<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, 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 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 November 8, 2000.
<PAGE> 2
INDEX
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets,
September 30, 2000 and December 31, 1999 .......................................................... 3
Consolidated Statements
of Operations for the Three Months Ended
September 30, 2000 and September 30, 1999 ......................................................... 4
Consolidated Statements of Operations for
the Nine Months Ended September 30, 2000
and September 30, 1999 ............................................................................ 5
Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 2000 and September 30, 1999 ......................................................... 6
Notes to Consolidated
Financial Statements .............................................................................. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ..................................................................................... 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ................................................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................................. 21
Item 2. Changes in Securities and Use of Proceeds ......................................................... 21
Item 3. Defaults Upon Senior Securities ................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders ............................................... 21
Item 5. Other Information ................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K .................................................................. 21
Signatures ................................................................................................... 22
</TABLE>
-2-
<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, 2000 December 31, 1999
ASSETS (Unaudited) (Note 1)
------ ----------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,857 $ 7,195
Accounts receivable, less allowance for doubtful accounts
of $2,602 and $2,632 11,292 16,007
Pharmaceuticals and supplies 2,960 3,485
Prepaid expenses and other current assets 3,778 4,778
Due from affiliated physician groups 16,279 16,884
Deferred income taxes 344 114
--------- ---------
TOTAL CURRENT ASSETS 42,510 48,463
--------- ---------
Property and equipment, less accumulated depreciation and
amortization of $13,470 and $12,366 3,601 4,222
Deferred charges, less accumulated amortization of $267 and $86 209 380
Management service agreements, less accumulated amortization of
$10,407 and $8,206 63,129 66,113
Other assets 518 467
--------- ---------
TOTAL ASSETS $ 109,967 $ 119,645
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 12,811 $ 15,665
Accrued expenses and other liabilities 3,535 5,440
Current portion of notes payable 35,233 3,745
Current portion of capital lease obligations 272 267
--------- ---------
TOTAL CURRENT LIABILITIES 51,851 25,117
Notes payable, less current portion 807 35,445
Capital lease obligations, less current portion 374 580
Deferred income taxes 9,512 9,802
Minority interest 977 924
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, respectively 123 123
Paid-in capital 102,011 101,979
Accumulated deficit (55,705) (54,342)
--------- ---------
46,446 47,777
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 109,967 $ 119,645
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 4
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts in thousands except for share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, September 30,
2000 1999
---- ----
<S> <C> <C>
NET REVENUE $ 29,727 $ 32,589
COSTS AND EXPENSES
Salaries and benefits 5,087 6,209
Pharmaceuticals and supplies 20,382 19,600
Other operating costs 1,996 2,787
General and administrative 1,558 1,634
Depreciation and amortization 1,166 1,143
Interest 892 799
Provision for doubtful accounts 119 461
------------ ------------
31,200 32,633
------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (1,473) (44)
Minority owners' share of net earnings (55) (220)
------------ ------------
LOSS BEFORE INCOME TAXES (1,528) (264)
Income tax benefit (581) (100)
------------ ------------
NET LOSS TO COMMON STOCKHOLDERS ($ 947) ($ 164)
============ ============
LOSS PER COMMON SHARE:
Basic ($ 0.08) ($ 0.01)
============ ============
Diluted ($ 0.08) ($ 0.01)
============ ============
Weighted average number of common shares:
Basic 12,290,406 11,966,597
============ ============
Diluted 12,290,406 11,966,597
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 5
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts in thousands except for share data)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, September 30,
2000 1999
---- ----
<S> <C> <C>
NET REVENUE $ 99,952 $ 102,951
COSTS AND EXPENSES
Salaries and benefits 15,910 19,218
Pharmaceuticals and supplies 68,450 59,843
Other operating costs 6,666 8,905
General and administrative 4,272 5,002
