-----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, C8yAoDmgTpeSF6OnLo7NaMpcm0+WWzlA9nD715pVAt0UeUefEARKgpPhciDstWAg CpPR3lS6Oya6fpGzCSDksQ== 0000950144-00-006724.txt : 20000516 0000950144-00-006724.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950144-00-006724 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESPONSE ONCOLOGY INC CENTRAL INDEX KEY: 0000763098 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [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: 632305 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, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value, 12,290,406 shares as of May 8, 2000. 2 INDEX PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Consolidated Balance Sheets, March 31, 2000 and December 31, 1999---------------------- 3 Consolidated Statements of Earnings for the Three Months Ended March 31, 2000 and March 31, 1999------------------------- 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and March 31, 1999------------------------- 5 Notes to Consolidated Financial Statements-------------------------------------- 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--------------------------------------------- 10 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. Other Information----------------------------------------- 16 Item 6. Exhibits and Reports on Form 8-K-------------------------- 16 Signatures---------------------------------------------------------- 17
-2- 3 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
March 31, December 31, 2000 1999 (Unaudited) (Note 1) --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,961 $ 7,195 Accounts receivable, less allowance for doubtful accounts of $2,715 and $2,632 17,407 16,007 Supplies and pharmaceuticals 3,187 3,485 Prepaid expenses and other current assets 5,043 4,778 Due from affiliated physician groups 18,111 16,884 Deferred income taxes 114 114 --------- --------- TOTAL CURRENT ASSETS 49,823 48,463 Property and equipment, net 4,042 4,222 Deferred charges, less accumulated amortization of $124 and $86 342 380 Management service agreements, less accumulated amortization of $8,968 and $8,206 65,367 66,113 Other assets 526 467 ========= ========= TOTAL ASSETS $ 120,100 $ 119,645 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 16,625 $ 15,665 Accrued expenses and other liabilities 5,503 5,440 Current portion of notes payable 4,047 3,745 Current portion of capital lease obligations 268 267 --------- --------- TOTAL CURRENT LIABILITIES 26,443 25,117 Notes payable, less current portion 34,648 35,445 Capital lease obligations, less current portion 512 580 Deferred income taxes 9,802 9,802 Minority interest 1,179 924 STOCKHOLDERS' EQUITY Series A convertible preferred stock, $1.00 par value (aggregate involuntary liquidation preference $183) authorized 3,000,000 shares; issued and outstanding 16,631 shares at each period end 17 17 Common stock, $.01 par value, authorized 30,000,000 shares; issued and outstanding 12,290,406 and 12,270,406 shares 123 123 Paid-in capital 102,011 101,979 Accumulated deficit (54,635) (54,342) --------- --------- 47,516 47,777 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 120,100 $ 119,645 ========= =========
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 ----------------------------- March 31, March 31, 2000 1999 ------------ ----------- NET REVENUE $ 35,586 $ 36,309 COSTS AND EXPENSES Salaries and benefits 5,513 6,566 Pharmaceuticals and supplies 24,165 20,487 Other operating costs 2,480 3,429 General and administrative 1,474 1,681 Depreciation and amortization 1,135 1,117 Interest 827 863 Provision for doubtful accounts 210 191 ------------ ----------- 35,804 34,334 ------------ ----------- EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (218) 1,975 Minority owners' share of net earnings 255 112 ------------ ----------- EARNINGS (LOSS) BEFORE INCOME TAXES (473) 1,863 Income tax provision (benefit) (180) 708 ------------ ----------- NET EARNINGS (LOSS) $ (293) $ 1,155 ============ =========== EARNINGS (LOSS) PER COMMON SHARE: Basic $ (0.02) $ 0.10 ============ =========== Diluted $ (0.02) $ 0.10 ============ =========== Weighted average number of common shares: Basic 12,282,139 12,049,331 ============ =========== Diluted 12,282,139 12,085,663 ============ ===========
See accompanying notes to consolidated financial statements. -4- 5 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands)
Three Months Ended ---------------------- March 31, March 31, 2000 1999 ------- ------- OPERATING ACTIVITIES Net earnings (loss) ($ 293) $ 1,155 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,135 1,117 Provision for doubtful accounts 210 191 Gain on sale of property and equipment (28) -- Minority owners' share of net earnings 255 112 Changes in operating assets and liabilities: Accounts receivable (1,610) 861 Supplies and pharmaceuticals, prepaid expenses and other current assets 33 643 Deferred charges and other assets (30) 44 Due from affiliated physician groups (1,227) (113) Accounts payable and accrued expenses 1,023 (1,531) ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (532) 2,479 INVESTING ACTIVITIES Proceeds from sale of property and equipment 33 -- Purchase of equipment (199) (250) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (166) (250) FINANCING ACTIVITIES Proceeds from exercise of stock options 32 -- Principal payments on notes payable (501) (198) Principal payments on capital lease obligations (67) (90) ------- ------- NET CASH USED IN FINANCING ACTIVITIES (536) (288) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,234) 1,941 Cash and cash equivalents at beginning of period 7,195 1,083 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,961 $ 3,024 ======= =======
See accompanying notes to consolidated financial statements. -5- 6 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 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. Operating results for the three month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 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, 1999. Net Revenue: The Company's net patient service revenue includes charges to patients, insurers, government programs and other third-party payers for medical services provided. Such amounts are recorded net of contractual adjustments and other uncollectible amounts. Contractual adjustments result from the differences between the amounts charged for services performed and the amounts allowed by government programs and other public and private insurers. The Company's revenue from practice management affiliations includes a fee equal to practice operating expenses incurred by the Company (which excludes expenses that are the obligation of the physicians, such as physician salaries and benefits) and a management fee 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 fixed or percentage fee. Clinical research revenue is recorded based on contracts with various pharmaceutical manufacturers to provide clinical data regarding the use of their products. The following table is a summary of net revenue by source for the respective three month periods ended March 31, 2000 and 1999.
