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 June 30, 1999 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.)
1805 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 [ ]
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, 11,968,601 shares as of August 13, 1999.
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets,
June 30, 1999 and December 31, 1998................................................................. 3
Consolidated Statements
of Earnings for the Three Months Ended
June 30, 1999 and June 30, 1998..................................................................... 4
Consolidated Statements of Earnings for
The Six Months Ended June 30, 1999
and June 30, 1998 .................................................................................. 5
Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 1999 and June 30, 1998 .................................................................... 6
Notes to Consolidated
Financial Statements................................................................................ 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................................................................................... 12
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk........................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 17
Item 2. Changes in Securities and Use of Proceeds........................................................... 17
Item 3. Defaults Upon Senior Securities..................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................................. 17
Item 5. Market Information and Related Stockholder Matters.................................................. 17
Item 6. Exhibits and Reports on Form 8.K ................................................................... 17
Signatures .................................................................................................... 18
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
June 30, 1999 December 31, 1998
ASSETS (Unaudited) (Note 1)
------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 3,948 $ 1,083
Accounts receivable, less allowance for doubtful accounts
of $2,609 and $2,772 20,587 22,844
Supplies and pharmaceuticals 3,069 3,406
Prepaid expenses and other current assets 5,028 6,276
Due from affiliated physician groups 17,542 18,630
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TOTAL CURRENT ASSETS 50,174 52,239
Property and equipment, less accumulated depreciation and
amortization of $11,610 and $11,150 4,538 5,273
Deferred charges, less accumulated amortization of $9 and $496 452 50
Management service agreements, less accumulated amortization of
$6,669 and $5,160 66,509 68,087
Other assets 1,109 1,104
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TOTAL ASSETS $ 122,782 $ 126,753
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 13,918 $ 16,528
Accrued expenses and other liabilities 6,406 7,350
Current portion of notes payable 6,949 11,107
Current portion of capital lease obligations 232 357
Deferred income taxes 473 473
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TOTAL CURRENT LIABILITIES 27,978 35,815
Capital lease obligations, less current portion 563 962
Notes payable, less current portion 35,321 32,290
Deferred income taxes 7,236 7,295
Minority interest 1,014 981
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $1.00 par value (aggregate
involuntary liquidation preference $293) authorized 3,000,000 shares;
issued and outstanding 26,631 shares 27 27
Common stock, $.01 par value, authorized 30,000,000 shares; issued and
outstanding 11,931,731 and 12,049,331 shares 119 120
Paid-in capital 101,561 101,912
Accumulated deficit (51,037) (52,649)
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50,670 49,410
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 122,782 $ 126,753
=========== =================
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
-------------------------------
June 30, June 30,
1999 1998
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NET REVENUE $ 34,053 $ 32,627
COSTS AND EXPENSES
Salaries and benefits 6,442 6,201
Pharmaceuticals and supplies 19,756 16,367
Other operating costs 2,691 3,617
General and administrative 1,687 1,614
Depreciation and amortization 1,119 1,164
Interest 843 721
Provision for doubtful accounts 504 392
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33,042 30,076
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 1,011 2,551
Minority owners' share of net earnings (274) (248)
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EARNINGS BEFORE INCOME TAXES 737 2,303
Provision for income taxes 280 875
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NET EARNINGS TO COMMON STOCKHOLDERS $ 457 $ 1,428
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.04 $ 0.12
============ ============
Diluted $ 0.04 $ 0.12
============ ============
Weighted average number of common shares:
Basic 11,931,731 12,040,965
============ ============
Diluted 11,961,986 12,302,259
============ ============
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)
Six Months Ended
-------------------------------
June 30, June 30,
1999 1998
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NET REVENUE $ 70,362 $ 62,222
COSTS AND EXPENSES
Salaries and benefits 13,008 12,072
Pharmaceuticals and supplies 40,243 31,397
Other operating costs 6,120 6,575
General and administrative 3,368 3,083
Depreciation and amortization 2,236 2,254
Interest 1,706 1,425
Provision for doubtful accounts 695 611
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67,376 57,417
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EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,986 4,805
Minority owners' share of net earnings (386) (418)