Depreciation and amortization 3,449 3,380
Interest 2,548 2,505
Provision for doubtful accounts 405 1,156
------------ ------------
101,700 100,009
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (1,748) 2,942
Minority owners' share of net earnings (445) (606)
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (2,193) 2,336
Income tax provision (benefit) (830) 888
------------ ------------
NET EARNINGS (LOSS) TO COMMON STOCKHOLDERS ($ 1,363) $ 1,448
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic ($ 0.11) $ 0.12
============ ============
Diluted ($ 0.11) $ 0.12
============ ============
Weighted average number of common shares:
Basic 12,287,660 11,982,250
============ ============
Diluted 12,287,660 12,006,954
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<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,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) to common stockholders ($1,363) $ 1,448
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,449 3,380
Deferred income taxes (249) - - -
Provision for doubtful accounts 405 1,156
Gain on sale of property and equipment (38) - - -
Minority owners' share of net earnings 445 606
Changes in operating assets and liabilities:
Accounts receivable 4,310 2,971
Pharmaceuticals and supplies, prepaid expenses and other current assets 1,520 1,899
Deferred charges and other assets 113 88
Due from affiliated physician groups 190 (489)
Accounts payable, accrued expenses and other liabilities (3,956) (1,259)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,826 9,800
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 47 - - -
Purchase of equipment (579) (596)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (532) (596)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 32 - - -
Distributions to joint venture partners (392) (593)
Financing costs incurred - - - (416)
Principal payments on notes payable (3,071) (1,978)
Principal payments on capital lease obligations (201) (224)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (3,632) (3,211)
INCREASE IN CASH AND CASH EQUIVALENTS 662 5,993
Cash and cash equivalents at beginning of period 7,195 1,083
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,857 $ 7,076
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE> 7
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine month periods ended September
30, 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 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, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In Thousands) September 30, September 30,
-------------- ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net patient service revenue $ 2,661 $ 6,778 $ 10,921 $ 22,704
Practice management service fees 18,753 16,679 57,955 50,981
Pharmaceutical sales to physicians 8,199 8,926 30,618 28,031
Clinical research revenue 114 206 458 1,235
-------- -------- -------- --------
$ 29,727 $ 32,589 $ 99,952 $102,951
======== ======== ======== ========
</TABLE>
Revenue is recognized when earned. Sales and related cost of sales are generally
recognized upon delivery of goods or performance of services.
-7-
<PAGE> 8
Net Earnings (Loss) Per Common Share:
A reconciliation of the basic earnings (loss) per share and the diluted earnings
(loss) per share computations is presented below for the three and nine month
periods ended September 30, 2000 and 1999.
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding 12,290,406 11,966,597 12,287,660 11,982,250
Net effect of dilutive stock options and
warrants based on the treasury stock method - - -(A) - - -(A) - - -(A) 24,704
---------- ---------- ---------- -----------
Weighted average shares and common stock
equivalents 12,290,406 11,966,597 12,287,660 12,006,954
========== ========== ========== ===========
Net earnings (loss) ($ 947) ($ 164) ($ 1,363) $ 1,448
========== ========== ========== ===========
Diluted per share amount ($ 0.08) ($ 0.01) ($ 0.11) $ 0.12
========== ========== ========== ===========
</TABLE>
(A) 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 terms of the Company's original lending agreement provided for a $42.0
million Credit Facility, to mature in June 2002, to fund the Company's working
capital needs. The Credit Facility, originally 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 an original
spread between 1.375% and 2.5%, depending upon borrowing levels. The Company was
also obligated to a commitment fee of .25% to .5% of the unused portion of the
Revolving Credit Facility. At September 30, 2000, $34.5 million aggregate
principal was outstanding under the Credit Facility with a current interest rate
of approximately 10.1%. The Company is subject to certain affirmative and
negative covenants which, among other things, originally required that the
Company maintain certain financial ratios, including minimum fixed charge
coverage, funded debt to EBITDA and minimum net worth. This original lending
agreement was subsequently and significantly amended in both November 1999 and
March 2000 as described below.
