1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998 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.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1212264
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(State or Other Jurisdiction (I. R. S. Employer
of Incorporation or Organization) Identification No.)
1775 Moriah Woods Blvd., Memphis, TN 38117
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(Address of principal executive offices) (Zip Code)
(901) 761-7000
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(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
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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, 12,021,828 shares as of April 25, 1998.
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INDEX
PART I. FINANCIAL INFORMATION
Page
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Item 1. Financial Statements
Consolidated Balance Sheets,
March 31, 1998 and December 31, 1997------------------------------------------------------------------3
Consolidated Statements
of Earnings for the Three Months Ended
March 31, 1998 and March 31, 1997---------------------------------------------------------------------4
Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1998 and March 31, 1997 --------------------------------------------------------------------5
Notes to Consolidated
Financial Statements----------------------------------------------------------------------------------6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations-----------------------------------------------------------------------------------------9
PART II. OTHER INFORMATION
Item 5. Market Information and Related Stockholder Matters---------------------------------------------------12
Item 6. Exhibits and Reports on Form 8-K --------------------------------------------------------------------12
Signatures -----------------------------------------------------------------------------------------------------13
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, 1998 December 31, 1997
(Unaudited) (Note 1)
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 476 $ 2, 425
Accounts receivable, less allowance for doubtful accounts
of $2,238 and $3,130 19,771 16,910
Supplies and pharmaceuticals 2,812 2,772
Prepaid expenses and other current assets 6,374 4,219
Due from affiliated physician groups 15,361 14,823
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TOTAL CURRENT ASSETS 44,794 41,149
Property and equipment, less accumulated depreciation and
amortization of $10,062 and $9,727 3,570 3,555
Deferred charges, less accumulated amortization of $428 and $513 350 386
Management service agreements, less accumulated amortization of $4,706
and $4,016 102,666 103,054
Deferred income taxes 2,618 2,618
Other assets 1,074 931
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TOTAL ASSETS $ 155,072 $ 151,693
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 10,788 $ 9,751
Accrued expenses and other liabilities 5,774 4,370
Current portion of notes payable 37,837 8,537
Current portion of capital lease obligations 48 45
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TOTAL CURRENT LIABILITIES 54,447 22,703
Capital lease obligations, less current portion 27 44
Notes payable, less current portion 5,591 35,399
Deferred income taxes 26,348 26,162
Minority interest 718 1,037
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $1.00 par value, authorized 3,000,000
shares; issued and outstanding 27,233 shares at each period end,
liquidating preference $11.00 per share 27 27
Common Stock, $.01 par value, authorized 30,000,000 shares; issued and
outstanding 12,021,828 and 11,972,358 shares, respectively 120 120
Paid-in capital 101,703 101,402
Accumulated deficit (33,909) (35,201)
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67,941 66,348
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 155,072 $ 151,693
========= =========
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollar amounts in thousands except for share data)
Three Months Ended
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March 31, 1998 March 31, 1997
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NET REVENUE $ 29,595 $ 24,365
COSTS AND EXPENSES
Salaries and benefits 5,871 5,117
Pharmaceuticals and supplies 15,030 11,168
Other operating costs 2,958 2,576
General and administrative 1,469 1,122
Depreciation and amortization 1,090 1,311
Interest 704 1,104
Provision for doubtful accounts 219 376
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27,341 22,774
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,254 1,591
Minority owners' share of net earnings 170 192
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EARNINGS BEFORE INCOME TAXES 2,084 1,399
Provision for income taxes 792 532
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NET EARNINGS $ 1,292 $ 867
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EARNINGS PER COMMON SHARE:
Basic $ 0.11 $ 0.09
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Diluted $ 0.11 $ 0.09
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Weighted average number of common shares:
Basic 12,008,254 10,088,418
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Diluted 12,217,188 10,149,178
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See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Three Months Ended
