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, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
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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
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(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, 12,290,764 shares as of November 8, 2001.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets,
September 30, 2001 and December 31, 2000..............................................................3
Consolidated Statements of Operations
for the Three Months Ended
September 30, 2001 and September 30, 2000.............................................................5
Consolidated Statements of Operations
for the Nine Months Ended
September 30, 2001 and September 30, 2000.............................................................6
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 2001 and September 30, 2000.............................................................7
Notes to Consolidated
Financial Statements..................................................................................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................................................................14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk....................................................................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................24
Item 2. Changes in Securities and Use of Proceeds............................................................24
Item 3. Defaults Upon Senior Securities......................................................................24
Item 4. Submission of Matters to a Vote of Security Holders..................................................24
Item 5. Other Information....................................................................................25
Item 6. Exhibits and Reports on Form 8-K.....................................................................25
Signatures...............................................................................................................26
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except for share data)
September 30, 2001 December 31, 2000
(Unaudited) (Note 2)
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,298 $ 7,327
Accounts receivable, less allowance for doubtful accounts
of $3,874 and $3,489 8,985 9,469
Pharmaceuticals and supplies 4,178 3,702
Prepaid expenses and other current assets 3,319 3,529
Due from affiliated physician groups 12,472 19,121
Deferred income taxes -- 1,168
------- -------
TOTAL CURRENT ASSETS 37,252 44,316
------- -------
Property and equipment, net 2,168 3,212
Management service agreements, less accumulated amortization of
$9,290 and $7,685 42,626 44,231
Other assets 314 654
------- -------
TOTAL ASSETS $82,360 $92,413
======= =======
Continued:
-3-
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except for share data)
Continued:
September 30, 2001 December 31, 2000
(Unaudited) (Note 2)
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 577 $ 14,665
Accrued expenses and other liabilities 1,960 4,581
Current portion of notes payable -- 34,509
Current portion of capital lease obligations -- 277
--------- ---------
TOTAL CURRENT LIABILITIES 2,537 54,032
NON-CURRENT LIABILITIES
Capital lease obligations, less current portion -- 303
Deferred income taxes 688 3,525
Minority interest 481 1,164
--------- ---------
TOTAL NON-CURRENT LIABILITIES 1,169 4,992
LIABILITIES SUBJECT TO SETTLEMENT UNDER
REORGANIZATION PROCEEDINGS
Accounts payable 15,654 --
Accrued expenses and other liabilities 2,065 --
Secured notes payable 29,199 --
Subordinated notes payable 756 --
Capital lease obligations 390 --
--------- ---------
TOTAL LIABILITIES SUBJECT TO SETTLEMENT
UNDER REORGANIZATION PROCEEDINGS 48,064 --
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 12,290,764 at each period end 123 123
Paid-in capital 102,011 102,011
Accumulated deficit (71,561) (68,762)
--------- ---------
30,590 33,389
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,360 $ 92,413
========= =========
See accompanying notes to consolidated financial statements.
-4-
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts in thousands except for share data)
Three Months Ended
--------------------------------------
September 30, September 30,
2001 2000
------------- -------------
NET REVENUE $ 29,542 $ 29,727
COSTS AND EXPENSES
Salaries and benefits 3,437 5,087
Pharmaceuticals and supplies 23,034 20,382
Other operating costs 1,288 1,996
General and administrative 950 1,558
Depreciation and amortization 875 1,166
Interest 480 892
Provision for doubtful accounts 98 119
------------ ------------
30,162 31,200
REORGANIZATION COSTS 621 --
------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (1,241) (1,473)
Minority owners' share of net earnings (104) (55)
------------ ------------
LOSS BEFORE INCOME TAXES (1,345) (1,528)
Income tax benefit (638) (581)
------------ ------------
NET LOSS $ (707) $ (947)
============ ============
LOSS PER COMMON SHARE:
Basic $ (0.06) $ (0.08)
============ ============
Diluted $ (0.06) $ (0.08)
============ ============
Weighted average number of common shares:
Basic 12,290,764 12,290,406
============ ============
Diluted 12,290,764 12,290,406
============ ============
See accompanying notes to consolidated financial statements.
-5-
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts in thousands except for share data)
Nine Months Ended
--------------------------------------
September 30, September 30,
2001 2000
------------- -------------
NET REVENUE $ 92,015 $ 99,952
COSTS AND EXPENSES
Salaries and benefits 11,871 15,910
Pharmaceuticals and supplies 69,797 68,450
Other operating costs 4,244 6,666
General and administrative 4,009 4,272
Depreciation and amortization 2,710 3,449
Interest 2,039 2,548
Provision for doubtful accounts 625 405
------------ ------------
95,295 101,700
------------ ------------
REORGANIZATION COSTS 1,276 --
------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (4,556) (1,748)
Minority owners' share of net earnings (109) (445)
------------ ------------
LOSS BEFORE INCOME TAXES (4,665) (2,193)
Income tax benefit (1,866) (830)
------------ ------------
NET LOSS $ (2,799) $ (1,363)
============ ============
LOSS PER COMMON SHARE:
Basic $ (0.23) $ (0.11)
============ ============
Diluted $ (0.23) $ (0.11)
============ ============
Weighted average number of common shares:
Basic 12,290,764 12,287,660
============ ============
Diluted 12,290,764 12,287,660
============ ============
See accompanying notes to consolidated financial statements.
-6-
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Nine Months Ended
---------------------------------
September 30, September 30,
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net loss $(2,799) $(1,363)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 2,710 3,449
Deferred income taxes (1,669) (249)
Provision for doubtful accounts 625 405
Gain on sale of property and equipment (25) (38)
Minority owners' share of net earnings 109 445
Changes in operating assets and liabilities:
Accounts receivable (141) 4,310
Pharmaceuticals and supplies, prepaid expenses and other current
assets (278) 1,520
Other assets 267 113
Due from affiliated physician groups 6,524 190
Accounts payable, accrued expenses and other liabilities 1,992 (3,956)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES
BEFORE REORGANIZATION ITEMS 7,315 4,826
OPERATING CASH FLOW FROM REORGANIZATION ITEMS
Bankruptcy related professional fees paid (824) --
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,491 4,826
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 123 47
Purchase of equipment (107) (579)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 16 (532)
FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 32
Distributions to joint venture partners (792) (392)
Principal payments on notes payable (4,554) (3,071)
Principal payments on capital lease obligations (190) (201)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (5,536) (3,632)
INCREASE IN CASH AND CASH EQUIVALENTS 971 662
Cash and cash equivalents at beginning of period 7,327 7,195
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,298 $ 7,857
======= =======
See accompanying notes to consolidated financial statements.