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. Compliance with certain
covenants was also waived for the quarters ended September 30, 1999 and December
31, 1999.
On March 30, 2000, the Company and its lenders again 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.
-8-
<PAGE> 9
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.
During the third quarter of 2000, the Company did not meet certain financial
covenants of the Credit Facility, including those related to minimum cash flow
requirements. This occurred primarily due to further erosion in high dose
chemotherapy volumes. As a result of this event of default, the Company's
lenders adjusted the interest rates on the outstanding principal to the default
rate of prime plus 3% (currently 12.5%) and terminated any obligation to advance
additional loans or issue letters of credit. The Company does not anticipate
that the termination of the lenders obligation to advance additional loans or
letters of credit will have an immediate impact on operations. Under the terms
of the Credit Facility, additional remedies available to the lenders (as long as
an event of default exists and has not been cured) include acceleration of all
principal and accrued interest outstanding, the right to foreclose on related
security interests in the assets of the Company and stock of its subsidiaries,
and the right of setoff against any monies or deposits that the lenders have in
their possession. The Company has submitted revised financial projections and
its specialty pharmaceutical business plan to its lenders seeking approval to
deploy additional capital and personnel to the development of the new business.
The Company has also engaged in discussions with certain investment banking
firms to assist in the procurement of equity financing. Management is seeking
from the lenders, after evaluating the information provided by the Company, a
forbearance agreement for some period of time while the Company pursues its
desired strategy. Additionally, the Company and its lenders are evaluating other
strategies to improve the cash flow of the Company. There can be no assurances
that the Company will be successful in obtaining additional equity funding,
renegotiating certain terms of the Credit Facility, or refinancing the existing
debt. The Company's lenders continue to reserve all rights and remedies
available to them under the terms of the Credit Facility. If the Company's
lenders exercise the rights and remedies as described above, the Company would
be forced to seek formal reorganization protection.
The Company enters into LIBOR-based interest rate swap agreements ("Swap
Agreement") with the Company's lender as required by the terms of the Credit
Facility. In June 2000, the Company entered into a new Swap Agreement effective
July 1, 2000. Amounts hedged under this most recent Swap Agreement accrue
interest at the difference between 7.24% and the ninety-day LIBOR rate and are
settled quarterly. The Company has hedged $17.0 million under the terms of the
Swap Agreement. The Swap Agreement matures on July 1, 2001.
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
-9-
<PAGE> 10
that provides coverage during the policy period ending August 1, 2001, 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, 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 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 (loss) before
income taxes.
(In thousands)
<TABLE>
<CAPTION>
Physician
IMPACT Practice Cancer Research
Services Management Services Total
-------- ---------- -------- -----
<S> <C> <C> <C> <C>
For the three months ended September 30, 2000:
Net revenue $ 10,860 $ 18,753 $ 114 $ 29,727
Total operating expenses 11,120 16,585 109 27,814
-------- -------- -------- --------
Segment contribution (loss) (260) 2,168 5 1,913
Depreciation and amortization 107 1,001 - - - 1,108
-------- -------- -------- --------
Segment profit (loss) ($ 367) $ 1,167 $ 5 $ 805
======== ======== ======== ========
Segment assets $ 13,775 $ 83,516 $ 1,149 $ 98,440
======== ======== ======== ========
Capital expenditures $ 29 $ 41 - - - $ 70
======== ======== ======== ========
</TABLE>
-10-
<PAGE> 11
<TABLE>
<CAPTION>
Physician
IMPACT Practice Cancer 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
======== ======== ======== ========
</TABLE>
Reconciliation of consolidated loss before income taxes:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Segment profit $ 805 $ 2,455
Unallocated amounts:
Corporate salaries, general and administrative 1,372 1,922
Corporate depreciation and amortization 59 54
Corporate interest expense 902 743
------- -------
Loss before income taxes ($1,528) ($ 264)
======= =======
</TABLE>
(In thousands)
<TABLE>
<CAPTION>
Physician
IMPACT Practice Cancer Research
Services Management Services Total
-------- ---------- -------- -----
<S> <C> <C> <C> <C>
For the nine months ended September 30, 2000:
Net revenue $41,539 $57,955 $ 458 $99,952
Total operating expenses 40,523 50,622 446 91,591
------- ------- ------- -------
Segment contribution 1,016 7,333 12 8,361
Depreciation and amortization 304 2,975 - - - 3,279
------- ------- ------- -------
Segment profit $ 712 $ 4,358 $ 12 $ 5,082
======= ======= ======= =======
Segment assets $13,775 $83,516 $ 1,149 $98,440
======= ======= ======= =======
Capital expenditures $ 180 $ 311 - - - $ 491
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Physician
IMPACT Practice Cancer 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 13,689
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
======== ======== ======== ========
</TABLE>
-11-
<PAGE> 12
Reconciliation of consolidated earnings (loss) before income taxes:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Segment profit $ 5,082 $10,464
Unallocated amounts:
Corporate salaries, general and administrative 4,554 5,579
Corporate depreciation and amortization 171 155
Corporate interest expense 2,550 2,394
------- -------
Earnings (loss) before income taxes ($2,193) $ 2,336
======= =======
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of consolidated assets: As of September 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
Segment assets
Unallocated amounts: $ 98,440 $112,264
Cash and cash equivalents 7,857 7,076
Prepaid expenses and other assets 2,877 2,987
Property and equipment, net 793 897
-------- --------
Consolidated assets $109,967 $123,224
======== ========
</TABLE>
-12-
<PAGE> 13
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 September 30,
2000, the Company's total network included 37 IMPACT Centers located in 19
states and the District of Columbia. The network consists of 21 wholly owned
centers, 13 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 significantly, as evidenced by a 53% decrease in high dose
procedures in the first nine months of 2000 as compared to the first nine months
of 1999 and a 64% decrease as compared to the first nine months of 1998. High
dose procedures in the Company's wholly owned IMPACT Centers decreased 56% in
the first nine months of 2000 as compared to the first nine months of 1999,
while procedures in the Company's managed and joint venture Centers decreased
47% and 45%, respectively. The Company closed 12 marginal IMPACT Centers in 1999
due to decreased patient volumes and 5 additional IMPACT Centers in the first
nine months of 2000. On an ongoing basis, the Company evaluates the economic
feasibility of the Centers in its IMPACT network. The Company is generally able
to re-deploy related assets throughout the IMPACT Center network.
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. At the 2000 ASCO annual meeting, additional data on this topic was
presented by affiliates of the Company and other researchers that indicated
favorable preliminary results. Despite these results, the Company has not
experienced an increase in referrals of breast cancer patients. If additional
follow-up data is 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 such
diseases can be identified, related treatment protocols implemented, and
effectively managed through the existing network. The Company is also evaluating
other strategic alternatives for the IMPACT Center 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. 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. In
addition, the Company recruited a chief medical officer and a vice president of
operations in the third quarter of 2000. These individuals have operating
responsibilities over the existing business segments and for the development of
the specialty pharmacutical business. The Company has
-13-
<PAGE> 14
also engaged in discussions with potential strategic partners, including certain
pharmaceutical manufacturers, partner hospitals, and affiliated physicians.
Various clinical and marketing materials have also been developed. The Company
expects to treat its initial multiple sclerosis and rheumatoid arthritis
patients in the fourth quarter of 2000.
