1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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.
-----------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1212264
--------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1805 Moriah Woods Blvd., Memphis, TN 38117
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(901) 761-7000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value, 11,968,601 shares as of November 12, 1999.
2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets,
September 30, 1999 and December 31, 1998--------------------------3
Consolidated Statements
of Earnings for the Three Months Ended
September 30, 1999 and September 30, 1998-------------------------4
Consolidated Statements of Earnings for
the Nine Months Ended September 30, 1999
and September 30, 1998 -------------------------------------------5
Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 1999 and September 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 Disclosures
About Market Risk -----------------------------------------------15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings------------------------------------------------16
Item 2. Changes in Securities and Use of Proceeds------------------------16
Item 3. Defaults Upon Senior Securities----------------------------------16
Item 4. Submission of Matters to a Vote of Security Holders--------------16
Item 5. Market Information and Related Stockholder Matters---------------16
Item 6. Exhibits and Reports on Form 8-K --------------------------------16
Signatures -----------------------------------------------------------------17
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
September 30, 1999 December 31, 1998
(Unaudited) (Note 1)
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,076 $ 1,083
Accounts receivable, less allowance for doubtful accounts
of $2,833 and $2,772 18,717 22,844
Supplies and pharmaceuticals 3,143 3,406
Prepaid expenses and other current assets 4,351 6,276
Due from affiliated physician groups 17,852 18,630
--------- ---------
TOTAL CURRENT ASSETS 51,139 52,239
Property and equipment, less accumulated depreciation and
amortization of $11,980 and $11,150 4,477 5,273
Deferred charges, less accumulated amortization of $47 and $496 414 50
Management service agreements, less accumulated amortization of
$7,445 and $5,160 66,886 68,087
Other assets 308 1,104
--------- ---------
TOTAL ASSETS $ 123,224 $ 126,753
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 14,331 $ 16,528
Accrued expenses and other liabilities 6,960 7,350
Current portion of notes payable 8,062 11,107
Current portion of capital lease obligations 291 357
Deferred income taxes 473 473
--------- ---------
TOTAL CURRENT LIABILITIES 30,117 35,815
Capital lease obligations, less current portion 641 962
Notes payable, less current portion 33,618 32,290
Deferred income taxes 7,236 7,295
Minority interest 994 981
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 11,968,601 and 12,049,331 shares 120 120
Paid-in capital 101,672 101,912
Accumulated deficit (51,201) (52,649)
--------- ---------
50,618 49,410
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 123,224 $ 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
-----------------------------------
September 30, September 30,
1999 1998
------------- -------------
NET REVENUE $ 32,589 $ 31,858
COSTS AND EXPENSES
Salaries and benefits 6,209 6,291
Pharmaceuticals and supplies 19,600 16,031
Other operating costs 2,787 3,422
General and administrative 1,634 1,478
Depreciation and amortization 1,143 1,538
Interest 799 771
Provision for doubtful accounts 461 198
------------ ------------
32,633 29,729
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES & MINORITY INTEREST (44) 2,129
Minority owners' share of net earnings (220) (264)
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (264) 1,865
Provision (credit) for income taxes (100) 709
------------ ------------
NET EARNINGS (LOSS) TO COMMON STOCKHOLDERS $ (164) $ 1,156
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (0.01) $ 0.10
============ ============
Diluted $ (0.01) $ 0.10
============ ============
Weighted average number of common shares:
Basic 11,966,597 12,048,501
============ ============
Diluted 11,966,597 12,087,248
============ ============
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)
Nine Months Ended
-----------------------------------
September 30, September 30,
1999 1998
-------------- --------------
NET REVENUE $ 102,951 $ 94,080
COSTS AND EXPENSES
Salaries and benefits 19,218 18,363
Pharmaceuticals and supplies 59,843 47,428