(In thousands) Three Months Ended March 31, ----------------------- 2000 1999 ------- ------- Net patient services revenue $ 4,633 $ 8,149 Practice management service fees 19,993 17,589 Pharmaceutical sales to physicians 10,781 9,744 Clinical research revenue 179 827 ======= ======= $35,586 $36,309 ======= =======
Revenue is recognized when earned. Sales and related cost of sales are generally recognized upon delivery of goods or performance of services. -6- 7 Net Earnings (Loss) Per Common Share: A reconciliation of the basic earnings (loss) per share and the diluted earnings (loss) per share computation is presented below for the three month periods ended March 31, 2000 and 1999. (Dollar amounts in thousands except per share data)
Three Months Ended March 31, ------------------------------- 2000 1999 ----------- ----------- Weighted average shares outstanding 12,282,139 12,049,331 Net effect of dilutive stock options and warrants based on the treasury stock method --(1) 36,332 ----------- ----------- Weighted average shares and common stock Equivalents 12,282,139 12,085,663 =========== =========== Net earnings (loss) $ (293) $ 1,155 =========== =========== Diluted per share amount $ (0.02) $ 0.10 =========== ===========
(1) Stock options and warrants are excluded from the weighted average number of common shares due to their anti-dilutive effect. 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 Revolving Credit Facility. At March 31, 2000, $36.3 million aggregate principal was outstanding under the Credit Facility with a current interest rate of approximately 9.3%. 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 charge 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 3.25%. The Company's obligation for commitment fees was adjusted from a maximum of .5% to .625% of the unused portion of the Revolving Credit Facility. Repayment of the January 1, 2000 quarterly installment was accelerated. In addition, certain affirmative and negative covenants were added or modified, including minimum EBITDA requirements for the fourth quarter of 1999 and the first quarter of 2000. Certain covenants were also waived for the quarters ending September 30, 1999 and December 31, 1999. -7- 8 On March 30, 2000, the Company and its lenders amended various terms of the Credit Facility. As a result of this amendment, certain affirmative and negative covenants were added (including minumum quarterly cash flow requirements through March 2001), and certain other existing covenants were modified. Additionally, certain principal repayment terms were modified and certain future and current compliance with specific covenants was waived. Finally, the maturity date of the Credit Facility was accelerated to June 2001. The Company expects to have a longer-term facility in place prior to the June 2001 maturity date, but there can be no assurances that such facility will in fact be consummated. The installment notes payable to affiliated physicians and physician practices were issued as partial consideration for the practice management affiliations. Principal and interest under the long-term notes may, at the election of the holders, be paid in shares of common stock of the Company based on conversion prices ranging from $11.50 to $16.97. 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 March 31, 2000, 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 due 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 except that the Company does not allocate interest expense, taxes or corporate overhead to -8- 9 the individual segments. The Company evaluates performance based on profit or loss from operations before income taxes and unallocated amounts.
(In thousands) Physician Cancer IMPACT Practice Research Services Management Services Total -------- ---------- -------- -------- For the three months ended March 31, 2000: Net revenue $15,414 $19,993 $ 179 $ 35,586 Total operating expenses 14,639 17,514 181 32,334 ------- ------- ------- -------- Segment contribution (deficit) 775 2,479 (2) 3,252 Depreciation and amortization 93 987 -- 1,080 ======= ======= ======= ======== Segment profit (loss) $ 682 $ 1,492 ($ 2) $ 2,172 ======= ======= ======= ======== Segment assets $19,494 $87,796 $ 1,241 $108,531 ======= ======= ======= ======== Capital expenditures $ 10 $ 172 -- $ 182 ======= ======= ======= ========
Physician Cancer IMPACT Practice Research Services Management Services Total -------- ---------- -------- -------- For the three months ended March 31, 1999: Net revenue $17,893 $17,589 $ 827 $ 36,309 Total operating expenses 15,268 14,908 516 30,692 ------- ------- ------- -------- Segment contribution 2,625 2,681 311 5,617 Depreciation and amortization 146 921 -- 1,067 ======= ======= ======= ======== Segment profit $ 2,479 $ 1,760 $ 311 $ 4,550 ======= ======= ======= ======== Segment assets $24,855 $89,889 $ 2,818 $117,562 ======= ======= ======= ======== Capital expenditures $ 44 $ 179 -- $ 223 ======= ======= ======= ========
Reconciliation of profit (loss):
Three Months Ended March 31, ----------------------- 2000 1999 --------- -------- Segment profit $ 2,172 $ 4,550 Unallocated amounts: Corporate salaries, general and administrative 1,771 1,774 Corporate depreciation and amortization 55 50 Corporate interest expense 819 863 --------- -------- Earnings (loss) before income taxes ($ 473) $ 1,863 ========= ========
Reconciliation of consolidated assets:
As of March 31, ----------------------- 2000 1999 --------- -------- Segment assets $ 108,531 $117,562 Unallocated amounts: Cash and cash equivalents 5,961 3,024 Prepaid expenses and other assets 4,763 3,400 Property and equipment, net 845 898 --------- -------- Consolidated assets $ 120,100 $124,884 ========= ========
-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; 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 300 medical oncologists are associated with the Company through these programs. As of March 31, 2000, the Company's total network included 39 IMPACT Centers located in 21 states and the District of Columbia. The network consists of 22 wholly owned centers, 14 managed programs, and 3 centers owned and operated in joint venture with a host hospital. In May of 1999, the results of certain breast cancer studies were released at the meeting of the American Society of Clinical Oncology (ASCO). These studies, involving the use of high dose chemotherapy, sparked controversy among oncologists, and, in the aggregate, caused confusion among patients, third-party payers, and physicians about the role of high dose chemotherapy in the treatment of breast cancer. Since the release of these data, the Company's high dose business has slowed, as evidenced by a 48% decrease in high dose procedures in the first quarter of 2000 as compared to the first quarter of 1999. The Company closed 12 marginal IMPACT Centers in 1999 due to decreased patient volumes and 3 additional IMPACT Centers in the first quarter of 2000. The Company anticipates that maturity of existing breast cancer data along with the release of new data will clarify the role of high dose therapies for breast cancer. On May 20-23, at the 2000 ASCO annual meeting, additional data on this topic will be presented by affiliates of the Company and other researchers. If the results of these data are negative, conflicting, or inconclusive, it could result in a further decrease in high dose referrals and procedures and adversely affect the financial results of this line of business. In response to this