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March 31, 1998 March 31, 1997
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OPERATING ACTIVITIES
Net earnings $ 1,292 $ 867
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 1,090 1,311
Provision for doubtful accounts 219 376
Minority owners' share of net earnings 170 192
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable (3,080) (2,910)
Supplies and pharmaceuticals, prepaid expenses and other current assets (2,128) (505)
Deferred charges and other assets (139) 54
Due from affiliated physician groups (538) (1,959)
Accounts payable and accrued expenses 2,440 1,284
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NET CASH USED IN OPERATING ACTIVITIES (674) (1,290)
INVESTING ACTIVITIES
Purchase of equipment (350) (240)
Distribution to joint venture partner (489) --
Acquisition of non-medical assets of affiliated physician groups (39) --
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NET CASH USED IN INVESTING ACTIVITIES (878) (240)
FINANCING ACTIVITIES
Bank overdraft -- 783
Financing costs incurred -- (18)
Proceeds from exercise of stock options 300 --
Proceeds from notes payable -- 7,151
Principal payments on notes payable (685) (7,784)
Proceeds from note payable to parent -- 1,005
Principal payments on capital lease obligations (12) (22)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (397) 1,115
DECREASE IN CASH AND CASH EQUIVALENTS (1,949) (415)
Cash and cash equivalents at beginning of period 2,425 415
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 476 $ --
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See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required for complete financial statements by generally accepted accounting
principles. In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain amounts have been reclassified for comparative purposes with
no effect on net earnings. Operating results for the three month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Response Oncology, Inc. and Subsidiaries' (the "Company's") annual report on
Form 10-K for the year ended December 31, 1997.
Net Revenue: The following table is a summary of net revenue by source for the
respective three month periods ended March 31, 1998 and 1997. Patient services
revenue is recorded net of contractual allowances and discounts of $1,355,000
and $1,701,000 for the quarters ended March 31, 1998 and 1997, respectively.
The Company's revenue from practice management affiliations includes a fee equal
to practice operating expenses incurred by the Company (which excludes expenses
that are the obligation of the physicians, such as physician salaries and
benefits) and a management fee either fixed in amount or equal to a percentage
of each affiliated oncology group's adjusted net revenue or net operating
income. In certain affiliations, the Company may also be entitled to a
performance fee if certain financial criteria are satisfied.
(In thousands) Three Months Ended
March 31,
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1998 1997
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Net patient services revenue $ 8,459 $8,754
Practice management service fees 14,060 10,875
Pharmaceutical sales to physicians 5,857 4,153
Physician investigator studies 1,219 583
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$29,595 $24,365
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Net Earnings Per Common Share: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), which changes the computation and presentation
of earnings per share. SFAS 128 requires the presentation of basic and diluted
earnings per share, replacing primary and fully diluted earnings per share
previously required. Earnings per share for all prior years presented have been
presented in accordance with SFAS 128.
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A reconciliation of the basic earnings per share and the diluted earnings per
share computation is presented below for the three months ended March 31, 1998
and 1997.
(Dollar amounts in thousands except per share data)
Three Months Ended March 31,
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1998 1997
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Weighted average shares outstanding 12,008,254 10,088,418
Net effect of dilutive stock options and
warrants based on the treasury stock method 208,934 60,760
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Weighted average shares and common stock
equivalents 12,217,188 10,149,178
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Net earnings $ 1,292 $ 867
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Diluted per share amount $ 0.11 $ 0.09
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NOTE 2 -- PARENT COMPANY
Prior to July 25, 1997 Response Oncology was a subsidiary of Seafield Capital
Corporation ("Seafield"). On July 1, 1997, Seafield's Board of Directors
declared a dividend to Seafield's shareholders of all shares of common stock of
Response owned by Seafield. For each shareholder of record on July 11, 1997,
1.2447625 shares of Response common stock were distributed on July 25, 1997 for
each share of Seafield common stock outstanding. The distribution of all shares
of Response stock held by Seafield to Seafield's shareholders was effected as a
dividend. The Seafield shareholders paid no consideration for any shares of
Response stock received in the distribution.
