-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fx9xb00hDeBJ4L6DSy+r9jnoSgxjeXlqrgMOv5k8XgcPkvYGvCRjnKkRijUIEhz/ ml6l+u9EVBap4m3Qiu7Qpw== 0000950144-98-013020.txt : 19981123 0000950144-98-013020.hdr.sgml : 19981123 ACCESSION NUMBER: 0000950144-98-013020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESPONSE ONCOLOGY INC CENTRAL INDEX KEY: 0000763098 STANDARD INDUSTRIAL CLASSIFICATION: 8093 IRS NUMBER: 621212264 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09922 FILM NUMBER: 98752851 BUSINESS ADDRESS: STREET 1: 1775 MORIAH WOODS BLVD CITY: MEMPHIS STATE: TN ZIP: 38117 BUSINESS PHONE: 9017617000 MAIL ADDRESS: STREET 1: 1775 MORIAH WOODS BLVD CITY: MEMPHIS STATE: TN ZIP: 38117 FORMER COMPANY: FORMER CONFORMED NAME: RESPONSE TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BIOTHERAPEUTICS INC DATE OF NAME CHANGE: 19891221 10-Q 1 RESPONSE ONCOLOGY 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, 1998 or --- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------- Commission file number 0-15416 ------------------- 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, 12,049,038 shares as of October 6, 1998. 2 INDEX PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Consolidated Balance Sheets, September 30, 1998 and December 31, 1997........................ 3 Consolidated Statements of Earnings for the Three Months Ended September 30, 1998 and September 30, 1997....................... 4 Consolidated Statements of Earnings for the Nine Months Ended September 30, 1998 and September 30, 1997....................... 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and September 30, 1997....................... 6 Notes to Consolidated Financial Statements............................................ 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 10 PART II. OTHER INFORMATION Item 5. Market Information and Related Stockholder Matters............. 13 Item 6. Exhibits and Reports on Form 8-K .............................. 13 Signatures ............................................................... 14
-2- 3 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
September 30, 1998 December 31, 1997 ASSETS (Unaudited) (Note 1) ---------- ----------------- CURRENT ASSETS Cash and cash equivalents $ 1,135 $ 2, 425 Accounts receivable, less allowance for doubtful accounts of $2,495 and $3,130 24,172 16,910 Supplies and pharmaceuticals 3,074 2,772 Prepaid expenses and other current assets 6,894 4,219 Due from affiliated physician groups 19,161 14,823 --------- --------- TOTAL CURRENT ASSETS 54,436 41,149 Property and equipment, less accumulated depreciation and amortization of $10,747 and $9,727 5,183 3,555 Deferred charges, less accumulated amortization of $645 and $513 289 386 Management service agreements, less accumulated amortization of $6,534 and $4,016 101,802 103,054 Deferred income taxes 2,618 2,618 Other assets 1,087 931 --------- --------- TOTAL ASSETS $ 165,415 $ 151,693 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 16,208 $ 9,751 Accrued expenses and other liabilities 6,180 4,370 Current portion of notes payable 38,602 8,537 Current portion of capital lease obligations 339 45 --------- --------- TOTAL CURRENT LIABILITIES 61,329 22,703 Capital lease obligations, less current portion 1,036 44 Notes payable, less current portion 4,766 35,399 Deferred income taxes 26,636 26,162 Minority interest 913 1,037 STOCKHOLDERS' EQUITY Series A convertible preferred stock, $1.00 par value, authorized 3,000,000 shares; issued and outstanding 26,631 and 27,233 shares, respectively, liquidating preference $11.00 per share 27 27 Common Stock, $.01 par value, authorized 30,000,000 shares; issued and outstanding 12,049,038 and 11,972,358 shares, respectively 120 120 Paid-in capital 101,913 101,402 Accumulated deficit (31,325) (35,201) --------- --------- 70,735 66,348 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 165,415 $ 151,693 ========= =========
See accompanying notes to consolidated financial statements. -3- 4 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, 1998 1997 ------- ------- NET REVENUE $ 31,858 $ 25,710 COSTS AND EXPENSES Salaries and benefits 6,291 5,541 Pharmaceuticals and supplies 16,031 12,320 Other operating costs 3,422 3,030 General and administrative 1,478 1,158 Depreciation and amortization 1,538 1,030 Interest 771 570 Provision for doubtful accounts 198 356 ------------ ------------ 29,729 24,005 ------------ ------------ EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 2,129 1,705 Minority owners' share of net earnings (264) (19) ------------ ------------ EARNINGS BEFORE INCOME TAXES 1,865 1,686 Provision for income taxes 709 641 ------------ ------------ NET EARNINGS TO COMMON STOCKHOLDERS $ 1,156 $ 1,045 ============ ============ EARNINGS PER COMMON SHARE: Basic $ 0.10 $ 0.09 ============ ============ Diluted $ 0.10 $ 0.09 ============ ============ Weighted average number of common shares: Basic 12,048,501 11,970,078 ============ ============ Diluted 12,087,248 12,228,231 ============ ============