-7-
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
NOTE 1 -- ORGANIZATION AND DESCRIPTION OF BUSINESS/BANKRUPTCY PROCEEDINGS
Response Oncology, Inc. and subsidiaries (the "Company") is a comprehensive
cancer management company which owns and/or operates a network of outpatient
treatment centers ("IMPACT(R) Centers") that provide stem cell supported high
dose chemotherapy and other advanced cancer treatment services under the
direction of practicing oncologists; compounds and dispenses pharmaceuticals to
certain oncologists for a fixed or cost plus fee; owns the assets of and manages
oncology practices; and conducts outcomes research on behalf of pharmaceutical
manufacturers.
On March 29, 2001, the Company (including its wholly-owned subsidiaries, but
excluding entities that are majority-owned by Response Oncology, Inc.) filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Code"). The Company is operating as debtors-in-possession
under the Code, which protects it from its creditors pending reorganization
under the jurisdiction of the Bankruptcy Court. As debtors-in-possession, the
Company is authorized to operate its business but may not engage in transactions
outside the ordinary course of business without approval of the Bankruptcy
Court. A statutory creditors committee may be appointed in the Chapter 11 case,
but at this point such a committee has not been formed. As part of the Chapter
11 reorganization process, the Company has attempted to notify all known or
potential creditors of the Chapter 11 filing for the purpose of identifying all
prepetition claims against the Company.
Substantially all of the Company's liabilities as of the filing date
("prepetition liabilities") are subject to settlement under a plan of
reorganization. Generally, actions to enforce or otherwise effect repayment of
all prepetition liabilities as well as all pending litigation against the
Company are stayed while the Company continues to operate its business as
debtors-in-possession. Absent approval from the Bankruptcy Court, the Company is
prohibited from paying prepetition obligations. The Bankruptcy Court has
approved payment of certain prepetition obligations such as employee wages and
benefits. Additionally, the Bankruptcy Court has approved the retention of
various legal, financial and other professionals. Schedules were filed by the
Company with the Bankruptcy Court setting forth its assets and liabilities as of
the filing date as reflected in the Company's accounting records. Differences
between amounts reflected in such schedules and claims filed by creditors will
be investigated and either amicably resolved or subsequently adjudicated before
the Bankruptcy Court. The ultimate amount and settlement terms for such
liabilities are subject to a plan of reorganization, and accordingly, are not
presently determinable. There can be no assurance that any reorganization plan
that is effected will be successful.
Under the Code, the Company may elect to assume or reject real property leases,
employment contracts, personal property leases, service contracts and other
executory prepetition contracts, subject to Bankruptcy Court review. Parties
affected by such rejections may file prepetition claims with the Bankruptcy
Court in accordance with bankruptcy procedures. At this time, because of
material uncertainties, prepetition claims are generally carried at face value
in the accompanying financial statements. The Company cannot presently determine
or reasonably estimate the ultimate liability that may result from rejecting
leases or from filing of claims for any rejected contracts, and no provisions
have been made for the majority of these items. Additionally, the net expense
resulting from the Chapter 11 filing by the Company has been segregated and
reported as reorganization costs in the consolidated statements of operations
for the three and nine months ended September 30, 2001.
Under Chapter 11, the Company continues to conduct business in the ordinary
course under the protection of the Bankruptcy Court, while a reorganization
plan is developed to restructure its obligations. The Company has until
December 17, 2001, to file a reorganization plan. During this period, the
Company is continuing discussions with various lending institutions and
strategic and financial investors. There can be no assurance that any
reorganization plan that is effected will be successful. While the Company
intends to file its reorganization plan on or before December 17, 2001, the
Company may file a motion seeking to further extend the deadline. If this
occurs, there can be no assurances that the time to file the reorganization
plan will be extended to the requested date.
The Company's consolidated financial statements have been prepared in accordance
with the American Institute of Certified Public Accountants (AICPA) Statement of
Position 90-7 (SOP 90-7), "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code". In addition, the consolidated financial statements
have been prepared using accounting principles applicable to a going concern,
which contemplates the realization of assets and the payment of liabilities in
the ordinary course of business. As a result of the Chapter 11 filing, such
realization of assets and liquidation of liabilities is subject to uncertainty.
The financial statements include reclassifications made to reflect the
liabilities that have been deferred under the Chapter 11 proceedings as
"Liabilities Subject to Settlement under Reorganization Proceedings". Certain
accounting and business practices have been adopted that are applicable to
companies that are operating under Chapter 11.
-8-
NOTE 2 -- 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, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
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 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
various pharmaceutical manufacturers 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, 2001 and 2000.
Three Months Ended Nine Months Ended
(In Thousands) September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
------- ------- ------- -------
Net patient service revenue $ 1,140 $ 2,661 $ 4,479 $10,921
Practice management service fees 15,362 18,753 50,099 57,955
Pharmaceutical sales to physicians 13,010 8,199 37,278 30,618
Clinical research revenue 30 114 159 458
------- ------- ------- -------
$29,542 $29,727 $92,015 $99,952
======= ======= ======= =======
-9-
Net Loss Per Common Share:
A reconciliation of the basic loss per share and the diluted loss per share
computation is presented below for the three and nine month periods ended
September 30, 2001 and 2000.
(Dollar amounts in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ------------
Weighted average shares outstanding 12,290,764 12,290,406 12,290,764 12,287,660
Net effect of dilutive stock options and
warrants based on treasury stock
method --(A) --(A) --(A) --(A)
---------- ---------- ---------- ------------
Weighted average shares and common stock
equivalents 12,290,764 12,290,406 12,290,764 12,287,660
========== ========== ========== ============
Net loss $ (707) $ (947) $ (2,799) $ (1,363)
========== ========== ========== ============
Diluted per share amount $ (.06) $ (0.08) $ (0.23) $ (0.11)
========== ========== ========== ============
(A) Stock options and warrants are excluded from the weighted average
number of common shares due to their anti-dilutive effect.