uncertainty, the Company is evaluating new diseases that could potentially be managed through the IMPACT Center network. However, there can be no assurance that other diseases can be identified, implemented, and effectively managed through the existing network. During the first quarter of 2000, the Company decided to expand into the specialty pharmaceutical business and began to put in place certain of the resources necessary for this expansion. In this move, the Company intends to leverage its expertise and resources in the delivery of complex pharmaceuticals to cancer patients into the delivery of specialty drugs to patients with a wide range of chronic, costly and complex diseases. Specifically, this will include the distribution of new drugs with special handling requirements, and is expected to involve the use of the Company's regional network of specialized pharmaceutical centers. In addition, the Company intends to use its national network of IMPACT Centers and its highly trained healthcare professionals to administer the most fragile compounds to the expanded patient population. The Company has hired an expert consultant to assist in the development of the business plan and is in the process of recruiting a chief medical officer and director of managed care. The Company has also engaged in initial discussions with potential strategic partners. The soft launch of the specialty pharmaceutical business is expected to occur by the end of third quarter 2000. -10- 11 In its practice management relationships, the Company has predominantly used two models of Service Agreements: (i) an "adjusted net revenue" model; and (ii) a "net operating income" model. Service Agreements utilizing the adjusted net revenue model provide for payments out of practice net revenue, in the following order: (A) physician retainage (i.e. physician compensation, benefits, and perquisites, including malpractice insurance) equal to a defined percentage of net revenue ("Physician Expense"); (B) a clinic expense portion of the management fee (the "Clinic Expense Portion") equal to the aggregate actual practice operating expenses exclusive of Physician Expense; and (C) a base service fee portion (the "Base Fee") equal to a defined percentage of net revenue. In the event that practice net revenue is insufficient to pay all of the foregoing in full, then the Base Fee is first reduced, followed by the Clinic Expense Portion of the management fee, and finally, Physician Expense, therefore effectively shifting all operating risk to the Company. In each Service Agreement utilizing the adjusted net revenue model, the Company is entitled to a Performance Fee equal to a percentage of Annual Surplus, defined as the excess of practice revenue over the sum of Physician Expense, the Clinic Expense Portion, and the Base Fee. Service Agreements utilizing the net operating income model provide for a management fee equal to the sum of a Clinic Expense Portion (see preceding paragraph) plus a percentage (the "Percentage Portion") of the net operating income of the practice (defined as net revenue minus practice operating expenses). Practice operating expenses do not include Physician Expense. In those practice management relationships utilizing the net operating income model Service Agreement, the Company and the physician group share the risk of expense increases and revenue declines, but likewise share the benefits of expense savings, economies of scale and practice enhancements. Each Service Agreement contains a liquidated damages provision binding the physician practice and the principals thereof in the event the Service Agreement is terminated "for cause" by the Company. The liquidated damages are a declining amount, equal in the first year to the purchase price paid by the Company for practice assets and declining over a specified term. Principals are relieved of their individual obligations for liquidated damages only in the event of death, disability, or retirement at a predetermined age. Each Service Agreement provides for the creation of an oversight committee, a majority of whom are designated by the practice. The oversight committee is responsible for developing management and administrative policies for the overall operation of each clinic. However, under each Service Agreement, the affiliated practice remains obligated to repurchase practice assets, typically including intangible assets, in the event the Company terminates the Service Agreement for cause. In February 1999 and April 1999, respectively, the Company announced that it had terminated its Service Agreements with Knoxville Hematology Oncology Associates, PLLC, and Southeast Florida Hematology Oncology Group, P.A., two of the Company's three underperforming net revenue model relationships. Since these were not "for cause" terminations initiated by the Company, the affiliated practices were not responsible for liquidated damages. In 1998 the Company recorded an impairment charge related to the three Service Agreements in accordance with Financial Accounting Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" ("SFAS No. 121"). The structure of these contracts has failed over time to align the physician and Company incentives, producing deteriorating returns and/or negative cash flows to the Company. The Company currently has no plans to terminate the Service Agreement with the third physician group. In the fourth quarter of 1999, the Company terminated its Service Agreement with one single-physician practice in Florida. This termination was initiated on a "for cause" basis and the Company is seeking recovery of liquidated damages. During the same period, the Company began negotiations to terminate another Service Agreement with a single-physician practice. Since this is not a "for cause" termination initiated by the Company, the affiliated practice is not responsible for liquidated damages. The Company experienced deteriorating returns on this particular Service Agreement and concluded that continuing the relationship was not economically feasible. At December 31, 1999, the Company recorded a loss contingency related to the -11- 12 Service Agreements and associated assets in accordance with Financial Accounting Standards Board Statement No. 5 "Accounting for Contingencies". The Company anticipates that the second Service Agreement will be terminated in the second quarter of 2000. RESULTS OF OPERATIONS Net revenue decreased 2% to $35.6 million for the quarter ended March 31, 2000, compared to $36.3 million for the quarter ended March 31, 1999. Practice management service fees were $20.0 million for the first quarter of 2000 compared to $17.6 million for the same period in 1999 for a 14% increase. This increase is due to growth in utilization of both ancillary and non-ancillary services, and occurred despite a 13% decrease in the number of physicians under management agreements between the periods. On a same-physician basis, practice management service fees increased 28%. Pharmaceutical sales to physicians increased $1.1 million or 11% from $9.7 million for the first three months of 1999 to $10.8 million in 2000. Additionally, net patient service revenues from IMPACT services decreased $3.5 million, or 43%, from $8.1 million in the first quarter of 1999 to $4.6 million in the first quarter of 2000. This decrease in high dose chemotherapy revenues continues to reflect the confusion and related pullback in breast cancer related admissions resulting from the high dose