Other operating costs 8,905 9,997
General and administrative 5,002 4,561
Depreciation and amortization 3,380 3,792
Interest 2,505 2,196
Provision for doubtful accounts 1,156 809
------------ ------------
100,009 87,146
------------ ------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,942 6,934
Minority owners' share of net earnings (606) (682)
------------ ------------
EARNINGS BEFORE INCOME TAXES 2,336 6,252
Provision for income taxes 888 2,376
------------ ------------
NET EARNINGS TO COMMON STOCKHOLDERS $ 1,448 $ 3,876
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.12 $ 0.32
============ ============
Diluted $ 0.12 $ 0.32
============ ============
Weighted average number of common shares:
Basic 11,982,250 12,036,259
============ ============
Diluted 12,006,954 12,225,657
============ ============
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)
Nine Months Ended
-------------------------------
September 30, September 30,
1999 1998
------------- --------------
OPERATING ACTIVITIES
Net earnings to common stockholders $ 1,448 $ 3,876
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,380 3,792
Provision for doubtful accounts 1,156 809
Minority owners' share of net earnings 606 682
Changes in operating assets and liabilities net of
effect of acquisitions:
Accounts receivable 2,971 (8,070)
Supplies and pharmaceuticals, prepaid expenses and
other current assets 1,899 (2,910)
Deferred charges and other assets 88 (282)
Due from affiliated physician groups (489) (4,338)
Accounts payable, accrued expenses and other liabilities (1,259) 8,267
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,800 1,826
INVESTING ACTIVITIES
Purchase of equipment (596) (1,209)
Acquisition of non-medical assets of affiliated
physician groups -- (525)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (596) (1,734)
FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 322
Distributions to joint venture partners (593) (806)
Financing costs incurred (416) --
Proceeds from notes payable -- 1,000
Principal payments on notes payable (1,978) (1,745)
Principal payments on capital lease obligations (224) (153)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (3,211) (1,382)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,993 (1,290)
Cash and cash equivalents at beginning of period 1,083 2,425
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,076 $ 1,135
======= =======
See accompanying notes to consolidated financial statements.
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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine month
periods ended September 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'
respective practices. 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 nine month periods ended September 30, 1999 and 1998. Patient services
revenue is recorded net of contractual allowances and discounts of $1,129,000
and $1,442,000 for the quarters ended September 30, 1999 and 1998, respectively
and $3,040,000 and $4,010,000 for the nine months ended September 30, 1999 and
1998, respectively.
Three Months Ended Nine Months Ended
(In Thousands) September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
------- --------- -------- -------
Net patient services revenue $ 6,778 $ 9,228 $ 22,704 $27,775
Practice management service fees 16,679 14,974 50,981 44,010
Pharmaceutical sales to physicians 8,926 6,836 28,031 19,129
Physician investigator studies 206 820 1,235 3,166
======= ======== ======== =======
$32,589 $ 31,858 $102,951 $94,080
======= ======== ======== =======
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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 nine month periods ended
September 30, 1999 and 1998.
(Dollar amounts in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
Weighted average shares outstanding 11,966,597 12,048,501 11,982,250 12,036,259
Net effect of dilutive stock options and
warrants based on the treasury stock method -- 38,747 24,704 189,398
------------ ----------- ----------- -----------
Weighted average shares and common stock
equivalents 11,966,597 12,087,248 12,006,954 12,225,657
============ =========== =========== ===========
Net earnings (loss) $ (164) $ 1,156 $ 1,448 $ 3,876
============ =========== =========== ===========
Diluted per share amount $ (0.01) $ 0.10 $ 0.12 $ 0.32
============ =========== =========== ===========
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 September 30, 1999, $37.0 million aggregate
principal was outstanding under the Credit Facility with a current interest rate
of approximately 8.2%. 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.