NOTE 3 -- 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
acquisition and 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. 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
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 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.
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% (12.5% at the time of default) and terminated any
obligation to
-10-
advance additional loans or issue letters of credit. As a result of this
termination, the Company has not experienced an impact on operating cash flow.
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.
Effective December 29, 2000, the Company executed a forbearance agreement with
its lenders. Under the terms of the forbearance agreement, the lenders agreed to
forbear from enforcing their rights or remedies pursuant to the Credit Facility
documents until the earlier of (i) March 30, 2001 (as amended), or (ii) certain
defined events of default. During this period, the interest rate was adjusted to
prime plus 2%. The forbearance agreement also provided that a financial advisor
be retained by the Company to assist in the development of a restructuring plan
and perform certain valuation analyses.
With the Company's March 29, 2001 Chapter 11 bankruptcy filing, any potential
future revisions to the Credit Facility are subject to Chapter 11 reorganization
processes (described elsewhere in conjunction with discussion of the filing).
There can be no assurances as to the form of such revisions (if any) or their
impact on the Company's financial position or continued business viability.
Additionally, as of the date of the bankruptcy filing, the Company was in
technical default under the terms of the Credit Facility. Consistent with all of
the above-described factors, the Company has classified all amounts due under
the Company's Credit Facility as a liability subject to settlement under
reorganization proceedings in the accompanying consolidated balance sheet as of
September 30, 2001. The amounts due under the Company's Credit Facility were
classified as a current liability in the accompanying consolidated balance sheet
as of December 31, 2000. At September 30, 2001, $29.2 million aggregate
principal was outstanding under the Credit Facility with an interest rate of
approximately 6.8%.
The Company entered 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 accrued
interest at the difference between 7.24% and the ninety-day LIBOR rate and were
settled quarterly. The Company had hedged $17.0 million under the terms of the
Swap Agreement. The Swap Agreement terminated upon the filing of the Company's
bankruptcy petitions and has not been renewed. The Company has reviewed the
applicability and implications of SFAS No. 133 for the Company's financial
instruments. The sole derivative instrument to which the accounting prescribed
by the Statement is applicable is the Swap Agreement described above. The
Company recorded a cumulative adjustment charge in implementing SFAS No. 133 in
the first quarter of 2001 of approximately $100,000 in recognition of the
reported fair value of the Swap Agreement. Because of immateriality, the
cumulative adjustment has been reported in interest expense in the accompanying
consolidated statements of operations for the nine months ended September 30,
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. The unpaid principal amount of the notes
was $0.8 million at September 30, 2001.
NOTE 4 -- INCOME TAXES
The Company recognizes 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 5 -- COMMITMENTS AND CONTINGENCIES
With respect to professional and general liability risks, the Company currently
maintains insurance policies that provide coverage during the policy periods
ending February 1, 2002, and August 1, 2002, respectively, 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
$5,000,000 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, 2001, 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.
-11-
NOTE 6 -- 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 7 -- 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. Interest expense other than corporate interest expense is allocated 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 loss before income
taxes.
(In thousands)
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- -------
For the three months ended September 30, 2001:
Net revenue $14,150 $15,362 $ 30 $29,542
Total operating expenses 13,881 13,850 69 27,800
------- ------- ----- -------
Segment contribution (deficit) 269 1,512 (39) 1,742
Depreciation and amortization 55 724 -- 779
------- ------- ----- -------
Segment profit (loss) $ 214 $ 788 $ (39) $ 963
======= ======= ===== =======
Segment assets $11,878 $59,408 $ 511 $71,797
======= ======= ===== =======
Capital expenditures -- $ 46 -- $ 46
======= ======= ===== =======
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- -------
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 (deficit) (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
======== ======= ====== =======
-12-
(In thousands)
Reconciliation of consolidated loss before income taxes:
2001 2000
------- -------
Segment profit $ 963 $ 805
Unallocated amounts:
Corporate salaries, general and administrative 1,737 1,372
Corporate depreciation and amortization 96 59
Corporate interest expense 475 902
------- -------
Loss before income taxes $(1,345) $(1,528)
======= =======
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- -------
For the nine months ended September 30, 2001:
Net revenue $ 41,757 $50,099 $ 159 $92,015
Total operating expenses 41,921 44,853 201 86,975
-------- ------- ----- -------
Segment contribution (deficit) (164) 5,246 (42) 5,040
Depreciation and amortization 247 2,231 -- 2,478
-------- ------- ----- -------
Segment profit (loss) $ (411) $ 3,015 $ (42) $ 2,562
======== ======= ===== =======
Segment assets $ 11,878 $59,408 $ 511 $71,797
======== ======= ===== =======
Capital expenditures -- $ 99 -- $ 99
======== ======= ===== =======
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- -------
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
======= ======= ====== =======
Reconciliation of consolidated loss before income taxes:
2001 2000
------- -------
Segment profit $ 2,562 $ 5,082
Unallocated amounts:
Corporate salaries, general and administrative 4,955 4,555
Corporate depreciation and amortization 232 170
Corporate interest expense 2,040 2,550
------- -------
Loss before income taxes $(4,665) $(2,193)
======= =======
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Reconciliation of consolidated assets:
As of September 30,
-----------------------
2001 2000
------- --------
Segment assets $71,797 $ 98,440
Unallocated amounts:
Cash and cash equivalents 8,298 7,857
Prepaid expenses and other assets 1,757 2,877
Property and equipment, net 508 793
------- --------
Consolidated assets $82,360 $109,967
======= ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Response Oncology, Inc. and subsidiaries (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
non-medical aspects of oncology practices; and conducts clinical research on
behalf of pharmaceutical manufacturers. As of September 30, 2001, approximately
110 medical oncologists are associated with the Company through these programs.