chemotherapy/breast cancer study results presented at ASCO in May 1999. EBITDA (earnings before interest, taxes, depreciation and amortization) decreased $2.3 million, or 61%, to $1.5 million for the quarter ended March 31, 2000 in comparison to $3.8 million for the quarter ended March 31, 1999. The reduction is principally due to the decrease in IMPACT Center and cancer research volumes as compared to the first quarter of 1999. EBITDA from the physician practice management division decreased $.2 million primarily due to increases in pharmaceutical and supply costs, increases in contractual adjustments, and the termination and modification of certain Service Agreements. Salaries and benefits costs decreased $1.1 million, or 17%, from $6.6 million for the first quarter of 1999 to $5.5 million in 2000. The decrease is primarily due to the termination of certain Service Agreements, the modification of a Service Agreement which resulted in a change in the manner in which physician compensation is recorded, the closing of various IMPACT Centers and a reduction in corporate staffing. Supplies and pharmaceuticals expense increased $3.7 million, or 18%, from 1999 to 2000. The increase is primarily related to increased volume in pharmaceutical sales to physicians and greater utilization of new chemotherapy agents with higher costs in the practice management division. Supplies and pharmaceuticals expense as a percentage of net revenue was 68% and 56% for the quarters ended March 31, 2000 and 1999, respectively. The increase as a percentage of net revenue is due to the lower margin associated with the increased pharmaceutical sales to physicians as well as general price increases in pharmaceuticals used in the practice management division. General and administrative expenses decreased $.2 million, or 13%, from $1.7 million in the first quarter of 1999 to $1.5 million in the first quarter of 2000. The decrease is primarily due to the closure of various IMPACT Centers and the termination of certain Service Agreements. Other operating expenses decreased $.9 million, or 26%, from $3.4 million in 1999 to $2.5 million in 2000. Other operating expenses consist primarily of medical director fees, purchased services related to global case rate contracts, rent expense, and other operational costs. The decrease is primarily due to the closure of various IMPACT Centers and lower purchased services and physician fees as a result of lower IMPACT and cancer research volumes as compared to the first quarter of 1999. -12- 13 LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company's working capital was $23.4 million with current assets of $49.8 million and current liabilities of $26.4 million. Cash and cash equivalents represented $6.0 million of the Company's current assets. Cash used in operating activities was $.5 million in the first quarter of 2000 compared to cash provided by operating activities of $2.5 million for the same period in 1999. This decrease is largely attributable to growth in IMPACT accounts receivable and amounts due from affiliated physician groups resulting from growth in pharmaceutical sales to physicians and practice management service fees, coupled with a moderate slowdown in IMPACT collections. Cash used in investing activities was $.2 million and $.3 million for the quarters ended March 31, 2000 and 1999, respectively. The decrease is primarily attributable to a reduction in capital expenditures in the first quarter of 2000 as compared to the first quarter of 1999. Cash used in financing activities was $.5 million for the first quarter of 2000 and $.3 million for the same period in 1999. The increase in cash used in financing activities is primarily attributable to additional payments on notes payable in the first quarter of 2000 as compared to the first quarter of 1999. 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 Revolving Credit Facility. At March 31, 2000, $36.3 million aggregate principal was outstanding under the Credit Facility with a current interest rate of approximately 9.3%. 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 charge 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 3.25%. The Company's obligation for commitment fees was adjusted from a maximum of .5% to .625% of the unused portion of the Revolving Credit Facility. Repayment of the January 1, 2000 quarterly installment was accelerated. In addition, certain affirmative and negative covenants were added or modified, including minimum EBITDA requirements for the fourth quarter of 1999 and the first quarter of 2000. Certain covenants were also waived for the quarters ending September 30, 1999 and December 31, 1999. On March 30, 2000, the Company and its lenders amended various terms of the Credit Facility. As a result of this amendment, certain affirmative and negative covenants were added (including minumum quarterly cash flow requirements through March 2001), and certain other existing covenants were modified. Additionally, certain principal repayment terms were modified and certain future and current compliance with specific -13- 14 covenants was waived. Finally, the maturity date of the Credit Facility was accelerated to June 2001. The Company expects to have a longer-term facility in place prior to the June 2001 maturity date, but there can be no assurances that such facility will in fact be consummated. Furthermore, in light of the uncertainty surrounding the clinical data relative to the treatment of breast cancer with high dose chemotherapy, there can be no assurance that the Company will remain in compliance with the terms of the Credit Facility, as amended. In such event, the Company would be required to obtain waivers relative to the covenant violations or renegotiate certain terms of the Credit Facility. Long-term unsecured amortizing promissory notes bearing interest at rates from 4% to 9% were issued as partial consideration for the practice management affiliations consummated in 1996. Principal and interest under the long-term notes may, at the election of the holders, be paid in shares of common stock of the Company based upon conversion rates ranging from $11.50 to $16.97. The unpaid principal amount of the long-term notes was $2.4 million at March 31, 2000. HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 The federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), required that standards be developed for the privacy and protection of individually identifiable health information. As directed by HIPAA, the federal government recently proposed detailed regulations to protect individual health information that is maintained or transmitted electronically from improper access, alteration or loss. Final regulations are expected sometime this year. The Company expects that health care organizations will be required to comply with the new standards 24 months after the date of adoption. The Company expects to begin to address HIPAA issues during fiscal year 2000. Because the HIPAA regulations have not been finalized, the Company has not been able to determine the impact of the new standards on its financial position or results. The Company does expect to incur costs to evaluate and implement the rules, and will be actively evaluating such costs and their impact on financial position and operations. 