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EARNINGS BEFORE INCOME TAXES 2,600 4,387
Provision for income taxes 988 1,667
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NET EARNINGS TO COMMON STOCKHOLDERS $ 1,612 $ 2,720
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.13 $ 0.23
============ ============
Diluted $ 0.13 $ 0.22
============ ============
Weighted average number of common shares:
Basic 11,990,206 12,030,036
============ ============
Diluted 12,023,887 12,305,067
============ ============
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)
Six Months Ended
----------------------
June 30, June 30,
1999 1998
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OPERATING ACTIVITIES
Net earnings to common stockholders $ 1,612 $ 2,720
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 2,236 2,254
Provision for doubtful accounts 695 611
Minority owners' share of net earnings 386 418
Changes in operating assets and liabilities net of effect of acquisitions:
Accounts receivable 1,562 (6,587)
Supplies and pharmaceuticals, prepaid expenses and other current assets 1,296 (2,687)
Deferred charges and other assets 54 (270)
Due from affiliated physician groups (179) (1,947)
Accounts payable and accrued expenses (2,226) 5,868
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NET CASH PROVIDED BY OPERATING ACTIVITIES 5,436 380
INVESTING ACTIVITIES
Purchase of equipment (500) (886)
Acquisition of non-medical assets of affiliated physician groups -- (525)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (500) (1,411)
FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 302
Distributions to joint venture partners (353) (514)
Financing costs incurred (416) --
Proceeds from notes payable -- 1,000
Principal payments on notes payable (1,136) (1,016)
Principal payments on capital lease obligations (166) (33)
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NET CASH USED IN FINANCING ACTIVITIES (2,071) (261)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,865 (1,292)
Cash and cash equivalents at beginning of period 1,083 2,425
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,948 $ 1,133
======== ========
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
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 and six month periods
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. 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, 1998.
Net Revenue:
The Company's revenue from practice management affiliations includes a fee equal
to practice operating expenses incurred by the Company (which excludes expenses
that are the obligation of the physicians, such as physician salaries and
benefits) and a management fee either fixed in amount or equal to a percentage
of each affiliated oncology group's adjusted net revenue or net operating
income. In certain affiliations, the Company may also be entitled to a
performance fee if certain financial criteria are satisfied.
Pharmaceutical sales to physicians are recorded based upon the Company's
contracts with physician groups to manage the pharmacy component of the groups'
practice. Revenue recorded for these contracts represents the cost of
pharmaceuticals plus a percentage fee.
Revenue from physician investigator studies is recorded based upon the
Company's contracts with certain pharmaceutical companies to manage clinical
trials and is generally measured on a per patient basis for monitoring and
collection of data.
The following table is a summary of net revenue by source for the respective
three and six month periods ended June 30, 1999 and 1998. Patient services
revenue is recorded net of contractual allowances and discounts of $706,000 and
$1,212,000 for the quarters ended June 30, 1999 and 1998, respectively and
$1,910,000 and $2,567,000 for the six months ended June 30, 1999 and 1998,
respectively.
Three Months Ended Six Months Ended
(In Thousands) June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
------- ------- ------- -------
Net patient services revenue $ 7,778 $10,087 $15,927 $18,545
Practice management service fees 16,712 14,976 34,301 29,037
Pharmaceutical sales to physicians 9,361 6,437 19,105 12,294
Physician investigator studies 202 1,127 1,029 2,346
------- ------- ------- -------
$34,053 $32,627 $70,362 $62,222
======= ======= ======= =======
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Net Earnings Per Common Share:
A reconciliation of the basic earnings per share and the diluted earnings per
share computation is presented below for the three and six month periods ended
June 30, 1999 and 1998.
(Dollar amounts in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30
------------------------------- -------------------------------
1999 1998 1999 1998
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Weighted average shares outstanding 11,931,731 12,040,965 11,990,206 12,030,036
Net effect of dilutive stock options and
warrants based on the treasury stock method 30,255 261,294 33,681 275,031
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Weighted average shares and common stock
equivalents 11,961,986 12,302,259 12,023,887 12,305,067
=========== =========== =========== ===========
Net earnings $ 457 $ 1,428 $ 1,612 $ 2,720
=========== =========== =========== ===========
Diluted per share amount $ 0.04 $ 0.12 $ 0.13 $ 0.22
=========== =========== =========== ===========
NOTE 2 -- NOTES PAYABLE
The Company has a $42.0 million Credit Facility which matures June 2002, to fund
the Company's working capital needs. The Credit Facility, comprised of a $35.0
million Term Loan Facility and a $7.0 million Revolving Credit Facility, is
collateralized by the assets of the Company and the common stock of its
subsidiaries. The Credit Facility bears interest at a variable rate equal to
LIBOR plus a spread between 1.375% and 2.5%, depending upon borrowing levels.
