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
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RESPONSE ONCOLOGY, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1212264
--------------------------------- -------------------
(State or Other Jurisdiction (I. R. S. Employer
of Incorporation or Organization) Identification No.)
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.
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
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
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
2000 1999
(Unaudited) (Note 1)
--------- ---------
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
========= =========
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollar amounts in thousands except for share data)
Three Months Ended
-----------------------------
March 31, March 31,
2000 1999
------------ -----------
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
============ ===========
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Three Months Ended
----------------------
March 31, March 31,
2000 1999
------- -------
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
======= =======
See accompanying notes to consolidated financial statements.
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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.
(In thousands) Three Months Ended
March 31,
-----------------------
2000 1999
------- -------
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
======= =======
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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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)
Three Months Ended
March 31,
-------------------------------
2000 1999
----------- -----------
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
=========== ===========
(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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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
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the individual segments. The Company evaluates performance based on profit or
loss from operations before income taxes and unallocated amounts.
(In thousands)
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
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
======= ======= ======= ========
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
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
======= ======= ======= ========
Reconciliation of profit (loss):
Three Months Ended
March 31,
-----------------------
2000 1999
--------- --------
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
========= ========
Reconciliation of consolidated assets:
As of March 31,
-----------------------
2000 1999
--------- --------
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
========= ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Response Oncology, Inc. (the "Company") is a comprehensive cancer management
company. The Company provides advanced cancer treatment services through
outpatient facilities known as IMPACT(R) Centers under the direction of
practicing oncologists; compounds and dispenses pharmaceuticals to certain
medical oncology practices for a fee; owns the assets of and manages the
nonmedical aspects of oncology practices; and conducts clinical research on
behalf of pharmaceutical manufacturers. Approximately 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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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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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.
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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
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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
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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.
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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)
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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
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