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. The Company developed a Year 2000 Plan to address all of its Year 2000 issues. The Company's primary focus was 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 not experienced any significant disruptions to its financial or operating systems caused by failure of computerized systems resulting from Year 2000 issues. Furthermore, the Company does not expect Year 2000 issues to have a material adverse effect on the Company's operations or financial results in 2000. Although the Company has no information that indicates any significant Year 2000 issues, management recognizes and is attentive to future financial and operational risk associated with Year 2000 computer system failures. The actual costs incurred by the Company relative to the Year 2000 issue were approximately $125,000, which were in-line with Company estimates. The Company does not expect to incur any additional costs related to the Year 2000 issue. FORWARD-LOOKING STATEMENTS With the exception of historical information, the matters discussed in this filing are forward-looking statements that involve a number of risks and uncertainties. The actual future results of the Company could differ -14- 15 significantly from those statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: (i) a continued decline in high dose chemotherapy referrals due to the high dose chemotherapy breast cancer results; (ii) difficulty in transitioning operating responsibilities to new members of senior management; (iii) continued decline in margins for cancer drugs; (iv) reductions in third-party reimbursement from managed care plans and private insurance resulting from stricter utilization and reimbursement standards; (v) the inability of the Company to recover all or a portion of the carrying amounts of the cost of service agreements, resulting in an additional charge to earnings; (vi) the Company's dependence upon its affiliations with physician practices, given that there can be no assurance that the practices will remain successful or that key members of a particular practice will remain actively employed; (vii) changes in government regulations; (viii) risk of professional malpractice and other similar claims inherent in the provision of medical services; (ix) the Company's dependence on the ability and experience of its executive officers; (x) the Company's inability to raise additional capital or refinance existing debt; and (xi) potential volatility in the market price of the Company's common stock. The Company cautions that any forward-looking statement reflects only the beliefs of the Company or its management at the time the statement is made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement was made. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 borrowing costs by selecting favorable interest periods for traunches of the Credit Facility 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") with an affiliate of one of the Company's lenders 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. As of March 31, 2000, approximately 50% of the Company's outstanding principal balance under the Credit Facility was hedged under the Swap Agreement. The Swap Agreement matures in July 2000. The Company does not enter into derivative or interest rate transactions for speculative purposes. At March 31, 2000, $36.3 million aggregate principal was outstanding under the Credit Facility with a current interest rate of approximately 9.3%. The Company does not have any other material market-sensitive financial instruments. -15- 16 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. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10(s) Second Amendment to Credit Agreement dated March 30, 2000, between Registrant, AmSouth Bank, Union Planters Bank, N.A. and Bank of America, N.A. 27 Financial Data Schedule (for SEC use only) -16- 17 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/ Peter A. Stark ---------------------------------------- Peter A. Stark Vice President, Finance and Principal Accounting Officer Date: May 15, 2000 By: /s/ Anthony M. LaMacchia ---------------------------------------- Anthony M. LaMacchia President and Chief Executive Officer Date: May 15, 2000 -17- EX-10.S 2 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10(s) SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT dated as of March 30, 2000 ("this Amendment") is entered into by RESPONSE ONCOLOGY, INC., a Tennessee corporation ("Response"), RESPONSE ONCOLOGY MANAGEMENT OF SOUTH FLORIDA, INC., a Tennessee corporation ("Management"), RESPONSE ONCOLOGY OF TAMARAC, INC., a Florida corporation ("Tamarac") and RESPONSE ONCOLOGY OF FORT LAUDERDALE, INC., a Florida corporation ("Fort Lauderdale"; Response, Management, Tamarac and Fort Lauderdale are sometimes together referred to as the "Borrowers"), AMSOUTH BANK, an Alabama banking corporation ("AmSouth"), UNION PLANTERS BANK, NATIONAL ASSOCIATION, a national banking association ("UP"), and BANK OF AMERICA, N.A., a national banking association and formerly known as NationsBank, N.A. (collectively, the "Lenders"), and AMSOUTH BANK, an Alabama banking corporation, as agent for the Lenders (the "Agent"). RECITALS A. The Borrowers, the Agent and the Lenders are parties to that certain Credit Agreement dated as of June 10, 1999 as amended by a First Amendment thereto dated as of September 30, 1999 (as amended, the "Agreement") pursuant to which the Lenders have made available to the Borrowers (i) a revolving credit facility in an aggregate principal amount outstanding not to exceed $7,000,000, which has been reduced to $6,000,000, and (ii) a term loan facility in the principal amount of $35,000,000. B. The Borrowers have applied to the Lenders for modifications to certain provisions of the Agreement. C. The Lenders are willing to make such modification as requested only if, among other things, the Borrowers enter into this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the foregoing Recitals, the Borrowers, the Lenders and the Agent hereby agree as follows: 1. Capitalized terms used in this Amendment and not otherwise defined herein have the respective meanings attributed thereto in the Agreement. 2 2. The following definition is hereby added to Section 1.1 of the Agreement and shall read as follows: "EQUITY ISSUANCE" means (i) the issuance, sale or other disposition by any Borrower or any of their Subsidiaries of their capital stock, any rights, warrants or options to purchase or acquire any shares of their capital stock, or any other security or instrument representing, convertible into or exchangeable for an equity interest in the Borrowers or any of their Subsidiaries, and (ii) the receipt by the Borrowers or any of their Subsidiaries of any capital contribution (whether or not evidenced by any security or instrument). 3. The following definition is hereby added to Section 1.1 of the Agreement: "EXCESS CASH FLOW" for any fiscal quarter means Consolidated EBITDA for such fiscal quarter less the sum of (i) Capital Expenditures that are not financed with Purchase Money Debt, (ii) cash tax obligations, (iii) CMLTD, (iv) Interest Expense and (v) any increase in net Working Capital for such fiscal quarter (any decreases in Working Capital shall be subtracted). 4. The defined term of "EBITDA" set forth in Section 1.1 of the Agreement is hereby amended to read, in its entirety, as follows: "EBITDA" means the sum of net income before extraordinary items plus Interest Expense and expenses for taxes, depreciation and amortization, determined according to GAAP, with no adjustments for extraordinary gains or losses. With respect to a Practice disposed of by any Borrower during a fiscal quarter, retroactive effect will be given for such dispositions of Practices by such Borrower by excluding all cash flows for such Practices that are disposed of in determining EBITDA at any time after the date of disposition, in each case calculated as if the Practice had been disposed effective as of the beginning of the relevant fiscal quarter. 