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 1998 the Company recorded an impairment charge related to three under
performing 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 failed over time to align physician and Company incentives,
producing deteriorating returns and negative cash flows to the Company. 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 under performing net revenue model relationships. Since these
were not "for cause" terminations initiated by the Company, the affiliated
practices were not responsible for liquidated damages. 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
-14-
<PAGE> 15
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 Service Agreements and associated assets in
accordance with Financial Accounting Standards Board Statement No. 5 "Accounting
for Contingencies". The Company terminated the second Service Agreement in April
of 2000.
From time to time, the Company and its affiliated physicians disagree on the
interpretation of certain provisions of the Service Agreements. The Company is
currently in arbitration with one affiliated physician practice related to the
economic feasibility of certain capital expenditures. The Company believes that
it has a solid contractual basis for its position, but there can be no
assurances that the Company will prevail in arbitration. In such event, it could
have a material impact on the Company's future cash flows, specifically related
to capital expenditures.
During the second quarter of 2000, the Health Care Financing Administration
("HCFA"), which runs the Medicare program, announced its intent to adjust
certain pharmaceutical reimbursement mechanisms. HCFA targeted dozens of drugs,
principally those used for the treatment of cancer and AIDS. More specifically,
Medicare utilizes the average wholesale price ("AWP") of pharmaceuticals as the
benchmark for reimbursement. It is HCFA's stated position that some drug
companies are reporting artificially inflated AWPs to industry guides that are
used for government-reimbursement purposes resulting in overpayments by Medicare
and excess profits for physicians and other providers.
On September 8, 2000, HCFA announced that the previously reported reductions in
reimbursement rates for oncology drugs would not be fully implemented pending a
comprehensive study to develop more accurate reimbursement methodologies for
cancer therapy services. However, HCFA did encourage its intermediaries to adopt
a new fee schedule for selected chemotherapy agents. This reduction in
reimbursement rates could potentially take effect in January 2001. Should any of
these reimbursement changes occur, it would have a material adverse effect on
reimbursement for certain pharmaceutical products utilized by the Company's
affiliated physicians in the practice management division. Consequently, the
Company's management fee in its practice management relationships would be
materially reduced. Based on annualized 2000 utilization, the Company estimates
that the reduction in reimbursement for the selected chemotherapy agents would
result in a $.4 million reduction in EBITDA in 2001. This estimate assumes there
is no change in the disease types or payer mix, that no substitute or
alternative drugs are utilized, and that the change is implemented on January 1,
2001.
The Company has received a delisting notification from the Nasdaq Stock Market
for failure to maintain a minimum bid price of $1.00 over the last 30
consecutive trading days as required under the maintenance standards of the
Nasdaq National Market. The Company has 90 calendar days, or until January 30,
2001, to regain compliance with this rule by obtaining a bid price on its common
stock of at least $1.00 for a minimum of 10 consecutive trading days. There can
be no assurances that the Company will regain compliance with this requirement
or remain in compliance with other Nasdaq maintenance standards for the
continued listing of the Company's common stock.
RESULTS OF OPERATIONS
Net revenue decreased 9% to $29.7 million for the quarter ended September 30,
2000, compared to $32.6 million for the quarter ended September 30, 1999. The
$4.1 million, or 61%, decrease in IMPACT Center
-15-
<PAGE> 16
revenue and $.7 million, or 8%, decrease in pharmaceutical sales to physicians
was partially offset by a $2.1 million, or 12%, increase in practice management
service fees. Net revenue was $100.0 million for the nine months ended September
30, 2000, compared to $103.0 million for the same period in 1999. IMPACT Center
revenue decreased by $11.8 million, or 52%, and clinical research revenue
decreased by $.8 million, or 63%. Pharmaceutical sales to physicians increased
$2.6 million, or 9%, while practice management service fees increased $7.0
million, or 14%. The decrease in high dose chemotherapy revenues continues to
reflect the confusion and related pullback in breast cancer admissions resulting
from the high dose chemotherapy/breast cancer study results presented at ASCO in
May 1999. In addition, the Company experienced a decline in insurance approvals
on the high dose referrals obtained. The increase in pharmaceutical sales to
physicians for the nine months ended September 30, 2000 is due to growth and
increased drug utilization by the physicians serviced under these agreements.