NOTE 3 -- NOTES PAYABLE
The Company has a $45.0 million Credit Facility to fund the Company's
acquisition and working capital needs. The Credit Facility, comprised of a $35.0
million Acquisition Facility and a $10.0 million Working Capital Facility, is
collateralized by the common stock of the Company's subsidiaries. The Credit
Facility bears interest at a variable rate equal to LIBOR plus a spread between
1.5% and 2.125%, depending upon borrowing levels. At March 31, 1998, $29.2
million aggregate principal was outstanding under the Credit Facility with a
current interest rate of approximately 8.2%. The Credit Facility contains
affirmative and negative covenants which, among other things, require that the
Company maintain certain financial ratios, including minimum fixed charges
coverage, funded debt to EBITDA, net worth and current ratio. On March 31, 1998,
the Credit Facility was modified and amended, effective April 21, 1997, to
provide for redefinitions of certain restrictive covenants.
In May 1997, the Company entered into a LIBOR based interest rate swap agreement
("Swap Agreement") with an affiliate of the Company's primary lender as required
by the terms of the Credit Facility. Amounts hedged under the Swap Agreement
accrue interest at the difference between 6.42% and the thirty-day LIBOR rate
and are settled monthly. As of March 31, 1998, approximately 51% of the
Company's outstanding principal balance under the Credit Facility was hedged
under the Swap Agreement. The Swap Agreement matures in March 1999 and is
cancelable at the lender's option after July 1998.
Additionally, long-term unsecured amortizing promissory notes bearing interest
at rates from 4% to 9% 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 upon
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conversion rates ranging from $13.75 to $17.50. The unpaid principal amount of
the long-term notes was $14.0 million at March 31, 1998.
NOTE 4 -- INCOME TAXES
Upon the consummation of the physician practice management affiliations, the
Company recognized deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of purchased assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
With respect to professional and general liability risks, the Company currently
maintains an insurance policy that provides coverage during the policy period
ending August 1, 1998, on a claims-made basis, for $1,000,000 per claim in
excess of the Company retaining $25,000 per claim, and $3,000,000 in the
aggregate. Costs of defending claims are in addition to the limit of liability.
In addition, the Company maintains a $10,000,000 umbrella policy with respect to
potential general liability claims. Since inception, the Company has incurred no
professional or general liability losses and as of March 31, 1998, the Company
was not aware of any pending professional or general liability claims.
The Company has a commitment to lease medical equipment under 54 month operating
leases. Annual rentals under this commitment approximate $560,000.
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 -- NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or shareholder's equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that the Company
report financial and descriptive information about its reportable segments.
Financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. This statement also requires that the Company report
descriptive information about the way the operating segments were determined,
the products and services provided by the operating segments, differences
between the measurements used in reporting segment information and those used in
the Company's financial statements, and changes in the measurement of segment
amounts from period to period. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The adoption of this
statement will provide additional disclosures in the financial statements for
the year ended December 31, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Response Oncology, Inc. (the "Company") is a comprehensive cancer management
company. The Company provides advanced cancer treatment services through
outpatient facilities known as IMPACT(R) Centers under the direction of
practicing oncologists; owns the assets of and manages the nonmedical aspects of
oncology practices; and conducts clinical research on behalf of pharmaceutical
manufacturers. Approximately 400 medical oncologists are associated with the
Company through these programs. The Company opened 4 new centers in the quarter
ended March 31, 1998 bringing the total network to 52 IMPACT(R) Centers. The
network includes 28 wholly owned centers, 15 managed programs, and 9 centers
owned and operated in joint venture with a host hospital.