5. The defined term of "FIXED CHARGE COVERAGE RATIO" set forth in Section 1.1 of the Agreement is hereby amended to read, in its entirety, as follows: "FIXED CHARGE COVERAGE RATIO" means for any fiscal quarter (i) Consolidated EBITDA for such quarter divided by (ii) the sum of Interest Expense paid in cash during such quarter plus CMLTD paid in cash (excluding Subordinated Debt). With respect to a Practice disposed of by any Borrower during a fiscal quarter, retroactive effect will be given for such dispositions of Practices by such Borrower by excluding from the denominator of that calculation all Interest Expense paid in cash and CMLTD paid in cash with respect to the Practice(s) disposed of, in each case calculated as if the Practice had been disposed effective as of the beginning of the relevant fiscal quarter. 2 3 6. The defined term "MATURITY DATE" set forth in Section 1.1 of the Agreement is hereby amended to read, in its entirety, as follows: "MATURITY DATE" means June 30, 2001. 7. The defined term "PERMITTED ACQUISITION" set forth in Section 1.1 of the Agreement is hereby amended by deleting the following proviso from subclause (c) thereof: ;provided, however, an acquisition by Response of a Practice employing two physicians or less where proceeds of such Acquisition are $2,000,000 or less, will not require approval of the Agent or the Lenders. 8. The following definitions are hereby added to Section 1.1 of the Agreement and shall read as follows: "CURRENT ASSETS" means assets that, in accordance with GAAP, are current assets. "CURRENT LIABILITIES" means, as of the date of determination, all Liabilities maturing on demand or within one year from, and that are not renewable at the option of the obligor to a date later than one year after, the date as of which such determination is made and all other items (including taxes accrued as estimated) that, in accordance with GAAP, would be included as current liabilities. "PERMITTED BUSINESS" means a business activity, all aspects of which require the initial approval of the Lenders, including, but not limited to, creation, financing, funding, management personnel and execution. As to all such aspects, the Lenders must determine in their reasonable opinion and in their reasonable discretion, that such business activity will not now, or in the future, adversely affect the current and future cash flow of the Borrowers or otherwise adversely affect the Borrowers' finances or business. The determination of whether or not a particular proposed business activity will be approved by the Lenders as a Permitted Business shall be made under the following procedures and conditions: (a) Response shall deliver to Agent, prior to each initial Equity Issuance or other method of raising funds for each proposed business activity and prior to the Borrowers engaging in such activity, a written description of the proposed business activity and a request that the Lenders determine the such proposed activity constitutes a Permitted Business. Response shall include with such request, unaudited pro forma financial statements demonstrating the effect of the proposed business activity upon the Borrowers' cash flows, operations and financial status, all in such detail as the Agent shall request and shall provide the Agent with any other information requested by the Agent on behalf of the Lenders. 3 4 (b) Agent and the Lenders shall review such information and shall make a determination, in their reasonable discretion, of whether or not such proposed business activity constitutes a Permitted Business. The Agent shall notify Response (within fifteen (15) Business Days after receipt of the request described in (a) immediately-above) of either: (i) the Required Lenders' determination of whether the proposed business activity is a Permitted Business or not or (ii) their request for additional information. If the Agent requests additional information, the Agent shall notify Response within fifteen (15) Business Days after receipt of the additional information of the Lenders' determination of whether the proposed business activity is a Permitted Business or not. The failure of the Agent to notify Response of any of the foregoing within the stated fifteen (15) Business Days, shall be deemed to be a determination by the Lenders that the proposed business activity is NOT a Permitted Business. (c) Borrowers shall not engage in any initial Equity Issuance intended to be used to fund such business activity or engage in any such activity until Agent shall have issued its written determination that such proposed activity is a Permitted Business. (d) Any Permitted Business that is created as a separate legal entity from the Borrowers shall become a Participating Entity pursuant to the requirements of Section 3.3. The Lenders agree that in connection with arriving at their opinions and determinations through the exercise of their discretion pursuant to the foregoing provisions, the Lenders will not exercise such discretion in an unreasonable manner. If the Lenders determine that a proposed business activity is not a Permitted Business in their opinion and the Borrowers dispute whether the Lenders were reasonable in making such determination, the Borrowers' sole remedy shall be to request that the reasonableness of such determination by the Lenders be reviewed by an outside entity chosen as described below and the Borrowers hereby waive and disclaim any and all rights that they may have to seek redress in a court of law or equity for monetary damages or other relief in connection with the Lenders' determination that a proposed business is or is not a Permitted Business. Instead, the Borrowers agree that their sole legal and equitable remedy shall be to seek an injunction (subject to the provisions of Sections 10.24, 10.24.1 and 10.24.2) against the Lenders and Agent if the Lenders and Agent refuse to abide by the determination of a United States accounting firm made in compliance with the following procedures: (i) the Borrowers shall notify the Agent in writing within two (2) Business Days after receipt of the Lenders' determination (or the Lenders' deemed determination) that the Borrowers dispute the reasonableness of such determination and shall propose a United States accounting firm of national standing to review the decision; (ii) the Lenders shall either accept the firm proposed by the Borrowers or shall propose 4 5 an alternative United States accounting firm of national standing to review the decision within five (5) Business Days; (iii) if the Lenders propose an alternative United States accounting firm of national standing to review the decision, the Borrowers shall advise the Agent within (2) Business Days that it either accepts the Lenders' proposed firm or not; (iv) if the Borrowers do not accept the Lenders' proposed firm, then the two named accounting firms shall together, within five (5) Business Days select a third United States accounting firm of national standing and such firm shall be the firm that shall determine whether or not the determination made by the Lenders was reasonable or not. Once selected the accounting firm shall render an opinion within twenty (20) Business Days. The determination by the chosen accounting firm shall be final and binding upon the parties. The fees, costs and expenses associated with the employment of any and all of the accounting firms pursuant to the provisions hereof shall be borne by the Borrowers. "WORKING CAPITAL" means (A) the aggregate amount of all Current Assets, less (B) the aggregate amount of all Current Liabilities. 9. The definitions of "APPLICABLE COMMITMENT FEE," "APPLICABLE LIBO RATE MARGIN," and "APPLICABLE PRIME RATE MARGIN" shall be further amended to read, in their entirety, as follows: "APPLICABLE COMMITMENT FEE," "APPLICABLE LIBO RATE MARGIN," and "APPLICABLE PRIME RATE MARGIN" mean, with respect to any Loan and the commitment fee respecting the Revolving Credit Loan, during any Effective Period, the percentage rates per annum set forth opposite the appropriate test in the pricing grid below (ratio values shall be rounded to the nearest one-hundredth, with any value of .005 rounded upward):
