscal quarters
for the financial covenant set forth in Section 7.2 of this Agreement.
The Borrowers shall deliver to the Agent, concurrently with such
prepayment, a certificate signed by its chief financial officer in form
and substance satisfactory to the Agent setting forth the calculation
of such Net Proceeds.
Notwithstanding the foregoing, the Borrowers shall retain all Net
Proceeds from any Equity Issuance if (i) the Net Proceeds arise from an
Equity Issuance made for the purpose of funding a Permitted Business or
(ii) the Net Proceeds do not exceed $200,000 and arise from an Equity
Issuance solely for the purpose of a mandatory redemption of the
preferred stock of Response.
Promptly upon (and in any event not later than two (2) Business Days
after) their receipt thereof, the Borrowers will make a prepayment on
the Loans to be applied, first, to prepay the outstanding principal
amount of the Term Loans, second, upon payment in full of the Term
Loans, to prepay the outstanding principal amount of the Swing Line
Loans, and third, after payment in full of the Swing Line Loans, to
prepay the outstanding principal amount of the Revolving Credit Loans
(to be applied as more particularly set forth above in this Section
2.10) in an amount equal to 100% of all proceeds (including
7
<PAGE> 8
cash, stock or other consideration) generated from (i) the termination
or renegotiation of Service Agreements and (ii) settlements or
judgments involving litigation in which the Borrowers, or any of them,
are a party.
12. The Lenders and the Agent agree to waive (a) compliance by the
Borrowers with the financial covenant set forth in Section 7.3 for the fiscal
quarters ending March 31, 2000 and June 30, 2000, (b) compliance by the
Borrowers with the financial covenants set forth in Sections 7.2 and 7.4 for the
fiscal quarters ending March 31, 2000, June 30, 2000, September 30, 2000,
December 31, 2000 and March 31, 2001 and (c) any and all Defaults, Events of
Default and remedies the Lenders and Agent may have that arise from Borrowers'
failure to comply with the above-referenced financial covenants. In addition,
the Lenders and the Agent agree to extend the time for delivery to the Agent and
the Lenders of (a) the monthly financial reports required by Section 5.3.1 for
January 2000 and February 2000 and (b) the annual year end financial reports
required by Section 5.3.3, until (i) the date of execution of this Amendment by
the Borrowers in the case of the annual year end financial reports and the
January 2000 monthly financial report and (ii) five (5) days after the date of
execution of this Amendment in the case of the February 2000 monthly financial
report; and to waive the Defaults, Events of Default and remedies the Lenders
and Agent may have that arise from Borrowers' prior failure to comply with the
requirements of Section 5.3.1 and 5.3.3, if the Borrowers' deliver such reports
by the dates set forth above.
13. Section 6.9 of the Agreement is hereby amended to read, in its
entirety, as follows:
6.9 Nature of Business. No Consolidated Entity shall suffer or
permit any material changes to be made in the character of its business
as carried on at the Closing Date, except for the accomplishment of
Permitted Acquisitions and the development of Permitted Businesses.
14. Section 7.7 of the Agreement is hereby amended to read, in its
entirety, as follows:
7.7 Minimum EBITDA. EBITDA for the Borrowers during the periods
referenced below shall not be less than the following:
8
<PAGE> 9
<TABLE>
<CAPTION>
Month Ended Minimum EBITDA Month Ended Minimum EBITDA
----------- -------------- ----------- --------------
<S> <C> <C> <C>
March 2000 $485,000 October 2000 $600,000
November 2000 640,000
December 2000 535,000
Quarter Ending Minimum EBITDA Quarter Ending Minimum EBITDA
-------------- -------------- -------------- --------------
March 31, 2000 $1,400,000 December 31, 2000 $2,002,000
Month Ended Minimum EBITDA Month Ended Minimum EBITDA
----------- -------------- ----------- --------------
April 2000 $560,000 January 2001 $525,000
May 2000 325,000 February 2001 520,000
June 2000 510,000 March 2001 670,000
Quarter Ending Minimum EBITDA Quarter Ending Minimum EBITDA
-------------- -------------- -------------- --------------
June 30, 2000 $1,550,000 March 31, 2001 $1,930,000
Month Ended Minimum EBITDA
----------- --------------
July 2000 $375,000
August 2000 570,000
September 2000 400,000
Quarter Ending Minimum EBITDA
-------------- --------------
September 30, 2000 $1,515,000
</TABLE>
Provided, however, any excess EBITDA of the minimum set forth for the
respective months set forth above, may be forwarded to the next
succeeding month for any fiscal quarter so long as EBITDA for the three
months for the respective quarter ending set forth above exceeds the
minimum EBITDA for such quarter described above.