The Company is also obligated to a commitment fee of .25% to .5% of the unused
portion of the Line of Credit. At June 30, 1999, $37.0 million aggregate
principal was outstanding under the Credit Facility with a current interest rate
of approximately 7.5%. The Company is subject to certain affirmative and
negative covenants which, among other things, require the Company to maintain
certain financial ratios, including minimum fixed charges coverage, funded debt
to EBITDA and minimum net worth.
In June, 1999 the Company entered into a LIBOR based interest rate swap
agreement ("Swap Agreement") effective July 1, 1999 with the Company's lender as
required by the terms of the Credit Facility. Amounts hedged under the Swap
Agreement accrue interest at the difference between 5.93% and the ninety day
LIBOR rate and are settled quarterly. The Company is committed to hedge $18.0
million under the terms of the Swap Agreement. The Swap Agreement matures on
July 1, 2000.
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 $17.00. The unpaid principal amount of the
long-term notes was $5.1 million at June 30, 1999 of which $3.1 million is
included in current liabilities.
NOTE 3 -- INCOME TAXES
Upon the consummation of the physician practice management affiliations, the
Company recognized deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial
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statement carrying amounts of purchased assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
With respect to professional and general liability risks, the Company currently
maintains an insurance policy that provides coverage during the policy period
ending August 1, 2000, on a claims-made basis, for $1,000,000 per claim in
excess of the Company retaining $25,000 per claim, and $3,000,000 in the
aggregate. Costs of defending claims are in addition to the limit of liability.
In addition, the Company maintains a $10,000,000 umbrella policy with respect to
potential professional and general liability claims. Since inception, the
Company has incurred no professional or general liability losses and as of June
30, 1999, the Company was not aware of any pending professional or general
liability claims that would have a material adverse effect on the Company's
financial condition or results of operations.
NOTE 5 -- DUE FROM AFFILIATED PHYSICIANS
Due from affiliated physicians consists of management fees earned and payable
pursuant to the management service agreements ("Service Agreements"). In
addition, the Company may also fund certain working capital needs of the
affiliated physicians from time to time.
NOTE 6 -- SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different services. The Company has three reportable segments: IMPACT Services,
Physician Practice Management and Cancer Research Services. The IMPACT Services
segment provides stem cell supported high-dose chemotherapy and other advanced
cancer treatment services under the direction of practicing oncologists as well
as compounding and dispensing pharmaceuticals to certain medical oncology
practices. The Physician Practice Management segment owns the assets of and
manages oncology practices. The Cancer Research Services segment conducts
clinical cancer research on behalf of pharmaceutical manufacturers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's annual audited
consolidated financial statements except that the Company does not allocate
interest expense, taxes or corporate overhead to the individual segments. The
Company evaluates performance based on profit or loss from operations before
income taxes and unallocated amounts. The totals per the schedules below will
not and should not agree to the consolidated totals. The differences are due to
corporate overhead and other unallocated amounts which are reflected in the
reconciliation to consolidated earnings before income taxes.
(In thousands)
Physician
IMPACT Practice Cancer Research
Services Management Services Total
-------- ---------- ---------------- --------
For the three months ended June 30, 1999:
Net revenue $ 17,139 $ 16,712 $ 202 $ 34,053
Total operating expenses 14,980 14,282 263 29,525
-------- ---------- -------- --------
Segment contribution (loss) 2,159 2,430 (61) 4,528
Depreciation and amortization 135 934 -- 1,069
======== ========== ======== ========
Segment profit (loss) 2,024 1,496 (61) 3,459
======== ========== ======== ========
Segment assets 23,281 88,182 2,521 113,984
======== ========== ======== ========
Capital expenditures 116 36 -- 152
======== ========== ======== ========
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Physician
IMPACT Practice Cancer Research
Services Management Services Total
-------- ---------- --------------- --------
For the three months ended June 30, 1998:
Net revenue $ 16,524 $ 14,976 $ 1,127 $ 32,627
Total operating expenses 13,091 12,655 647 26,393
-------- ---------- -------- --------
Segment contribution 3,433 2,321 480 6,234
Depreciation and amortization 159 828 -- 987
======== ========== ======== ========
Segment profit 3,274 1,493 480 5,247
======== ========== ======== ========
Segment assets 25,912 124,158 2,496 152,566
======== ========== ======== ========
Capital expenditures 35 1,695 6 1,736