In order to preserve its operational strength and the assets of its businesses,
the Company (including its wholly-owned subsidiaries, but excluding entities
that are majority-owned by Response Oncology, Inc.) sought protection under the
federal bankruptcy laws by filing a voluntary petition for relief on March 29,
2001, under Chapter 11 of the United States Bankruptcy Code. Under Chapter 11,
the Company continues to conduct business in the ordinary course under the
protection of the Bankruptcy Court, while a reorganization plan is developed to
restructure its obligations. The Company has until December 17, 2001, to file a
reorganization plan. During this period, the Company is continuing discussions
with various lending institutions and strategic and financial investors. There
can be no assurance that any reorganization plan that is effected will be
successful. While the Company intends to file its reorganization plan on or
before December 17, 2001, the Company may file a motion seeking to further
extend the deadline. If this occurs, there can be no assurances that the time to
file the reorganization plan will be extended to the requested date.
As further discussed throughout this document, the Company sees important
threats and opportunities for its businesses requiring management's focused
attention over the near-term. The material decline in the Company's IMPACT
Center volumes, coupled with continuing contractual issues in its physician
practice management segment, have required and will continue to require
significant and rapid strategic and operational responses to facilitate the
Company's continued viability. The Company's business plan is currently being
modified to not only incorporate such responses, but also to explore
management's plans to exploit key opportunity areas and more effectively
leverage important Company assets, including possibilities to expand and enhance
the Company's pharmaceutical services. The extent and likelihood of the
expansion of its pharmaceutical services will ultimately be determined in the
context of the development of the Company's reorganization plan. Since the
filing of the bankruptcy petitions, the Company's primary focus has been, and
will continue to be, on stabilizing and maximizing the profitability of the
existing business segments. The Company is in discussions with various parties
seeking alternative debt and/or equity financing as part of the development of
its reorganization plan. In addition, the Company is evaluating the sale of all
or part of its business operations. More specifically, the Company is involved
in complex negotiations with numerous parties with the overall objective of
maximizing recovery for the estate. In particular, the Company is evaluating
multiple tentative purchase offers related to certain of its businesses, and
continues to negotiate with certain interested parties. While there are no
binding agreements in place related to the potential sale of these or any other
portions of the Company's business operations, the tentative offers received
to-date indicate a wide range of sales proceeds that might be realized by the
Company from any potential transaction. Any binding agreement within the price
ranges currently being discussed would be for amounts materially less than the
existing book value of the Company's management services agreements. Given the
fluid nature of these discussions, it is impossible at this juncture to
determine what the outcome of these negotiations will ultimately yield. However,
the outcome of these negotiations will likely have a material effect on the
consolidated financial statements of the Company.
In 1990 the Company began development of a network of specialized IMPACT Centers
to provide complex outpatient chemotherapy services under the direction of
practicing oncologists. The majority of the therapies provided at the IMPACT
Centers entail the administration of high dose chemotherapy coupled with
peripheral blood stem cell support of the patient's immune system. At September
30, 2001, the Company's network consisted of 7 IMPACT Centers, including 2
wholly-owned, 3 managed programs, and 2 owned and operated in joint venture with
a host hospital. Prior to January 1997, the Company derived substantially all of
its revenues from outpatient cancer treatment services through
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reimbursements from third party payers on a fee-for-service or discounted
fee-for-service basis. During 1997, the Company began concentrating its efforts
on contracting on a "global case rate" basis where the Company contracts with
the appropriate third-party payor to receive a single payment that covers the
patient's entire course of treatment at the center and any necessary in-patient
care.
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, which has necessitated the closing of
multiple Centers as discussed below. As a result, related procedures decreased
49% in 2000 as compared to 1999 and 58% in the first nine months of 2001 as
compared to the same period in 2000. High dose procedures in the Company's
wholly-owned IMPACT Centers decreased 70% in the first nine months of 2001 as
compared to the same period in 2000, while procedures in the Company's managed
and joint venture Centers decreased 55% and 7%, respectively. The Company closed
30 IMPACT Centers since the third quarter of 2000 due to decreased patient
volumes. On an ongoing basis, the Company evaluates the economic feasibility of
the centers in its IMPACT network, and it is likely that additional closures
will take place in the fourth quarter of 2001.
While additional data presented at the 2000 ASCO annual meeting appeared to
somewhat clarify the role of high dose therapies for breast cancer and indicated
favorable preliminary results, the Company has not experienced an increase in
referrals for breast cancer patients nor does the Company expect this trend to
reverse in the foreseeable future. Because of the significance of this negative
trend to the Company's IMPACT Center volumes, the Company is actively evaluating
the best fashion in which to leverage the IMPACT Center network. This evaluation
includes the exploration of opportunities to deliver high dose therapies against
diseases other than breast cancer; however, there can be no assurance that other
such diseases and related treatment protocols can be identified, implemented,
and/or effectively managed through the existing network, especially given the
significant reduction in the number of Centers. Continuing declines in high dose
therapy volumes and/or an inability to develop new referral lines or treatment
options for the network that result in increased non-breast cancer volumes will
adversely affect the financial results of this line of business. Such adverse
results would likely require that the Company evaluate potential additional
closures of individual IMPACT Centers in the 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 remaining network of IMPACT
Centers and its highly trained healthcare professionals to administer the most
fragile compounds to the expanded patient population. The Company hired an
expert consultant to assist in the development of the business plan. The Company
has 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.
These services have been marketed to select physicians and third-party payers in
existing locations within the IMPACT Center network. The Company treated its
first patient utilizing such specialty drugs in the second quarter of 2001.
Although the Company is still pursuing this strategy in selected markets, given
its current financial and operating constraints, there can be no assurances that
this plan will be successfully implemented. The extent and likelihood of the
expansion of its pharmaceutical services will ultimately be determined in the
context of the development of the Company's reorganization plan. Since the
filing of the bankruptcy petitions, the Company's primary focus has been, and
will continue to be, on stabilizing and maximizing the profitability of the
existing business segments.
The Company also provides pharmacy management services for certain medical
oncology practices through its retail pharmacy locations. These services include
compounding and dispensing pharmaceuticals for a fixed or cost plus fee.