In January 1996, the Company implemented a diversification strategy into
physician practice management. As of March 31, 1998 the practice management
division included affiliations with 44 physicians in 12 medical oncology
practices in Florida and Tennessee. The Company has sought deep geographic
penetration in its markets believing that significant market share is crucial to
achieving efficiencies, revenue enhancements, and marketing of complete cancer
services to diverse payors including managed care. Pursuant to Service
Agreements, the Company provides management services that extend to all
nonmedical aspects of the operations of the affiliated practices. The Company is
responsible for providing facilities, equipment, supplies, support personnel,
and management and financial advisory services. The Company's resulting revenue
from Service Agreements include a fee equal to practice operating expenses
incurred by the Company and a management fee either fixed in amount or equal to
a percentage of each affiliated practice's adjusted net revenue or operating
income. In certain affiliations, the Company may also be entitled to a
performance fee if certain financial criteria are satisfied.
RESULTS OF OPERATIONS
The Company recorded net earnings for the quarter ended March 31, 1998 of
$1,292,000 or $0.11 per diluted share compared to net earnings of $867,000 or $
0.09 per diluted share for the same period in 1997. Earnings before income taxes
for the quarter ended March 31, 1998 were $2,084,000 compared to $1,399,000 for
the same period of 1997.
Net revenue for the quarter ended March 31, 1998 was $29,595,000 compared to
$24,365,000 for the quarter ended March 31, 1997, an increase of $5,230,000 or
21%. Growth in net revenue for the quarter ended March 31, 1998 was driven by;
an increase in revenue from the practice management division, increased
pharmaceutical sales to physicians and increased revenues from the clinical
research division. For the first quarter, practice management fees increased by
29%, from $10,875,000 in 1997 to $14,060,000 in 1998. The number of physicians
in practice management relationships with the Company increased from 38 on March
31, 1997 to 44 on March 31, 1998. Pharmaceutical sales to physicians increased
$1,704,000 or 41% from the first quarter of 1997 to the first quarter of 1998.
Revenue from the clinical research division increased 109% from the three month
period ended March 31, 1997 to the three month period ended March 31, 1998 for
an increase of $636,000.
While salaries and benefits expense increased $754,000 for the quarter ended
March 31, 1998 over the same period in 1997, the expense as a percentage of net
revenue decreased from 21% for the first quarter of 1997 to 20% for the first
quarter of 1998.
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Pharmaceuticals and supplies expense increased by $3,862,000 or 35% for the
quarter ended March 31, 1998 over the corresponding period in 1997. The Company
attributes the increase primarily to growth in the practice management division
as well as a significant increase in pharmaceutical sales to physicians.
Interest expense was $704,000 for the first quarter of 1998 as compared to
$1,104,000 for the first quarter of 1997, a decrease of $400,000 as a result of
the conversion of the note payable to Seafield to shares of the Company's common
stock during the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's working capital was $(9.7) million with current
assets of $44.8 million and current liabilities of $54.4 million. Cash and cash
equivalents represented $.5 million of the Company's current assets. Current
liabilities includes the entire principal balance under the Company's
Acquisition facility which is due in March 1999.
Cash used in operating activities was $.7 million in the first quarter of 1998
compared to cash used in operating activities of $1.3 million for the same
period in 1997. Cash used in investing activities was $.9 million and $.2
million for the quarters ended March 31, 1998 and 1997, respectively. Cash used
in financing activities was $.4 million for the first quarter of 1998 and
provided by financing activities was $1.1 million for the same period in 1997.
The Company has a $45.0 million Credit Facility to fund the Company's
acquisition and working capital needs. The Credit Facility, comprised of a $35.0
million Acquisition Facility and a $10.0 million Working Capital Facility, is
collateralized by the common stock of the Company's subsidiaries. The Credit
Facility bears interest at a variable rate equal to LIBOR plus a spread between
1.5% and 2.125%, depending upon borrowing levels. At March 31, 1998, $29.2
million aggregate principal was outstanding under the Credit Facility with a
current interest rate of approximately 8.2%. The Credit Facility contains
affirmative and negative covenants which, among other things, require that the
Company maintain certain financial ratios, including minimum fixed charges
coverage, funded debt to EBITDA, net worth and current ratio. On March 31, 1998,
the Credit Facility was modified and amended, effective April 21, 1997, to
provide for redefinitions of certain restrictive covenants.