Total Funded Debt to Prime Rate LIBOR Consolidated EBITDA Margin Margin Commitment Fee Tier 1 - Less than or equal to 2.00 0% 1.375% .25% Tier 2 - Greater than or equal to .25% 1.75% .375% 2.01 and less than or equal to 2.50 Tier 3 - Greater than or equal to .625% 2.125% .375% 2.51 and less than or equal to 3.0 Tier 4 - Greater than 3.01 1.00% 3.25% .625%
The Total Funded Debt to Consolidated EBITDA ratio shall be established by Agent on the basis of the consolidated quarterly financial statements of and schedules prepared by 5 6 Response delivered to Agent pursuant to this Agreement and shall be calculated as set forth in Section 7.3 hereof. The Borrowers must maintain a Total Funded Debt to Consolidated EBITDA ratio for two consecutive fiscal quarters at a Tier level other than Tier 4 in order for the Pricing Values to be maintained at a Tier level below Tier 4. If the Borrowers have complied with the foregoing, then as long as the Borrowers have not returned to the Tier 4 level for the ratio of Total Funded Debt to Consolidated EBITDA, then the Tier level for the Pricing Values shall be determined on the basis of each fiscal quarter. Notwithstanding the foregoing, at the end of any Effective Period, and during any period of time for which Pricing Values may be set by Agent pursuant to Section 8.1.5 hereof, the Pricing Values with respect to the Loans shall automatically become the highest values provided for in the applicable pricing grid set forth above. From March 31, 2000 until the date the Borrowers achieve the Pricing Values for Tier 1 or Tier 2 or Tier 3 for two consecutive fiscal quarters, the Pricing Values shall be Tier 4. 10. The repayment grid set forth in Section 2.10 of the Agreement is hereby further amended to read, in its entirety, as follows:
Date Payment ---- ------- April 1, 2000 $ 250,000 May 1, 2000 250,000 June 1, 2000 250,000 July 1, 2000 250,000 August 1, 2000 250,000 September 1, 2000 250,000 October 1, 2000 250,000 November 1, 2000 250,000 December 1, 2000 250,000 January 1, 2001 250,000 February 1, 2001 250,000 March 1, 2001 250,000 April 1, 2001 1,500,000 June 30, 2001 Balance Due in Full
11. The following paragraphs are hereby added to the end of Section 2.10 of the Agreement and shall read as follows: In the event the Borrowers have Excess Cash Flow in any fiscal quarter (beginning with the fiscal quarter ending June 30, 2000), the Borrowers on or before the 30th day after the end of each fiscal quarter must make a mandatory prepayment of the Loans by an amount equal to seventy-five percent (75%) of said Excess Cash Flow up to a ceiling of $750,000. All of such prepayment shall be applied to the Term Loans. 6 7 Promptly upon (and in any event not later than two (2) Business Days after) their receipt thereof of Net Proceeds from any Equity Issuance, the Borrowers will make a prepayment on the Loans to be applied, first, to prepay the outstanding principal amount of the Term Loans, second, upon payment in full of the Term Loans, to prepay the outstanding principal amount of the Swing Line Loans, and third, after payment in full of the Swing Line Loans, to prepay the outstanding principal amount of the Revolving Credit Loans (to be applied as more particularly set forth above in this Section 2.10). The Borrowers shall prepay the Loans in an amount equal to a percentage of the Net Proceeds, which percentage shall be based on the percentage set forth opposite the appropriate test in the grid below:
Percentage Prepaid Total Funded Debt of Net Proceeds to Consolidated EBITDA from any Equity Issuance ---------------------- ------------------------ Tier 1 - Less than or equal to 1.0 50% Tier 2 - Greater than or equal to 1.01 75% and less than or equal to 1.5 Tier 3 - Greater than 1.51 100%
If the Borrowers achieve the ratio described in either Tier 1 or Tier 2 above and retain a portion of Net Proceeds from any Equity Issuance due to having obtained such ratios, the applicable ratio achieved will automatically be the test for all future fiscal quarters for the financial covenant set forth in Section 7.2 of this Agreement. The Borrowers shall deliver to the Agent, concurrently with such prepayment, a certificate signed by its chief financial officer in form and substance satisfactory to the Agent setting forth the calculation of such Net Proceeds. Notwithstanding the foregoing, the Borrowers shall retain all Net Proceeds from any Equity Issuance if (i) the Net Proceeds arise from an Equity Issuance made for the purpose of funding a Permitted Business or (ii) the Net Proceeds do not exceed $200,000 and arise from an Equity Issuance solely for the purpose of a mandatory redemption of the preferred stock of Response. Promptly upon (and in any event not later than two (2) Business Days after) their receipt thereof, the Borrowers will make a prepayment on the Loans to be applied, first, to prepay the outstanding principal amount of the Term Loans, second, upon payment in full of the Term Loans, to prepay the outstanding principal amount of the Swing Line Loans, and third, after payment in full of the Swing Line Loans, to prepay the outstanding principal amount of the Revolving Credit Loans (to be applied as more particularly set forth above in this Section 2.10) in an amount equal to 100% of all proceeds (including 7 8 cash, stock or other consideration) generated from (i) the termination or renegotiation of Service Agreements and (ii) settlements or judgments involving litigation in which the Borrowers, or any of them, are a party. 12. The Lenders and the Agent agree to waive (a) compliance by the Borrowers with the financial covenant set forth in Section 7.3 for the fiscal quarters ending March 31, 2000 and June 30, 2000, (b) compliance by the Borrowers with the financial covenants set forth in Sections 7.2 and 7.4 for the fiscal quarters ending March 31, 2000, June 30, 2000, September 30, 2000, December 31, 2000 and March 31, 2001 and (c) any and all Defaults, Events of Default and remedies the Lenders and Agent may have that arise from Borrowers' failure to comply with the above-referenced financial covenants. In addition, the Lenders and the Agent agree to extend the time for delivery to the Agent and the Lenders of (a) the monthly financial reports required by Section 5.3.1 for January 2000 and February 2000 and (b) the annual year end financial reports required by Section 5.3.3, until (i) the date of execution of this Amendment by the Borrowers in the case of the annual year end financial reports and the January 2000 monthly financial report and (ii) five (5) days after the date of execution of this Amendment in the case of the February 2000 monthly financial report; and to waive the Defaults, Events of Default and remedies the Lenders and Agent may have that arise from Borrowers' prior failure to comply with the requirements of Section 5.3.1 and 5.3.3, if the Borrowers' deliver such reports by the dates set forth above. 13. Section 6.9 of the Agreement is hereby amended to read, in its entirety, as follows: 6.9 Nature of Business. No Consolidated Entity shall suffer or permit any material changes to be made in the character of its business as carried on at the Closing Date, except for the accomplishment of Permitted Acquisitions and the development of Permitted Businesses. 14. Section 7.7 of the Agreement is hereby amended to read, in its entirety, as follows: 7.7 Minimum EBITDA. EBITDA for the Borrowers during the periods referenced below shall not be less than the following: 8 9