During 1996, the Company executed a strategy of diversification into physician
practice management and subsequently affiliated with 43 physicians in 12 medical
oncology practices in Florida and Tennessee. Pursuant to Service Agreements, the
Company provides management services that extend to all nonmedical aspects of
the operations of the
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affiliated practices. The Company is responsible for providing facilities,
equipment, supplies, support personnel, and management and financial advisory
services. As further described below, the Company has terminated certain Service
Agreements and is currently affiliated with 28 physicians in 5 medical oncology
practices.
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 whose members
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 failed over
time to align the physician and Company incentives, producing deteriorating
returns and/or negative cash flows to the Company. The Company is currently
negotiating the termination of the Service Agreement with the third physician
group. As previously stated, the intangible asset related to this Service
Agreement was written-off pursuant to SFAS No. 121 in 1998.
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 still pursuing recovery of liquidated
damages. During the same period, the Company began negotiations to terminate
another Service Agreement with a single-physician practice. Since this was not a
"for cause" termination initiated by the Company, the affiliated practice was
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
had recorded an impairment charge related to both Service Agreements and
associated assets. The Company terminated the second Service Agreement in April
of 2000.
In the fourth quarter of 2000, the Company began negotiating, in response to
certain contract disputes, to sell the assets of Oncology/Hematology Group of
South Florida, P.A. ("OHGSF") to the existing physician group. Concurrent with
the
-16-
sale of the assets, the Service Agreement was terminated, and the parties signed
a pharmacy management agreement for the Company to provide turnkey pharmacy
management services to the practice. The sale and pharmacy management agreement
were completed and effective February 1, 2001. At December 31, 2000, the Company
adjusted the Service Agreement and associated assets to their net realizable
value as measured by the termination and sale agreement.
In the first quarter of 2001, the Company began negotiating the termination of a
three-physician practice in Florida. These negotiations resulted from several
contractual disagreements between the practice and the Company. Although the
termination is probable, the financial terms have not been agreed upon and
therefore the financial impact of any potential termination is not currently
estimable. The net book value of the Service Agreement related to this physician
group as of September 30, 2001, is approximately $2.7 million.
From time to time, the Company and its affiliated physicians disagree on the
interpretation of certain provisions of the Service Agreements. The Company has
one pending arbitration proceeding and recently received a ruling on another
case. The pending arbitration matter relates to a dispute over the methodology
utilized for certain financial calculations provided for in the Service
Agreement. The dispute is generally related to the timing of recording certain
adjustments that affect the calculation of the Company's service fee and
physician compensation. The Company and affiliated physician are currently
engaged in settlement discussions related to this issue. The arbitration ruling
received by the Company addressed issues related to the economic feasibility of
certain capital expenditures. In this matter, the arbitrator ruled that outlays
by the Company for capital expenditures are subject to economic feasibility
standards. However, the Company was required to expand the office space for this
particular practice that will result in build out expenses of approximately
$215,000 and additional future rent obligations. This arbitration ruling is
currently subject to the automatic stay provided for under Chapter 11 of the
United States Bankruptcy Code and will likely be resolved in the context of the
bankruptcy proceedings.
In January 2001, the Company received a notice of default from one of its
affiliated physician practices alleging a breach of contract for failure to
obtain or take adequate steps to develop certain ancillary services. The Company
has negotiated a forbearance agreement with the practice to prevent issuance of
a notice of termination while it works to develop the project. These activities
have included negotiations related to building construction and the purchase of
land and equipment. While the Company has made progress on the development of
these services, there can be no assurance that the Company will satisfy all
requirements of the project. These matters are currently subject to the
automatic stay provided for under Chapter 11 of the United States Bankruptcy
Code and will likely be resolved in the context of the bankruptcy proceedings.
The filing of the voluntary bankruptcy petitions by the Company were technical
defaults under the terms of the Service Agreements. However, such provisions are
not enforceable under the Bankruptcy Code and the affiliated practices are
stayed from terminating their agreements for cause because of the bankruptcy
filings. However, before the Service Agreements can be assumed by the Company,
any alleged prepetition breaches have to be cured by the Debtor.
During the second quarter of 2000, the Centers for Medicare and Medicaid
Services ("CMS" -- fka the Health Care Financing Administration), which oversees
the Medicare program, announced its intent to adjust certain pharmaceutical
reimbursement mechanisms. CMS 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 CMS'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. CMS's investigation into
inflated AWPs is ongoing.
On September 8, 2000, CMS 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, CMS did encourage its intermediaries to adopt
a new fee schedule for selected chemotherapy agents. To date, the Company has
not experienced any reduction in reimbursement levels related to these
chemotherapy agents. However, should any of these reimbursement changes occur,
it could 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 could be materially reduced.
On September 21, 2001, a joint Health and Oversight and Investigations
subcommittee investigative hearing was held
-17-
further examining the Medicare drug reimbursement program. In addition, during
September 2001, the United States General Accounting Office ("GAO") issued it
report to Congressional Committees on the matter. In general, based on findings
that payments for covered outpatient drugs exceeded the provider's cost, the GAO
recommended "that the Administrator of CMS take steps to begin reimbursing
providers for part-B covered drugs and related services at levels reflecting
providers' acquisition costs using information about actual market transaction
prices". Neither the effective date of such reimbursement changes nor the exact
drugs and reimbursement methodology changes has been established. Given the
dynamic nature of the proposed changes, the Company is currently not able to
reasonably estimate their financial impact, but any such decreases in
reimbursement rates could have a material adverse effect on the Company's
operations.
On December 1, 2000, the Company 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 had 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. On March 15, 2001, the Company's common stock was delisted from the Nasdaq
Stock Market. The decision was issued following a written appeal and hearing
before the Nasdaq Listing Qualifications Panel due to the non-compliance with
the listing standard that requires the Company's stock to maintain a minimum bid
price of $1.00 or more. The Company's common stock is currently traded on the
OTC Bulletin Board.