======== ========== ======== ========
Reconciliation of profit:
1999 1998
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Segment profit $ 3,459 $ 5,247
Unallocated amounts:
Corporate general and administrative 1,883 2,200
Corporate depreciation and amortization 51 177
Corporate interest expense 788 567
-------- ----------
Earnings before income taxes $ 737 $ 2,303
======== ==========
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(In thousands)
Physician
IMPACT Practice Cancer Research
Services Management Services Total
-------- ---------- --------------- --------
For the six months ended June 30, 1999:
Net revenue $ 35,032 $ 34,301 $ 1,029 $ 70,362
Total operating expenses 30,248 29,190 779 60,217
-------- ---------- -------- --------
Segment contribution 4,784 5,111 250 10,145
Depreciation and amortization 281 1,855 -- 2,136
======== ========== ======== ========
Segment profit 4,503 3,256 250 8,009
======== ========== ======== ========
Segment assets 23,281 88,182 2,521 113,984
======== ========== ======== ========
Capital expenditures 146 53 4 203
======== ========== ======== ========
Physician
IMPACT Practice Cancer Research
Services Management Services Total
-------- ---------- --------------- --------
For the six months ended June 30, 1998:
Net revenue $ 30,839 $ 29,037 $ 2,346 $ 62,222
Total operating expenses 24,374 24,381 1,194 49,949
-------- ---------- -------- --------
Segment contribution 6,465 4,656 1,152 12,273
Depreciation and amortization 392 1,624 -- 2,016
======== ========== ======== ========
Segment profit 6,073 3,032 1,152 10,257
======== ========== ======== ========
Segment assets 25,912 124,158 2,496 152,566
======== ========== ======== ========
Capital expenditures 69 1,728 9 1,806
======== ========== ======== ========
Reconciliation of profit:
1999 1998
-------- ----------
Segment profit $ 8,009 $ 10,257
Unallocated amounts:
Corporate general and administrative 3,657 4,361
Corporate depreciation and amortization 101 238
Corporate interest expense 1,651 1,271
-------- ----------
Earnings before income taxes $ 2,600 $ 4,387
======== ==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Response Oncology, Inc. (the "Company") is a comprehensive cancer management
company. The Company provides advanced cancer treatment services through
outpatient facilities known as IMPACT(R) Centers under the direction of
practicing oncologists; compounds and dispenses pharmaceuticals to certain
medical oncology practices for a fee; owns the assets of and manages the
nonmedical aspects of oncology practices; and conducts clinical research on
behalf of pharmaceutical manufacturers. Approximately 400 medical oncologists
are associated with the Company through these programs.
In May of 1999 the results of certain breast cancer studies were released at the
meeting of the American Society of Clinical Oncology. These studies involving
the use of high dose chemotherapy sparked controversy among oncologists, and, in
the aggregate, caused confusion among patients 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 chemotherapy IMPACT Center business has
slowed, as evidenced by the number of procedures in the second quarter at 256,
as compared with 333 in the second quarter of 1998. In response to the declining
demand for high-dose chemotherapy in general, the Company has closed seven of
its centers in the second quarter and plans to close an additional four in the
third quarter of 1999. The assets used in the closed centers will go into
inventory and be used in other centers as needed. As of June 30, 1999, the
Company's total network included 46 IMPACT Centers located in 23 states and the
District of Columbia. The network consists of 28 wholly owned centers, 14
managed programs, and 4 centers owned and operated in joint venture with a host
hospital.
The Company expects that the decline in procedures will continue to adversely
affect profitability in the third quarter of 1999, and there could be further
erosion in this line of business beyond 1999. In response to the release of the
data the Company has developed new protocols for metastatic breast cancer,
adjuvant breast cancer, and lymphoma utilizing therapies to follow high dose
chemotherapy in an attempt to reduce the risk of disease recurrence. Full
deployment of these protocols will take place over the next several quarters.
However, there can be no assurance that these new protocols and therapies will
be accepted by the medical oncology community or that, after appropriate trials
these protocols and therapies will prove to be effective.
During the first quarter of 1999, the Company terminated its service agreement
with one of the Company's three underperforming adjusted net revenue model
physician practice management relationships. The second of the three
underperforming service agreements was terminated by the Company in the second
quarter of 1999. The Company had established a reserve against the three service
agreements as of December 31, 1998 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." The Company's physician
practice management division currently includes affiliations with 39
physicians in 10 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 includes 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.