The decrease in pharmaceutical sales to physicians for the quarter ended
September 30, 2000 is due to the termination of pharmaceutical sales agreements
with two physician practices effective July 1, 2000. Clinical research revenue
decreased primarily as a result of a decline in the number of research studies
being conducted by the Company and a decrease in patient accruals on open
studies. The Company is currently evaluating its strategy and business plan
relative to standard and high dose chemotherapy clinical trials. Finally, the
increase in practice management service fees is due to growth in utilization of
both ancillary and non-ancillary services, and occurred despite a 5% and 10%
decrease in the number of physicians under management agreements between the
quarter and nine months ended September 30, 2000, as compared to the same
periods in 1999. On a same-physician basis, practice management service fees
increased 16% and 21% for the quarter and nine months ended September 30, 2000,
as compared to the same periods in 1999.
Salaries and benefits costs decreased $1.1 million, or 18%, from $6.2 million
for the third quarter of 1999 to $5.1 million in 2000. For the nine months ended
September 30, salaries and benefits costs decreased $3.3 million, or 17%, from
$19.2 million in 1999 to $15.9 million for the same period 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.
Pharmaceuticals and supplies expense increased $.8 million, or 4%, and $8.6
million, or 14%, for the quarter and nine months ended September 30, 2000 as
compared to the same periods in 1999. The increase is primarily related to
increased volume in pharmaceutical sales to physicians and greater utilization
of new chemotherapy agents with higher costs in the practice management
division, thus causing a decrease in the overall operating margin.
Pharmaceuticals and supplies as a percent of net revenue was 69% and 60% for the
quarters ended September 30, 2000 and 1999, respectively. For the nine months
ended September 30, 2000 and 1999, pharmaceuticals and supplies expense as a
percentage of net revenue was 68% and 58%, respectively.
General and administrative expenses decreased $.1 million, or 6%, from $1.6
million in the third quarter of 1999 to $1.5 million in the third quarter of
2000. For the nine months ended September 30, general and administrative
expenses decreased $.7 million, or 14%, from $5.0 million in 1999 to $4.3
million for the same period in 2000. The decrease is primarily due to the
closure of various IMPACT Centers and the termination of certain Service
Agreements. In addition, the Company terminated its Service Agreement with a
single-physician practice during the second quarter of 2000. This termination
resulted in the receipt of a $.2 million settlement that reduced general and
administrative expenses in the second quarter of 2000.
Other operating expenses decreased $.8 million, or 29%, from $ 2.8 million for
the third quarter of 1999 to $2.0 million for the third quarter of 2000. For the
nine months ended September 30, other operating expenses decreased $2.2 million,
or 25%, from $8.9 million in 1999 to $6.7 million for the same period 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 quarter and nine
months ended September 30, 1999.
-16-
<PAGE> 17
For the third quarter of 2000, all operating and general expenses other than
those related to pharmaceuticals and supplies were reduced by $2.0 million, or
19%, as compared with those of the third quarter of 1999. For the nine months
ended September 30, 2000, operating and general expenses, other than those for
pharmaceuticals and supplies, were reduced by $6.3 million, or 19%, over those
of the first nine months of 1999. These reductions reflect cost reduction and
containment steps put in place in the first quarter of 2000, the closure of 7
IMPACT Centers, and lower patient volumes.
EBITDA (earnings before interest, taxes, depreciation and amortization)
decreased $1.2 million, or 71%, to $.5 million for the quarter ended September
30, 2000 as compared to $1.7 million for the quarter ended September 30, 1999.