On July 31, 2001, the Bankruptcy Court approved the establishment of an Employee
Retention Plan ("ERP") by the Company in order to provide monetary incentives
for certain employees to remain with the Company during its restructuring
efforts. The ERP also provides severance benefits for certain employees in the
event of a "without cause" termination. In addition, amendments to certain
employment agreements of officers of the Company were approved. Pursuant to
these court orders, approximately $950,000 was placed in escrow for the benefit
of various employees and officers related to the stay bonus components of the
ERP and employment contracts. This amount is reflected in cash and cash and
equivalents as of September 30, 2001. The aggregate contingent liability of the
ERP and employment contracts is approximately $1.0 million as of September 30,
2001.
RESULTS OF OPERATIONS
Net revenue decreased 1% to $29.5 million for the quarter ended September 30,
2001, compared to $29.7 million for the quarter ended September 30, 2000. The
$1.5 million, or 57%, decrease in IMPACT Center revenue and $3.4 million, or
18%, decrease in practice management service fees was partially offset by a $4.8
million, or 59%, increase in pharmaceutical sales to physicians. Net revenue was
$92.0 for the nine months ended September 30, 2001, compared to $100.0 million
for the same period in 2000. IMPACT Center revenue decreased by $6.4 million, or
59%, and clinical research revenue decreased by $.3 million, or 65%.
Pharmaceutical sales to physicians increased $6.7 million, or 22%. Practice
management service fees decreased $7.9 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 and closed 30 Centers since September 30, 2000.
The increase in pharmaceutical sales to physicians for the nine months ended
September 30, 2001 is due to growth and increased drug utilization by the
physicians serviced under these agreements and the addition of one pharmacy
management contract effective February 1, 2001, but was tempered by the
termination of pharmaceutical sales agreements with two physician practices
effective July 1, 2000. Furthermore, the Company received notice of termination
of one additional pharmacy management contract effective September 30, 2001. The
decrease in practice management service fees is primarily due to the termination
and sale of related assets of a certain Service Agreement effective February 1,
2001. Net revenue on a same-practice basis increased 4%, or $21,000, for the
third quarter of 2001 and remained relatively unchanged for the nine months
ended September 30, 2001.
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. During the third quarter of 2001, the Company
concluded and/or terminated its remaining standard and high dose chemotherapy
clinical trials and sold the assets and research infrastructure of its clinical
research segment to a third-party. The transaction did not result in a material
gain or loss to the Company, and is still pending Bankruptcy Court approval.
-18-
Salaries and benefits costs decreased $1.7 million, or 32%, from $5.1 million
for the third quarter of 2000 to $3.4 million in 2001. For the nine months ended
September 30, salaries and benefits costs decreased $4.0 million, or 25%, from
$15.9 million in 2000 to $11.9 million for the same period in 2001. The decrease
is primarily due to the termination of certain Service Agreements, the closing
of various IMPACT Centers and a reduction in corporate and central business
office staffing.
Pharmaceuticals and supplies expense increased $2.7 million, or 13%, and $1.3
million, or 2%, for the quarter and nine months ended September 30, 2001 as
compared to the same periods in 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, thus causing a decrease in the overall operating margin.
Pharmaceuticals and supplies as a percent of net revenue was 78% and 69% for the
quarters ended September 30, 2001 and 2000, respectively. For the nine months
ended September 30, 2001 and 2000, pharmaceuticals and supplies expense as a
percentage of net revenue was 76% and 68%, 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 in the practice management division.
General and administrative expenses, excluding reorganization costs, decreased
$.6 million, or 39%, from the third quarter of 2000 to the third quarter of
2001. For the nine months ended September 30, general and administrative
expenses, excluding reorganization costs, decreased $.3 million, or 6%, from
$4.3 million in 2000 to $4.0 for the same period in 2001. The decrease is
primarily due to decreased administrative expenses due to the closure of various
IMPACT Centers and the termination of certain Service Agreements.
Other operating expenses decreased $.7 million, or 35%, from $ 2.0 million for
the third quarter of 2000 to $1.3 million for the third quarter of 2001. For the
nine months ended September 30, other operating expenses decreased $2.4 million,
or 36%, from $6.7 million in 2000 to $4.2 million for the same period in 2001.
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, 2000.
Reorganization costs for the quarter and nine months ended September 30, 2001,
primarily consist of legal and consulting fees incurred as a result of the
bankruptcy filing.
For the third quarter of 2001, all operating and general expenses (including
reorganization costs) other than those related to pharmaceuticals and supplies
were reduced by $2.3 million, or 27%, as compared with those of the third
quarter of 2000. For the nine months ended September 30, 2001, operating and
general expenses (including reorganization costs) other than those for
pharmaceuticals and supplies, were reduced by $5.4 million, or 20%, over those
of the first nine months of 2000. These reductions reflect cost reduction and
containment steps put in place in the first quarter of 2000, the closure of
various IMPACT Centers, lower patient volumes, and the termination of certain
Service Agreements, tempered by increased costs for professional services,
principally legal and accounting fees, related to the Company's restructuring
efforts and bankruptcy filing.
Depreciation and amortization decreased $.3 million, or 25%, from $1.2 million
for the third quarter of 2001 to $.9 million for the third quarter of 2001. For
the nine months ended September 30, depreciation and amortization decreased $.7
million, or 21%, from $3.4 million in 2000 to $2.7 million in 2001. This
decrease is primarily due to the termination of certain Service Agreements.
EBITDA (earnings before interest, taxes, depreciation and amortization)
decreased $.5 million, or 98%, to $10,000 for the quarter ended September 30,
2001 as compared to $.5 million for the quarter ended September 30, 2000. For
the nine months ended September 30, EBITDA decreased $3.7 million, or 98%, to
$84,000 in 2001, as compared to $3.8 million for the same period in 2000. EBITDA
is presented because it is a widely accepted financial indicator of a company's
ability to service indebtedness. However, EBITDA should not be considered as an
alternative to income (loss) from operations or to cash flows from operating,
investing or financing activities, as determined in accordance with generally
accepted accounting principles. EBITDA should also not be construed as an
indication of the Company's operating performance or as a measure of liquidity.
In addition, because EBITDA is not calculated identically by all
-19-
companies, the presentation herein may not be comparable to other similarly
titled measures of other companies.