See accompanying notes to consolidated financial statements. -4- 5 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (Dollar amounts in thousands except for share data)
Nine Months Ended ---------------------------------------- September 30, 1998 September 30, 1997 ------------------ ------------------ NET REVENUE $ 94,080 $ 75,710 COSTS AND EXPENSES: Salaries and benefits 18,363 15,711 Pharmaceuticals and supplies 47,428 36,041 Other operating costs 9,997 7,987 General and administrative 4,561 3,403 Depreciation and amortization 3,792 3,490 Interest 2,196 2,466 Provision for doubtful accounts 809 1,156 ------------ ------------ 87,146 70,254 ------------ ------------ EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 6,934 5,456 Minority owners' share of net earnings (682) (416) ------------ ------------ EARNINGS BEFORE INCOME TAXES 6,252 5,040 Provision for income taxes 2,376 1,915 ------------ ------------ NET EARNINGS TO COMMON STOCKHOLDERS $ 3,876 $ 3,125 ============ ============ EARNINGS PER COMMON SHARE: Basic $ 0.32 $ 0.28 ============ ============ Diluted $ 0.32 $ 0.27 ============ ============ Weighted average number of shares: Basic 12,036,259 11,348,925 ============ ============ Diluted 12,225,657 11,538,441 ============ ============
See accompanying notes to consolidated financial statements. -5- 6 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands)
Nine Months Ended -------------------------------------- September 30, 1998 September 30, 1997 ------------------ ------------------ OPERATING ACTIVITIES Net earnings to common stockholders $ 3,876 $ 3,125 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 3,792 3,490 Provision for doubtful accounts 809 1,156 Minority owners' share of net earnings 682 416 Changes in operating assets and liabilities net of effect of acquisitions: Accounts receivable (8,070) (2,978) Supplies and pharmaceuticals, prepaid expenses and other current assets (2,910) (1,972) Deferred charges and other assets (282) (405) Due from affiliated physician groups (4,338) (2,780) Accounts payable and accrued expenses 8,267 5,870 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,826 5,922 INVESTING ACTIVITIES Purchase of equipment (1,209) (692) Investment in joint venture -- 73 Acquisition of non-medical assets of affiliated physician groups (525) (787) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (1,734) (1,406) FINANCING ACTIVITIES Financing costs incurred -- (103) Distributions to joint venture partner (806) -- Proceeds from exercise of stock options 322 26 Proceeds from notes payable 1,000 1,271 Principal payments on notes payable (1,745) (5,567) Proceeds from note payable to parent -- 1,006 Principal payments on capital lease obligations (153) (59) ------- ------- NET CASH USED IN FINANCING ACTIVITIES (1,382) (3,426) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,290) 1,090 Cash and cash equivalents at beginning of period 2,425 415 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,135 $ 1,505 ======= =======
See accompanying notes to consolidated financial statements. -6- 7 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 and nine month periods ended September 30, 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 and nine month periods ended September 30, 1998 and 1997. Patient services revenue is recorded net of contractual allowances and discounts of $1,442,000 and $1,629,000 for the quarters ended September 30, 1998 and 1997, respectively and $4,010,000 and $4,827,000 for the nine months ended September 30, 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 Nine Months Ended September 30, September 30, -------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net patient services revenue $ 9,228 $ 8,578 $27,775 $25,803 Practice management service fees 14,974 11,496 44,010 34,023 Pharmaceutical sales to physicians 6,836 4,843 19,129 13,522 Physician investigator studies 820 793 3,166 2,362 ------- ------- ------- ------- $31,858 $25,710 $94,080 $75,710 ======= ======= ======= =======