15. Exhibit A and Schedule 6.1.7 to the Agreement are hereby revised as
set forth in the attached Revised Exhibit A and Revised Schedule 6.1.7.
16. The Lenders and the Agent have consented to and do hereby consent
that (i) in determining EBITDA for any purpose during the fiscal quarters ending
December 31, 1999, net income for the Borrowers shall be computed without (x)
the one-time charge against earnings in the amount of $265,000 in connection
with certain severance payments made to former executives, (y) a loss on
impairment charge associated with the Practices of Keys Hemoncology Associates
and Lawrence A. Snetman, M.D., P.A., in the amount of $1,840,270 and (z) certain
adjustments to accounts receivable from Impact Centers up to $1,400,000 and (ii)
in calculating the covenant
9
<PAGE> 10
set forth in Section 7.3 of the Agreement, Borrowers shall not be permitted to
recognize income previously adjusted and collection of accounts receivable
previously written off.
17. Upon the date the Borrowers are in full compliance with the terms of
Section 2.10 and Article 7 of the Agreement in effect on the Closing Date as
evidenced by a certificate signed by the chief financial officer of Response, on
behalf of the Borrowers, in form and substance satisfactory to Agent and setting
forth the calculations of Article 7 (the "Triggering Event"), the Borrowers
shall pay to the Lenders or their Affiliates Pro Rata (determined as of the date
of the Triggering Event) the following fee as consideration for the execution of
this Amendment:
<TABLE>
<CAPTION>
Date of Triggering Event Fee
------------------------ ---
<S> <C>
Before September 30, 2000 $50,000
After September 30, 2000 but on or before $50,000 and $50,000 worth of
March 30, 2001 Response stock(1)
After March 30, 2001 $100,000 and $100,000 worth
of Response stock(1)
</TABLE>
Provided, however, if the Borrowers have (A) reduced the amount of the
outstanding principal under the Term Loans as of the date hereof by an amount
equal to or greater than $10,000,000, but less than $20,000,000, as of the
Triggering Event, without a significant reduction in the Borrowers EBITDA or
tangible assets, then the foregoing fees due the Lenders shall be reduced by
fifty percent (50%) (e.g., if the Borrowers had complied with the foregoing on
October 1, 2000, the fee would be $25,000 and $25,000 worth of Response stock1)
or (B) reduced the amount of the outstanding principal under the Term Loans as
of the date hereof by an amount equal to or greater than $20,000,000, as of the
Triggering Event, without a significant reduction in the Borrowers EBITDA or
tangible assets, then the foregoing fees due the Lenders shall be waived.
18. The following Sections 5.28 and 5.29 are added to the Agreement and
shall read as follows:
5.28 Cash Deposits. Not later than April 30, 2000, all cash of the
Borrowers (excluding deposits in transit) shall be consolidated no less
frequently than once a week in an account or accounts maintained with
one or more Lenders.
5.29 Audits. Not later than June 30, 2000, the Borrowers shall
permit the Lenders or their representatives, at the Borrowers' expense
(not to exceed $10,000), to conduct an audit of the accounts receivable
of the Borrowers. The Agent shall provide
- --------
(1) The number of shares of Response's stock to be issued to the
Lenders is based upon the average closing price of Response's stock during the
10 days preceding the Triggering Date.
10
<PAGE> 11
Response with a written list of three accounting firms that are
acceptable to the Lenders and their quoted fee for the audit. Response
shall select one of the accounting firms from such list within three
(3) Business Days.
19. The Lenders and the Agent hereby agree that if the Borrowers
deliver to the Agent prior to June 28, 2001, one or more binding written
commitments acceptable to the Lenders in their sole and absolute discretion,
that have been accepted in writing by the Borrowers (with payment by the
Borrowers of any and all fees that are required to make the commitments
binding), wherein the lending entities named therein have committed to lend to
the Borrowers an amount sufficient to pay the Loans in full and which provide
for a closing and a funding to occur under their terms by no later than
September 28, 2001, the Maturity Date set forth in the Credit Agreement (as
amended hereby) shall be extended to September 28, 2001, without the payment of
additional fees by the Borrowers to the Lenders or the Agent, but subject to all
terms and conditions of the Credit Agreement (as amended hereby), including the
payment of fees provided for therein.
20. Notwithstanding the execution of this Amendment, all of the
indebtedness evidenced by each of the Notes shall remain in full force and
effect, as modified hereby, and nothing contained in this Amendment shall be
construed to constitute a novation of the indebtedness evidenced by any of the
Notes or to release, satisfy, discharge, terminate or otherwise affect or impair
in any manner whatsoever (a) the validity or enforceability of the indebtedness
evidenced by any of the Notes; (b) the liens, security interests, assignments
and conveyances effected by the Agreement or the Credit Documents, or the
priority thereof; (c) the liability of any maker, endorser, surety, guarantor or
other person that may now or hereafter be liable under or on account of any of
the Notes or the Agreement or the Credit Documents; or (d) any other security or
instrument now or hereafter held by the Agent or the Lenders as security for or
as evidence of any of the above-described indebtedness.