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 1.375% to 3.25%, depending on borrowing levels. The
Company's obligation for commitment fees was adjusted from a maximum of .5% to
.625% of the unused portion of the Line of Credit. Repayment of the January 1,
2000 quarterly installment was accelerated. In addition, certain affirmative and
negative covenants were added or modified, including minimum EBITDA requirements
for the fourth quarter of 1999 and the first quarter of 2000. Certain covenants
were also waived for the quarters ending September 30, 1999 and December 31,
1999.
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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 $4.5 million at September 30, 1999, of which $2.8 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 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
September 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
corporate interest expense, taxes or corporate overhead to the individual
segments. The Company evaluates performance based on profit or loss from
operations before income taxes and unallocated amounts. The totals per the
schedules below will not and should not agree to the consolidated totals. The
differences are due to corporate overhead and other unallocated amounts which
are reflected in the reconciliation to consolidated earnings before income
taxes.
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(In thousands)
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
For the three months ended September 30, 1999:
Net revenue $15,704 $ 16,679 $ 206 $ 32,589
Total operating expenses 13,898 14,707 440 29,045
------- -------- ------- --------
Segment contribution (loss) 1,806 1,972 (234) 3,544
Depreciation and amortization 134 955 -- 1,089
------- -------- ------- --------
Segment profit (loss) $ 1,672 $ 1,017 $ (234) $ 2,455
======= ======== ======= ========
Segment assets $21,098 $ 89,112 $ 2,054 $112,264
======= ======== ======= ========
Capital expenditures -- $ 300 -- $ 300
======= ======== ======= ========
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
For the three months ended September 30, 1998:
Net revenue $16,065 $ 14,973 $ 820 $ 31,858
Total operating expenses 12,937 13,232 378 26,547
------- -------- ------- --------
Segment contribution 3,128 1,741 442 5,311
Depreciation and amortization 201 1,292 -- 1,493
------- -------- ------- --------
Segment profit $ 2,927 $ 449 $ 442 $ 3,818
======= ======== ======= ========
Segment assets $27,350 $125,725 $ 2,555 $155,630
======= ======== ======= ========
Capital expenditures $ 57 $ 244 -- $ 301
======= ======== ======= ========
Reconciliation of profit:
1999 1998
--------- --------
Segment profit $ 2,455 $ 3,818
Unallocated amounts:
Corporate general and administrative 1,922 1,306
Corporate depreciation and amortization 54 45
Corporate interest expense 743 602
-------- --------
Earnings before income taxes $ (264) $ 1,865
======== ========
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(In thousands)
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
For the nine months ended September 30, 1999:
Net revenue $50,736 $ 50,980 $ 1,235 $102,951
Total operating expenses 44,146 43,897 1,219 89,262
------- -------- ------- --------
Segment contribution 6,590 7,083 16 13,589
Depreciation and amortization 415 2,810 -- 3,225
------- -------- ------- --------
Segment profit $ 6,175 $ 4,273 $ 16 $ 10,464
======= ======== ======= ========
Segment assets $21,098 $ 89,112 $ 2,054 $112,264
======= ======== ======= ========
Capital expenditures $ 146 $ 353 $ 4 $ 503
======= ======== ======= ========
Physician Cancer
IMPACT Practice Research
Services Management Services Total
-------- ---------- -------- --------
For the nine months ended September 30, 1998:
Net revenue $46,904 $ 44,010 $ 3,166 $ 94,080
Total operating expenses 37,311 37,613 1,572 76,496
------- -------- ------- --------
Segment contribution 9,593 6,397 1,594 17,584
Depreciation and amortization 593 2,916 -- 3,509
------- -------- ------- --------
Segment profit $ 9,000 $ 3,481 $ 1,594 $ 14,075
======= ======== ======= ========
Segment assets $27,350 $125,725 $ 2,555 $155,630
======= ======== ======= ========
Capital expenditures $ 126 $ 1,972 $ 9 $ 2,107
======= ======== ======= ========
Reconciliation of profit:
1999 1998
-------- --------
Segment profit $ 10,464 $ 14,075
Unallocated amounts:
Corporate general and administrative 5,579 5,667
Corporate depreciation and amortization 155 283
Corporate interest expense 2,394 1,873
-------- --------
Earnings before income taxes $ 2,336 $ 6,252
======== ========
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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.