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RESULTS OF OPERATIONS
Net revenue increased 5% to $34.1 million for the quarter ended June 30, 1999,
compared to $32.6 million for the quarter ended June 30, 1998. The $2.3 million
or 23% decrease in IMPACT Center revenue and $.9 million or 82% decrease in
revenue from physician investigator studies was offset by a $3.0 million or 47%
increase in pharmaceutical sales to physicians and a $1.7 million or 11%
increase in practice management service fees. The increase in practice
management service fees was 31%, excluding the two terminated agreements
from the quarter ended June 30, 1998.
Net revenue was $70.4 million for the six months ended June 30, 1999, compared
to $62.2 million for the same period in 1998. IMPACT Center revenue decreased by
$2.6 million or 14% and revenue from physician investigator studies decreased by
$1.3 million or 57%. Pharmaceutical sales to physicians increased $6.8 million
or 55% while practice management service fees increased $5.3 million or 18%.
Supplies and pharmaceuticals expense increased $3.4 million, or 21% and $8.8
million or 28% for the quarter and six months ended June 30, 1999 over the same
periods in 1998, respectively. 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's working capital was $22.2 million with current
assets of $50.2 million and current liabilities of $28.0 million. Cash and cash
equivalents represented $3.9 million of the Company's current assets.
Cash provided by operating activities was $5.4 million in the first six months
of 1999 compared to $.4 million for the same period in 1998. This increase is
largely attributable to improved accounts receivable collections in both the
IMPACT and Physician Practice Management divisions. Cash used in investing
activities was $.5 million and $1.4 million for the six months ended June 30,
1999 and 1998, respectively. Cash used in financing activities was $2.1 million
for the six months ended June 30, 1999 and $.3 million for the same period in
1998.
The Company has a $42.0 million Credit Facility which matures June 2002, to fund
the Company's working capital needs. The Credit Facility, comprised of a $35.0
million Term Loan Facility and a $7.0 million Revolving Credit Facility, is
collateralized by the assets of the Company and the common stock of its
subsidiaries. The Credit Facility bears interest at a variable rate equal to
LIBOR plus a spread between 1.375% and 2.5%, depending upon borrowing levels.
The Company is also obligated to a commitment fee of .25% to .5% of the unused
portion of the Line of Credit. At June 30, 1999, $37.0 million aggregate
principal was outstanding under the Credit Facility with a current interest rate
of approximately 7.5%. The Company is subject to certain affirmative and
negative covenants which, among other things, require the Company to maintain
certain financial ratios, including minimum fixed charges coverage, funded debt
to EBITDA and minimum net worth.
In June, 1999 the Company entered into a LIBOR based interest rate swap
agreement ("Swap Agreement") effective July 1, 1999 with the Company's lender as
required by the terms of the Credit Facility. Amounts hedged under the Swap
Agreement accrue interest at the difference between 5.93% and the ninety day
LIBOR rate and are settled quarterly. The Company is committed to hedge $18.0
million under the terms of the Swap Agreement. The Swap Agreement matures on
July 1, 2000.
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
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the election of the holders, be paid in shares of common stock of the Company
based on conversion prices ranging from $11.50 to $17.00. The unpaid principal
amount of the long-term notes was $5.1 million at June 30, 1999 of which $3.1
million is included in current liabilities.
IMPACT OF YEAR 2000
The Year 2000 Issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
occurs, computer programs, computers and embedded microprocessors controlling
equipment with date-sensitive systems may recognize Year 2000 as 1900 or not at
all. This inability to recognize or properly treat Year 2000 may result in
computer system failures or miscalculations of critical financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. In addition, there are two other related issues,
which could also lead to miscalculations or failures: (i) some older systems'
programming assigns special meaning to certain dates, such as 9/9/99 and (ii)
the Year 2000 is a leap year.
The Company started to formulate a plan to address the Year 2000 Issue in the
second quarter of 1998. To date the Company's primary focus has been on its own
internal information technology systems, including all types of systems in use
by the Company in its operations, finance and human resources departments, and
to deal with the most critical systems first. The Company has developed a Year
2000 Plan to address all of its Year 2000 issues. The Year 2000 plan involves
the following phases: awareness, assessment, renovation, testing and
implementation. The Company has completed an assessment of its internal
information technology systems and has established a timetable for the
renovation phase of the systems. The Company has already completed the
renovation of approximately 90% of its information technology systems, including
modifying and upgrading software and purchasing new software, and continues to
renovate the remaining portions of the systems. The Company's goal is to
complete the testing and implementation phases by November 15, 1999, although
complications arising from unanticipated acquisitions might cause some delay.