21. To induce the Agent and the Lenders to enter into this Amendment,
the Borrowers hereby release, acquit and forever discharge the Lenders, and each
of their respective officers, directors, agents, employees, successors and
assigns, from any and all liabilities, claims, demands, actions or causes or
actions of any kind or nature (if there be any), whether absolute or contingent,
disputed or undisputed, at law or in equity, or known or unknown, that the
Borrowers now have or ever had against the Agent or the Lenders arising under or
in connection with any of the Credit Documents or otherwise.
22. All references in the Credit Documents to "Credit Agreement" shall
refer to the Agreement as amended by this Amendment, and as the Agreement may be
further amended from time to time.
23. The Borrowers hereby certify that the organizational documents of
the Borrowers have not been amended since June 10, 1999.
11
<PAGE> 12
24. The Borrowers hereby represent and warrant to the Agent and the
Lenders that all representations and warranties contained in the Agreement are
true and correct as of the date hereof; and the Borrowers hereby certify that no
Event of Default nor any event that, upon notice or lapse of time or both, would
constitute an Event of Default, has occurred and is continuing. The Lenders
acknowledge that they have no present actual knowledge of any Events of Default
existing other than those that are addressed by the terms of this Amendment.
25. Except as hereby amended, the Agreement shall remain in full force
and effect as written. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which when
taken together shall constitute one and the same instrument. The covenants and
agreements contained in this Amendment shall apply to and inure to the benefit
of and be binding upon the parties hereto and their respective successors and
permitted assigns.
26. Nothing contained herein shall be construed as a waiver,
acknowledgment or consent to any breach of or Event of Default under the
Agreement and the Credit Documents not specifically mentioned herein.
27. This Amendment shall be governed by the laws of the State of
Alabama.
[Remainder of this page intentionally blank]
12
<PAGE> 13
IN WITNESS WHEREOF, each of the Borrowers, the Lenders and the Agent
has caused this Amendment to be executed and delivered by its duly authorized
corporate officer as of the day and year first above written.
RESPONSE ONCOLOGY, INC.
By: /s/ A. LaMacchia
----------------------------------------
Its: President
---------------------------------------
RESPONSE ONCOLOGY MANAGEMENT
OF SOUTH FLORIDA, INC.
By: /s/ A. LaMacchia
----------------------------------------
Its: President
---------------------------------------
RESPONSE ONCOLOGY OF TAMARAC, INC.
By: /s/ A. LaMacchia
----------------------------------------
Its: President
---------------------------------------
RESPONSE ONCOLOGY OF FORT
LAUDERDALE, INC.
By: /s/ A. LaMacchia
----------------------------------------
Its: President
---------------------------------------
<PAGE> 14
AMSOUTH BANK
By: /s/ Cathy M. Wind
----------------------------------------
Its: Vice President
<PAGE> 15
UNION PLANTERS BANK, NATIONAL
ASSOCIATION
By: /s/ Elizabeth Rouse
----------------------------------------
Its: Senior Vice President
-----------------------------------
<PAGE> 16
BANK OF AMERICA, N.A. (formerly known as
NationsBank, N.A.)
By: /s/ Elizabeth L. Knox
----------------------------------------
Its: Senior Vice President
-----------------------------------
<PAGE> 17
AMSOUTH BANK, as Agent
By: /s/ Cathy M. Wind
----------------------------------------
Its: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RESPONSE ONCOLOGY, INC. FOR THE THREE MONTHS ENDED MARCH
31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 5,961
<SECURITIES> 0
<RECEIVABLES> 20,122
<ALLOWANCES> 2,715
<INVENTORY> 3,187
<CURRENT-ASSETS> 49,823
<PP&E> 16,766
<DEPRECIATION> 12,724
<TOTAL-ASSETS> 120,100
<CURRENT-LIABILITIES> 26,443
<BONDS> 0
0
17
<COMMON> 123
<OTHER-SE> 47,376
<TOTAL-LIABILITY-AND-EQUITY> 120,100
<SALES> 35,586
<TOTAL-REVENUES> 35,586
<CGS> 24,165
<TOTAL-COSTS> 35,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 210
<INTEREST-EXPENSE> 827
<INCOME-PRETAX> (473)
<INCOME-TAX> (180)
<INCOME-CONTINUING> (293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (293)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