The Company performed 194 procedures in the third quarter of 1999 as compared
with 312 in the third quarter of 1998. In response to the declining demand for
high dose chemotherapy in general, the Company closed seven of its centers in
the second quarter and four in the third quarter of 1999. The assets from the
closed centers will go into inventory and be used in other centers as needed. As
of September 30, 1999, the Company's total network included 44 IMPACT Centers
located in 23 states and the District of Columbia. The network consists of 26
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 fourth 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 currently has
no plans to terminate the service agreement with the third physician group. The
Company's physician practice management division currently includes affiliations
with 40 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 2% to $32.6 million for the quarter ended September 30,
1999, compared to $31.9 million for the quarter ended September 30, 1998. The
$2.5 million or 27% decrease in IMPACT Center revenue and $.6 million or 75%
decrease in revenue from physician investigator studies was offset by a $2.1
million or 31% 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 32%, excluding the two terminated agreements from
the quarter ended September 30, 1998.
Net revenue was $103.0 million for the nine months ended September 30, 1999,
compared to $94.1 million for the same period in 1998. IMPACT Center revenue
decreased by $5.1 million or 18% and revenue from physician investigator studies
decreased by $1.9 million or 61%. Pharmaceutical sales to physicians increased
$8.9 million or 47% while practice management service fees increased $7.0
million or 16%.
Pharmaceuticals and supplies expense increased $3.6 million, or 22% and $12.4
million or 26% for the quarter and nine months ended September 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 September 30, 1999, the Company's working capital was $21.0 million with
current assets of $51.1 million and current liabilities of $30.1 million. Cash
and cash equivalents represented $7.1 million of the Company's current assets.
Cash provided by operating activities was $9.8 million in the first nine months
of 1999 compared to $1.8 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 $.6 million and $1.7 million for the nine months ended September
30, 1999 and 1998, respectively. Cash used in financing activities was $3.2
million for the nine months ended September 30, 1999 and $1.4 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 September 30, 1999, $37.0 million aggregate
principal was outstanding under the Credit Facility with a current interest rate
of approximately 8.2%. 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.
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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 1.375% to 3.25%, depending on borrowing levels. The
Company's obligation for commitment fees was adjusted from a maximum of .5% to
.625% of the unused portion of the Line of Credit. Repayment of the January 1,
2000 quarterly installment was accelerated. In addition, certain affirmative and
negative covenants were added or modified, including minimum EBITDA requirements
for the fourth quarter of 1999 and the first quarter of 2000. Certain covenants
were also waived for the quarters ending September 30, 1999 and December 31,
1999.
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 $4.5 million at September 30, 1999, of which $2.8 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 95% 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 30, 1999, although
complications arising from unanticipated acquisitions might cause some delay.
The Company has also assessed the potential for Year 2000 problems with the
information systems of its payors and vendors. 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 $75,000 to $100,000. 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 implementation of the
Company's contingency plan. In addition, the availability and cost of
consultants and
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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 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 has established a contingency plan to address unavoidable Year 2000
risks with internal information technology systems and with customers, vendors
and other third parties.
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 Company is committed to hedge $18.0 million under
the terms of the Swap Agreement. The Swap Agreement matures July 1, 2000. The
Company does not enter into derivative or interest rate transactions for
speculative purposes.
At September 30, 1999, $37.0 million aggregate principal was outstanding under
the Credit Facility with a current interest rate of approximately 8.2%. 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(q) Employment Agreement between Registrant and Anthony M. LaMacchia
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: November 15, 1999
By: /s/ Peter A. Stark
-----------------------------------
Peter A. Stark
Controller
Date: November 15, 1999
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