In May 1997, the Company entered into a LIBOR based interest rate swap agreement
("Swap Agreement") with an affiliate of the Company's primary lender as required
by the terms of the Credit Facility. Amounts hedged under the Swap Agreement
accrue interest at the difference between 6.42% and the thirty-day LIBOR rate
and are settled monthly. As of March 31, 1998, approximately 51% of the
Company's outstanding principal balance under the Credit Facility was hedged
under the Swap Agreement. The Swap Agreement matures in March 1999 and is
cancelable at the lender's option after July 1998.
Additionally, long-term unsecured amortizing promissory notes bearing interest
at rates from 4% to 9% 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 upon conversion rates ranging from $13.75 to $17.50. The unpaid principal
amount of the long-term notes was $14.0 million at March 31, 1998.
In October 1996, the Company procured a $23.5 million credit facility from
Seafield (the "Seafield Facility") to finance acquisitions and for working
capital. At December 31, 1996, $22.5 million was outstanding under the Seafield
Facility at an interest rate of 8%. On February 26, 1997, the $23.5 million loan
and accrued interest of $.6 million was converted into 3,020,536 shares of the
Company's common stock at a rate of $8 per share.
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The Company has a commitment to lease medical equipment in 1998 under 54 month
operating leases. Annual rentals under this commitment approximate $560,000.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer program that
has date sensitive software may recognize a date using "00" as the year 1900
rather than as the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has recently assessed its internal computer systems and believes
that the current systems used will properly utilize dates beyond December 31,
1999. The Company has been informed that their outside software vendors are in
the process of studying the year 2000 issue. Upon completion of the vendors'
studies which are expected in late 1998, the Company will determine the extent
to which it is vulnerable to the third parties' failure to remediate their own
year 2000 issues and the costs associated with resolving this issue.
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PART II - OTHER INFORMATION
ITEM 5 MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS
On July 1, 1997, Seafield's Board of Directors declared a dividend to Seafield's
shareholders of all shares of common stock of Response owned by Seafield. For
each shareholder of record on July 11, 1997, 1.2447625 shares of Response common
stock were distributed on July 25, 1997 for each share of Seafield common stock
outstanding. The distribution of all shares of Response stock held by Seafield
to Seafield's shareholders was effected as a dividend. The Seafield shareholders
paid no consideration for any shares of Response stock received in the
distribution.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.1 Employment Agreement effective as of January 1, 1998 by and between
Response Oncology, Inc., a Tennessee corporation and Kenneth L. Scott.
10.2 Employment Agreement effective as of January 1, 1998 by and between
Response Oncology, Inc. and Joseph T. Clark.
10.3 Employment Agreement effective as of January 1, 1998 by and between
Response Oncology, Inc. and Carlton Sedberry
10.4 Employment Agreement effective as of January 1, 1998 by and between
Response Oncology, Inc. and Mary E. Clements
10.5 Employment Agreement effective as of January 1, 1998 by and between
Response Oncology, Inc. and William H. West, M.D.
10.6 Employment Agreement effective as of January 1, 1998 by and between
Response Oncology, Inc. and Charles Weaver, M.D.
27 Financial Data Schedule (for SEC use only)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Response
Oncology, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESPONSE ONCOLOGY, INC.
By: /s/ Mary E. Clements
--------------------------------------
Mary E. Clements
Chief Financial Officer
and Principal Accounting Officer
Date: May 15, 1998
By: /s/ Dena L. Mullen
--------------------------------------
Dena L. Mullen
Director of Finance
Date: May 15, 1998
By: /s/ Peter A. Stark
--------------------------------------
Peter A. Stark
Controller
Date: May 15, 1998
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