The Company has also begun to assess the potential for Year 2000 problems with
the information systems of its payors and vendors. The Company expects to
complete the assessment with respect to such parties by October 31, 1999. The
Company has been provided an estimated timetable for completion of renovation
and testing that such vendors with which the Company has a material relationship
will undertake. The Company has estimated the costs that it may incur to remedy
the Year 2000 issues relating to such parties at $85,000. The Company's
diagnostic imaging equipment used to provide imaging services have computer
systems and applications, and in some cases embedded microprocessors, that could
be affected by Year 2000 issues. The Company has assessed the impact on its
diagnostic imaging equipment by contacting the vendors of such equipment. The
vendors with respect to the majority of the equipment used by the Company have
informed the Company that such equipment is Year 2000 compliant.
The Company has made an assessment of the potential for Year 2000 problems with
the embedded microprocessors in its other equipment, facilities and corporate
and regional offices, including telecommunications systems, utilities and
security systems. The Company estimates, on a preliminary basis, that the cost
of assessment, renovation, testing and implementation of its internal systems
will range from approximately $50,000 to $75,000. The major components of these
costs are: consultants, programming new software and hardware, software upgrades
and travel expenses. The Company expects that such costs will be funded through
operating cash flows. This estimate, based on currently available information,
will be updated as the Company proceeds with renovation, testing and
implementation, and may be adjusted upon receipt of more information from the
Company's vendors and other third parties and upon the design and implementation
of the Company's contingency plan. In addition, the availability and cost of
consultants and other personnel trained in this area and unanticipated
acquisitions might materially affect the estimated costs. The effects of the
aforementioned costs have had no material impact on the Company's progress as it
relates to other information
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15
system projects and implementation.
The Company's Year 2000 issue involves significant risks. There can be no
assurance that the Company will succeed in implementing the Year 2000 Plan it is
developing. The following describes the Company's most reasonably likely
worst-case scenario, given current uncertainties. If the Company's renovated or
replaced internal information technology systems fail the testing phase, or any
software application or embedded microprocessors central to the Company's
operations are overlooked in the assessment or implementation phases,
significant problems, including delays, may be incurred in billing the Company's
major customers (Medicare, HMO's or private insurance carriers) for services
performed. If its major customers' systems do not become Year 2000 compliant on
a timely basis, the Company will have problems and incur delays in receiving and
processing correct reimbursements. If the computer systems of third parties
(including hospitals) with which the Company's systems exchange data do not
become Year 2000 compliant both on a timely basis and in a manner compatible
with continued data exchange with the Company's systems, significant problems
may be incurred in billing and reimbursement. If the systems on the diagnostic
imaging equipment utilized by the Company are not Year 2000 compliant, the
Company may not be able to provide imaging services to patients. If the
Company's vendors or suppliers of the Company's necessary supplies and power,
telecommunications and financial services fail to provide the Company with
services, the Company will be unable to provide services to its patients. If any
of these uncertainties were to occur, the Company's business, financial
condition and results of operations would be adversely affected. The Company is
unable to assess the likelihood of such events occurring or the extent of the
effect on the Company.
The Company is establishing a contingency plan to address unavoidable Year 2000
risks with internal information technology systems and with customers, vendors
and other third parties; and expects to finalize such a plan by November 15,
1999.
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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 is also a party to a LIBOR based interest rate swap agreement ("Swap
Agreement"), effective date July 1, 1999, with the Company's lender as required
by the terms of the Credit Facility. Amounts hedged under the Swap Agreement
accrue interest at the difference between 5.93% and the ninety day LIBOR rate
and are settled quarterly. The Swap Agreement matures July 1, 2000. The Company
does not enter into derivative or interest rate transactions for speculative
purposes.
At June 30, 1999, $37.0 million aggregate principal was outstanding under the
Credit Facility with a current interest rate of approximately 7.5%. The company
does not have any other material market-sensitive financial instruments.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10(a) Credit Agreement dated June 10, 1999 between Registrant,
AmSouth Bank, Union Planters National Bank and NationsBank,
N.A.
10(b) Swap Agreement dated June 25, 1999 between Registrant and
NationsBank, N.A.
27 Financial Data Schedule (for SEC use only)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Response
Oncology, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RESPONSE ONCOLOGY, INC.
By: /s/ Mary E. Clements
--------------------------------
Mary E. Clements
Chief Financial Officer
and Principal Accounting Officer
Date: August 13, 1999
By: /s/ Dena L. Mullen
--------------------------------
Dena L. Mullen
Director of Finance
Date: August 13, 1999
By: /s/ Peter A. Stark
--------------------------------
Peter A. Stark
Controller
Date: August 13, 1999
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