The reduction in EBITDA is principally due to the decrease in IMPACT Center and
cancer research volumes as compared to the same periods in 2000, as well as the
termination of certain Service Agreements. EBITDA from the IMPACT services
segment increased $.5 million, or 203% for the quarter ended September 30, 2001,
and decreased $1.2 million, or 116%, for the nine months ended September 30,
2001 as compared to the same periods in 2000. The increase for the quarter ended
September 30, 2001 as compared to the same quarter in 2000 is primarily due to
growth in pharmaceutical sales to physicians. The decrease for the nine months
ended September 30, 2001 as compared to the same period in 2000 is primarily due
to the net effect of an increase in pharmaceutical sales to physicians and 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. EBITDA from the physician
practice management segment decreased 30% for the quarter ended September 30,
2001 and 28% for the nine months ended September 30, 2001 as compared to the
same periods in 2000. The decrease is principally due to increases in
pharmaceutical and supply costs, the termination of certain Service Agreements,
and the modification of financial terms of certain Service Agreements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company's working capital totaled $34.7 million with
current assets of $37.2 million and current liabilities (excluding liabilities
subject to settlement under reorganization proceedings of $48.1 million) of $2.5
million. Cash and cash equivalents represented $8.3 million of the Company's
current assets. As noted above, approximately $950,000 of the Company's cash and
cash equivalents as of September 30, 2001, is escrowed pursuant to the Company's
employee retention plan that was approved by the Bankruptcy Court in the third
quarter of 2001. Positive working capital is primarily attributable to the
change in balance sheet classification of amounts subject to settlement under
reorganization proceedings, as further described below.
Cash provided by operating activities was $6.5 million in the first nine months
of 2001 compared to $4.8 million for the same period in 2000. This increase is
largely attributable to a reduction in amounts due from affiliated physician
groups resulting from the sale proceeds and recovery of working capital
associated with the asset sale and concurrent termination of a Service Agreement
in the first quarter of 2001. The increase is also due to the timing of
inventory purchases and payments of accounts payable and accrued expenses.
Cash provided by investing activities was $16,000, principally related to the
proceeds from the sale of equipment for the nine months ended September 30,
2001. Cash used in investing activities was $0.5 million, principally related to
the purchase of equipment, for the nine months ended September 30, 2000.
Cash used in financing activities was $5.5 million for the nine months ended
September 30, 2001 and $3.6 million for the same period in 2000. This increase
is primarily attributable to distributions to joint venture partners and
additional principal payments on notes payable during the first nine months of
2001 as compared to the same period in 2000.
Under the terms of the Bankruptcy case, liabilities in the amount of $48.1
million are subject to settlement under reorganization proceedings. Generally,
actions to enforce or otherwise effect repayment of all prepetition liabilities
as well as all pending litigation against the Company are stayed while the
Company continues its business operations as debtors-in-possession. The ultimate
amount and settlement terms for such liabilities are subject to a plan of
reorganization, and accordingly, are not presently determinable.
Since the filing of the bankruptcy petitions, the Company has been operating
under various interim cash collateral orders whereby the Company is authorized
to utilize cash according to cash budgets approved by the Bankruptcy Court. On
October 26, 2001, a permanent cash collateral order was approved by the
Bankruptcy Court. Pursuant to the terms of the permanent cash collateral order,
the Company is authorized to utilize cash according to approved cash budgets
until the earlier of the occurrence of a specific defined event or March 31,
2002. Such defined events include, but are not limited to, the filing of a
reorganization plan, the sale of all of the assets of the Company, conversion of
the cases to Chapter 7 of the Bankruptcy Code, or the occurrence of an uncured
default. Furthermore, a lump sum principal payment to the lenders of $2.6
million was made on October 31, 2001. The Company's historical cash flow since
the filing of the petitions and current cash budgets indicate sufficient
liquidity to fund its operations during the aforementioned periods.
The terms of the Company's original lending agreement provided for a $42.0
million Credit Facility, to mature in June
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2002, to fund the Company's acquisition and 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. 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 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 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.
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% (12.5% at the time of default) and terminated any
obligation to advance additional loans or issue letters of credit. As a result
of this termination, the Company has not experienced an impact on operating cash
flow. 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.
Effective December 29, 2000, the Company executed a forbearance agreement with
its lenders. Under the terms of the forbearance agreement, the lenders agreed to
forbear from enforcing their rights or remedies pursuant to the Credit Facility
documents until the earlier of (i) March 30, 2001 (as amended), or (ii) certain
defined events of default. During this period, the interest rate was adjusted to
prime plus 2%. The forbearance agreement also provided that a financial advisor
be retained by the Company to assist in the development of a restructuring plan
and perform certain valuation analyses.
With the Company's March 29, 2001 Chapter 11 bankruptcy filing, any potential
future revisions to the Credit Facility are subject to Chapter 11 reorganization
processes (described elsewhere in conjunction with discussion of the filing).
There can be no assurances as to the form of such revisions (if any) or their
impact on the Company's financial position or continued business viability.
Additionally, as of the date of the bankruptcy filing, the Company was in
technical default under the terms of the Credit Facility. Consistent with all of
the above-described factors, the Company has classified all amounts due under
the Company's Credit Facility as a liability subject to settlement under
reorganization proceedings. At September 30, 2001, $29.2 million aggregate
principal was outstanding under the Credit Facility with an interest rate of
approximately 6.8%.
The Company entered 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 accrued
interest at the difference between 7.24% and the ninety-day LIBOR rate and were
settled quarterly. The Company had hedged $17.0 million under the terms of the
Swap Agreement. The Swap Agreement terminated upon the filing of the Company's
bankruptcy petitions and has not been renewed. The Company has reviewed the
applicability and implications of SFAS No. 133 for the Company's financial
instruments. The sole derivative instrument to which the accounting prescribed
by the Statement is applicable is
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the Swap Agreement described above. The Company recorded a cumulative adjustment
charge in implementing SFAS No. 133 in the first quarter of 2001 of
approximately $100,000 in recognition of the reported fair value of the Swap
Agreement. Because of immateriality, the cumulative adjustment has been reported
in interest expense in the accompanying consolidated statements of operations
for the nine months ended September 30, 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 notes was $0.8 million at September 30, 2001.