For the nine months ended September 30, EBITDA decreased $4.4 million, or 54%,
to $3.8 million in 2000, as compared to $8.2 million for the same period in
1999. The reduction is principally due to the decrease in IMPACT Center and
cancer research volumes as compared to the same periods in 1999. EBITDA from the
IMPACT services segment decreased $2.1 million, or 114%, and $5.6 million, or
85%, for the quarter and nine months ended September 30, 2000 as compared to the
same periods in 1999. The decrease is primarily due to a decrease in breast
cancer referral volumes and high dose chemotherapy procedures. In addition the
Company experienced a decline in insurance approvals on the high dose referrals
obtained. During the second quarter of 2000, the Company received notices of
termination of pharmaceutical sales agreements from two physician practices
effective July 1, 2000. The EBITDA contribution from these agreements totalled
$.2 million for the six months ended June 30, 2000. While the Company is
currently marketing these services to other physician practices, there can be no
assurance that new agreements will be executed to replace the EBITDA contributed
by the terminated agreements. EBITDA from the physician practice management
segment increased 10% for the quarter ended September 30, 2000 and 4% for the
nine months ended September 30, 2000 as compared to the same periods in 1999.
The lower increase in EBITDA for the nine months ended September 30, 2000 is
principally due to increases in pharmaceutical and supply costs, increases in
contractual adjustments, and the termination and modification of certain Service
Agreements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's working capital was ($9.4) million with
current assets of $42.5 million and current liabilities of $51.9 million. The
Company's Credit Facility matures on June 30, 2001. Consequently, the entire
outstanding principal balance on the Company's Credit Facility is classified as
a current liability at September 30, 2000. Cash and cash equivalents represented
$7.9 million of the Company's current assets.
Cash provided by operating activities was $4.8 million in the first nine months
of 2000 compared to $9.8 million for the same period in 1999. This decrease is
largely attributable to the $1.4 million net loss incurred by the Company in the
first nine months of 2000 as compared to $1.5 million in net earnings for the
first nine months of 1999. This decrease is also due to the timing of inventory
purchases and payments of accounts payable, tempered by improved collections on
accounts receivable and amounts due from affiliated physician groups. Cash used
in investing activities, principally related to the purchase of equipment, was
$.5 million for the nine months ended September 30, 2000 and $.6 million for the
same period in 1999. Cash used in financing activities was $3.6 million for the
nine months ended September 30, 2000 and $3.2 million for the same period in
1999. This increase is primarily attributable to an increase in principal
payments on notes payable during the first nine months of 2000, tempered by
larger distributions to joint venture partners and financing costs incurred
during the first nine months of 1999.
The terms of the Company's original lending agreement provided for a $42.0
million Credit Facility, to mature in June 2002, to fund the Company's working
capital needs. The Credit Facility, originally 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
-17-
<PAGE> 18
to LIBOR plus an original spread between 1.375% and 2.5%, depending upon
borrowing levels. The Company was also obligated to a commitment fee of .25% to
.5% of the unused portion of the Revolving Credit Facility. At September 30,
2000, $34.5 million aggregate principal was outstanding under the Credit
Facility with a current interest rate of approximately 10.1%. The Company is
subject to certain affirmative and negative covenants which, among other things,
originally required that the Company maintain certain financial ratios,
including minimum fixed charge coverage, funded debt to EBITDA and minimum net
worth. This original lending agreement was subsequently and significantly
amended in both November 1999 and March 2000 as described below.
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. Compliance with certain
covenants was also waived for the quarters ending September 30, 1999 and
December 31, 1999.
On March 30, 2000, the Company and its lenders again amended various terms of
the Credit Facility. As a result of this amendment, certain affirmative and
negative covenants were added (including minimum 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.