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. -7- 8 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, 1998 and 1997. (Dollar amounts in thousands except per share data)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Weighted average shares outstanding 12,048,501 11,970,078 12,036,259 11,348,925 Net effect of dilutive stock options and Warrants based on the treasury stock method 38,747 258,153 189,398 189,516 ----------- ----------- ----------- ----------- Weighted average shares and common stock equivalents 12,087,248 12,228,231 12,225,657 11,538,441 =========== =========== =========== =========== Net earnings $ 1,156 $ 1,045 $ 3,876 $ 3,125 =========== =========== =========== =========== Diluted per share amount $ 0.10 $ 0.09 $ 0.32 $ 0.27 =========== =========== =========== ===========
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, and expires in March 1999. At September 30, 1998, $30.2 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 September 30, 1998, approximately 50% 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. -8- 9 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 $13.0 million at September 30, 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, 1999, 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, 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 capital 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. -9- 10 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 475 medical oncologists are associated with the Company through these programs. As of September 30, 1998, the Company's total network includes 53 IMPACT Centers located in 26 states and the District of Columbia. The network consists of 31 wholly owned centers, 15 managed programs, and 7 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 September 30, 1998 the practice management division included affiliations with 47 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 Net income for the third quarter 1998 increased 11% to $1,156,000 from the $1,045,000 reported for the third quarter 1997. Diluted earnings per share increased to $0.10 as compared to $0.09 reported for the third quarter 1997. For the nine months ended September 30, 1998, net income increased 24% to 3,876,000, or $0.32 per diluted share, from the $3,125,000, or $0.27 per diluted share reported for the first nine months of 1997. Earnings before income taxes for the quarter and nine months ended September 30, 1998 were $1,865,000 and $6,252,000 compared to $1,686,000 and $5,040,000 for the same periods of 1997. Net revenue for the quarter ended September 30, 1998 was $31,858,000 compared to $25,710,000 for the quarter ended September 30, 1997, an increase of $6,148,000 or 24%. Growth in net revenue for the quarter ended September 30, 1998 was driven by an increase in revenue from the practice management division, increased pharmaceutical sales to physicians and increased revenues from the IMPACT Centers. For the third quarter of 1998, practice management fees increased by 30%, from $11,496,000 in 1997 to $14,974,000 in 1998. The number of physicians in practice management relationships with the Company increased from 41 on September 30, 1997 to 47 on September 30, 1998. Pharmaceutical sales to physicians increased $1,993,000 or 41% from the third quarter of 1997 to the third quarter of 1998. Revenue from the IMPACT division increased 8% from the three month period ended September 30, 1997 to the three month period ended September 30, 1998 for an increase of $650,000. Net revenue for the nine months ended September 30, 1998 was $94,080,000 compared to $75,710,000 for the nine months ended September 30, 1997, an increase of $18,370,000 or 24%. For the nine months ended September 30, 1998, practice management fees increased by 29%, from $34,023,000 in 1997 to -10- 11 $44,010,000 in 1998. Pharmaceutical sales to physicians increased $5,607,000 or 41% from the first nine months of 1997 to the same period of 1998. While salaries and benefits expense increased $750,000 and $2,652,000 for the quarter and nine months ended September 30, 1998 over the same periods in 1997, the expense as a percentage of net revenue decreased from 22% for the three period ended September 30, 1997 and 21% for the nine month period ended September 30, 1997 to 20% for the same periods in 1998. Pharmaceuticals and supplies expense increased by $3,711,000 or 30% and $11,387,000 or 32% for the quarter and nine months ended September 30, 1998, respectively over the corresponding periods 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 $2,196,000 for the nine months ended September 30, 1998 as compared to $2,466,000 for the nine months ended September 30, 1997, a decrease of $270,000 principally due to the conversion