The Company is committed to future minimum lease payments under operating leases
of approximately $13.8 million for administrative and operating facilities. Such
commitments may be further reduced as a result of the rejection of certain real
property leases in the context of the bankruptcy proceedings.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") mandated the development of a set of regulations to ensure the
privacy and protection of individually identifiable health information. On
August 17, 2000, the Department of Health and Human Services ("HHS") published
the first final rule of this set, Standards for Electronic Transactions
("Transactions Rule"). Most entities subject to the Transactions Rule must be
in compliance by October 16, 2002. On December 28, 2000, HHS published a second
final rule, addressing the privacy of individually identifiable health
information ("Privacy Rule"). Most entities subject to the Privacy Rule are
currently required to be in compliance by April 14, 2003. Three other HIPAA
components -- a rule establishing a unique identifier for employers to use in
electronic health care transactions, a rule creating a unique identifier for
providers to use in such transactions, and a rule setting standards for the
security of electronic health information -- were proposed in 1998, but have
not been finalized. Still to be proposed are rules establishing a unique
identifier for health plans for electronic transactions, standards for claims
attachments, and enforcement standards. Plans for a national individual
identifier rule have been placed on hold.
The Company is currently assessing preliminary HIPAA issues, with detailed
compliance and integration measures planned for 2002 and 2003. Because only
certain components 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, particularly related to the modification of its medical
billing systems, and will be actively evaluating such costs and their impact on
the Company's financial position and operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the provision
of Statement 142. Statement 142 will also require that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with FAS Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately
except with regard to business combinations initiated prior to July 1, 2001,
which it expects to account for using the pooling of interests method, and
Statement 142 effective January 1, 2002. Furthermore, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before Statement 142 is
adopted in full will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized and tested for
impairment in accordance with the appropriate pre-Statement 142 accounting
requirements prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make
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any necessary amortization period adjustments by the end of the first interim
period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill (and equity-method goodwill) is impaired as of
the date of adoption. To accomplish this, the Company must identify its
reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of adoption. The
Company will then have up to six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with Statement 141, to its carrying amount, both of which would be measured as
of the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of earnings.
And finally, any unamortized negative goodwill (and equity-method goodwill)
existing at the date Statement 142 is adopted must be written off as the
cumulative effect of a change in accounting principle.
As of the date of adoption, the Company expects to have unamortized identifiable
intangible assets in the amount of $42.1 million which will be subject to the
transitional provisions of Statements 141 and 142. Amortization expense related
to identifiable intangible assets was $3.0 million and $1.7 million for the year
ended December 31, 2000 and the nine months ended September 30, 2001,
respectively. Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate the impact
of adopting these Statements on the Company's financial statements at the date
of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with Statement 121. For example, Statement 144 provides guidance on
how a long-lived asset that is used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held for sale,
and prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. Statement 144 retains the basic provisions of Opinion 30 on
how to present discontinued operations in the income statement but broadens
that presentation to include a component of an entity (rather than a segment of
a business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated
for impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have 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 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; (xi) numerous uncertainties
introduced as a part of the Bankruptcy filings which may effect the Company's
businesses, results of operations and prospects; and (xii) issues related to the
implementation of the Company's new business plan. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure is to changes in interest rates
obtainable on its Credit Facility. The Company's interest rate risk objective is
to limit the impact of interest rate fluctuations on earnings and cash flows and
to lower its overall borrowings by selecting interest periods for traunches of
the Credit Facility that are more favorable to the Company based on the current
market interest rates. The Company has the option of fixing current interest
rates for interest periods of 1, 2, 3 or 6 months.
The Company was 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 accrued interest at the difference between 7.24% and the ninety-day
LIBOR rate and were settled quarterly. The Swap Agreement terminated upon the
filing of the Company's bankruptcy petitions and has not been renewed. The
Company does not enter into derivative or interest rate transactions for
speculative purposes.
At September 30, 2001, $29.2 million aggregate principal was outstanding under
the Credit Facility with a current interest rate of approximately 6.8%. The
Company does not have any other material market-sensitive financial instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed an Adversary Proceeding against Hem-Onc Associates of
the Treasure Coast, P.A. ("Treasure Coast") in the United States
Bankruptcy Court for the Western District of Tennessee on or about
June 28, 2001. The Adversary Proceeding alleges certain improper,
unlawful and harmful actions by Treasure Coast against the Company with
respect to the Service Agreement and various bankruptcy matters.
On or about August 14, 2001, Treasure Coast filed its answer to the
Adversary Proceeding and a Counterclaim against the Company. In its
Counterclaim, Treasure Coast alleges that the Company has failed to
develop an ancillary project at the direction of the Oversight
Committee, failure by the Company to pay prepetition clinic expenses,
improper closure of the nearby IMPACT Center, and other purported
defaults in performing its management duties under the Service
Agreement. Treasure Coast is seeking the following relief:
- An order barring the Company from assuming the Service
Agreement due to its alleged defaults and its alleged
inability to cure such defaults; or alternatively,
- A declaration that the Service Agreement is a
non-assignable Service Agreement and may not be
assumed by the Company; or alternatively,
- If the Service Agreement can be assumed, an order
requiring that certain real property lease agreements
be assumed with the Service Agreement;
- Damages for the Company's alleged breaches of the
Service Agreement;
- An order conditioning assumption of the Service
Agreement on prompt payment in full of all
prepetition clinic expenses of Treasure Coast;
- A declaration of the parties' respective rights in
bank accounts into which receipts of the Treasury
Coast practice or deposited.
The case is currently in the discovery phase, and a trial date has not
yet been set. Although the Company believes that its Adversary
Proceeding and defenses to the Counterclaim are meritorious and should
prevail there can be no assurances as to a favorable outcome to the
litigation.
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
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Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10(ab) Termination Agreement and Release between Registrant and Nelson Braslow, M.D.
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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/ Anthony M. LaMacchia
-----------------------------------
Anthony M. LaMacchia
President and Chief Executive Officer
Date: November 14, 2001
By: /s/ Peter A. Stark
--------------------------------------
Peter A. Stark
Chief Financial Officer
and Principal Accounting Officer
Date: November 14, 2001