During the third quarter of 2000, the Company did not meet certain financial
covenants of the Credit Facility, including those related to minimum cash flow
requirements. This occurred primarily due to further erosion in high dose
chemotherapy volumes. As a result of this event of default, the Company's
lenders adjusted the interest rates on the outstanding principal to the default
rate of prime plus 3% (currently 12.5%) and terminated any obligation to advance
additional loans or issue letters of credit. The Company does not anticipate
that the termination of the lenders obligation to advance additional loans or
letters of credit will have an immediate impact on operations. Under the terms
of the Credit Facility, additional remedies available to the lenders (as long as
an event of default exists and has not been cured) include acceleration of all
principal and accrued interest outstanding, the right to foreclose on related
security interests in the assets of the Company and stock of its subsidiaries,
and the right of setoff against any monies or deposits that the lenders have in
their possession. The Company has submitted revised financial projections and
its specialty pharmaceutical business plan to its lenders seeking approval to
deploy additional capital and personnel to the development of the new business.
The Company has also engaged in discussions with certain investment banking
firms to assist in the procurement of equity financing. Management is seeking
from the lenders, after evaluating the information provided by the Company, a
forbearance agreement for some period of time while the Company pursues its
desired strategy. Additionally, the Company and its lenders are evaluating other
strategies to improve the cash flow of the Company. There can be no assurances
that the Company will be successful in obtaining additional equity funding,
renegotiating certain terms of the Credit Facility, or refinancing the existing
debt. The Company's lenders continue to reserve all rights and remedies
available to them under the terms of the Credit Facility. If the Company's
lenders exercise the rights and remedies as described above, the Company would
be forced to seek formal reorganization protection.
The Company enters into LIBOR-based interest rate swap agreements ("Swap
Agreement") with the Company's lender as required by the terms of the Credit
Facility. In June 2000, the Company entered into a new Swap Agreement effective
July 1, 2000. Amounts hedged under this most recent Swap
-18-
<PAGE> 19
Agreement accrue interest at the difference between 7.24% and the ninety-day
LIBOR rate and are settled quarterly. The Company has hedged $17.0 million under
the terms of the Swap Agreement. The Swap Agreement matures on July 1, 2001.
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 $1.5 million at September 30,
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. To date, only the transactions and code sets standards have been
finalized. 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 is currently assessing preliminary HIPAA issues, with detailed
compliance and integration measures taking place in 2001 and 2002.
Because only certain elements of the HIPAA regulations have 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 its financial position and operations.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 requires all entities to report
derivative securities at fair value on the balance sheet. The Company has
performed a preliminary review of the applicability of SFAS No. 133 and believes
that the adoption of this standard, when effective, will not have a significant
impact on the Company's financial statements.
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
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)
-19-
<PAGE> 20
the Company's inability to raise additional capital or refinance existing debt;
(xi) the exercise of the lender's remedies as a result of the Company's event of
default; and (xii) 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 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 borrowing costs 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, 2000, 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 7.24% and the ninety-day LIBOR rate
and are settled quarterly. The Swap Agreement matures July 1, 2001. The Company
does not enter into derivative or interest rate transactions for speculative
purposes.
At September 30, 2000, $34.5 million aggregate principal was outstanding under
the Credit Facility with a current interest rate of approximately 10.1%. The
Company does not have any other material market-sensitive financial instruments.
-20-
<PAGE> 21
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
During the third quarter of 2000, the Company did not meet certain
financial covenants of the Credit Facility (as amended), including those related
to minimum cash flow requirements. At September 30, 2000, $34.5 million
aggregate principal and approximately $435,000 in accrued interest was
outstanding under the Credit Facility. There was no arrearage in the payment of
principal and interest on the date of filing this report. For further
information concerning defaults with respect to the Company's indebtedness,
please refer to Note 2 of the Company's financial statements or "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
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(v) Employment Agreement between Registrant and Nelson M. Braslow,
M.D.
27 Financial Data Schedule (for SEC use only)
-21-
<PAGE> 22
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
Chief Financial Officer
and Principal Accounting Officer
Date: November 14, 2000
By: /s/ Anthony M. LaMacchia
-----------------------------------
Anthony M. LaMacchia
President and Chief Executive Officer
Date: November 14, 2000
-22-