of the note payable to Seafield to shares of the Company's common stock during the first quarter of 1997. Based on recent guidance from the Securities and Exchange Commission, the Company announced a change in the amortization period on Service Agreements acquired in practice management affiliations to 25 years from 40 years beginning July 1, 1998. The Company estimates the change, based upon current agreements, will decrease its diluted earnings per share by approximately $0.02 per quarter beginning in the third quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company's working capital was $(6.9) million with current assets of $54.4 million and current liabilities of $61.3 million. Cash and cash equivalents represented $1.1 million of the Company's current assets. Current liabilities includes the entire principal balance under the Company's Credit Facility which is due in March 1999. Management expects that upon maturity of the Credit Facility, it will be refinanced under similar terms and conditions as those currently in place. Cash provided by operating activities was $1.8 million in the first nine months of 1998 compared to cash provided by operating activities of $5.9 million for the same period in 1997. The decrease in cash provided by operating activities is largely due to a recent change in patient contracting for the IMPACT division. The Company expects that once the change is stabilized the cash flow will return to a more positive level. Cash used in investing activities was $1.7 million and $1.4 million for the nine months ended September 30, 1998 and 1997, respectively. Cash used in financing activities was $1.4 million for the first nine months of 1998 compared to $3.4 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 June 30, 1998, $30.2 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 June 30, 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 -11- 12 under the Swap Agreement accrue interest at the difference between 6.42% and the thirty-day LIBOR rate and are settled monthly. As of June 30, 1998, approximately 50% 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 promissory 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 promissory notes was $13.0 million at September 30, 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. The Company has a commitment to lease medical equipment in 1998 under 54 month capital 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 internally developed computer systems and commercially purchased software and believes that the majority of current systems used will properly utilize dates beyond December 31, 1999. The Company's principal patient accounting system is not currently capable of processing year 2000; however the vendor is expected to deliver an update to the software during the fourth quarter of 1998 to make the system operational for the year 2000. The costs to make the current patient accounting system operational are estimated to be less than $125,000. The Company has also addressed the year 2000 implications as they relate to its medical equipment used in its centers and does not anticipate that material costs will be incurred to make equipment affected by the year 2000 operational. The Company cannot control the internal year 2000 compliancy plans of its third-party payors, including The Health Care Financing Administration, the Federal agency responsible for administering the Medicare program. The Company's cash flow is largely dependent on the ability of its third-party payors to timely and effectively process claims for services as submitted. If the payment of claims by third-party payors is disrupted for any reason, including the year 2000 issue, the Company's financial position and results of operations could be materially affected. -12- 13 PART II - OTHER INFORMATION ITEM 5 MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 27 Financial Data Schedule (for SEC use only) -13- 14 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 13, 1998 By: /s/ Dena L. Mullen ----------------------------------- Dena L. Mullen Director of Finance Date: November 13, 1998 By: /s/ Peter A. Stark ----------------------------------- Peter A. Stark Controller Date: November 13, 1998 -14- EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998. 1,000 9-MOS DEC-31-1998 DEC-31-1997 SEP-30-1998 1,135 0 26,667 2,495 3,074 54,436 15,930 10,747 165,415 61,329 44,743 0 27 120 70,588 165,415 31,858 31,858 16,031 3,422 9,307 198 771 1,865 709 1,156 0 0 0 1,156 0.10 0.10 Form 10Q for the period ended September 30, 1998
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