Month Ended Minimum EBITDA Month Ended Minimum EBITDA ----------- -------------- ----------- -------------- March 2000 $485,000 October 2000 $600,000 November 2000 640,000 December 2000 535,000 Quarter Ending Minimum EBITDA Quarter Ending Minimum EBITDA -------------- -------------- -------------- -------------- March 31, 2000 $1,400,000 December 31, 2000 $2,002,000 Month Ended Minimum EBITDA Month Ended Minimum EBITDA ----------- -------------- ----------- -------------- April 2000 $560,000 January 2001 $525,000 May 2000 325,000 February 2001 520,000 June 2000 510,000 March 2001 670,000 Quarter Ending Minimum EBITDA Quarter Ending Minimum EBITDA -------------- -------------- -------------- -------------- June 30, 2000 $1,550,000 March 31, 2001 $1,930,000 Month Ended Minimum EBITDA ----------- -------------- July 2000 $375,000 August 2000 570,000 September 2000 400,000 Quarter Ending Minimum EBITDA -------------- -------------- September 30, 2000 $1,515,000
Provided, however, any excess EBITDA of the minimum set forth for the respective months set forth above, may be forwarded to the next succeeding month for any fiscal quarter so long as EBITDA for the three months for the respective quarter ending set forth above exceeds the minimum EBITDA for such quarter described above. 15. Exhibit A and Schedule 6.1.7 to the Agreement are hereby revised as set forth in the attached Revised Exhibit A and Revised Schedule 6.1.7. 16. The Lenders and the Agent have consented to and do hereby consent that (i) in determining EBITDA for any purpose during the fiscal quarters ending December 31, 1999, net income for the Borrowers shall be computed without (x) the one-time charge against earnings in the amount of $265,000 in connection with certain severance payments made to former executives, (y) a loss on impairment charge associated with the Practices of Keys Hemoncology Associates and Lawrence A. Snetman, M.D., P.A., in the amount of $1,840,270 and (z) certain adjustments to accounts receivable from Impact Centers up to $1,400,000 and (ii) in calculating the covenant 9 10 set forth in Section 7.3 of the Agreement, Borrowers shall not be permitted to recognize income previously adjusted and collection of accounts receivable previously written off. 17. Upon the date the Borrowers are in full compliance with the terms of Section 2.10 and Article 7 of the Agreement in effect on the Closing Date as evidenced by a certificate signed by the chief financial officer of Response, on behalf of the Borrowers, in form and substance satisfactory to Agent and setting forth the calculations of Article 7 (the "Triggering Event"), the Borrowers shall pay to the Lenders or their Affiliates Pro Rata (determined as of the date of the Triggering Event) the following fee as consideration for the execution of this Amendment:
Date of Triggering Event Fee ------------------------ --- Before September 30, 2000 $50,000 After September 30, 2000 but on or before $50,000 and $50,000 worth of March 30, 2001 Response stock(1) After March 30, 2001 $100,000 and $100,000 worth of Response stock(1)
Provided, however, if the Borrowers have (A) reduced the amount of the outstanding principal under the Term Loans as of the date hereof by an amount equal to or greater than $10,000,000, but less than $20,000,000, as of the Triggering Event, without a significant reduction in the Borrowers EBITDA or tangible assets, then the foregoing fees due the Lenders shall be reduced by fifty percent (50%) (e.g., if the Borrowers had complied with the foregoing on October 1, 2000, the fee would be $25,000 and $25,000 worth of Response stock1) or (B) reduced the amount of the outstanding principal under the Term Loans as of the date hereof by an amount equal to or greater than $20,000,000, as of the Triggering Event, without a significant reduction in the Borrowers EBITDA or tangible assets, then the foregoing fees due the Lenders shall be waived. 18. The following Sections 5.28 and 5.29 are added to the Agreement and shall read as follows: 5.28 Cash Deposits. Not later than April 30, 2000, all cash of the Borrowers (excluding deposits in transit) shall be consolidated no less frequently than once a week in an account or accounts maintained with one or more Lenders. 5.29 Audits. Not later than June 30, 2000, the Borrowers shall permit the Lenders or their representatives, at the Borrowers' expense (not to exceed $10,000), to conduct an audit of the accounts receivable of the Borrowers. The Agent shall provide - -------- (1) The number of shares of Response's stock to be issued to the Lenders is based upon the average closing price of Response's stock during the 10 days preceding the Triggering Date. 10 11 Response with a written list of three accounting firms that are acceptable to the Lenders and their quoted fee for the audit. Response shall select one of the accounting firms from such list within three (3) Business Days. 19. The Lenders and the Agent hereby agree that if the Borrowers deliver to the Agent prior to June 28, 2001, one or more binding written commitments acceptable to the Lenders in their sole and absolute discretion, that have been accepted in writing by the Borrowers (with payment by the Borrowers of any and all fees that are required to make the commitments binding), wherein the lending entities named therein have committed to lend to the Borrowers an amount sufficient to pay the Loans in full and which provide for a closing and a funding to occur under their terms by no later than September 28, 2001, the Maturity Date set forth in the Credit Agreement (as amended hereby) shall be extended to September 28, 2001, without the payment of additional fees by the Borrowers to the Lenders or the Agent, but subject to all terms and conditions of the Credit Agreement (as amended hereby), including the payment of fees provided for therein. 20. Notwithstanding the execution of this Amendment, all of the indebtedness evidenced by each of the Notes shall remain in full force and effect, as modified hereby, and nothing contained in this Amendment shall be construed to constitute a novation of the indebtedness evidenced by any of the Notes or to release, satisfy, discharge, terminate or otherwise affect or impair in any manner whatsoever (a) the validity or enforceability of the indebtedness evidenced by any of the Notes; (b) the liens, security interests, assignments and conveyances effected by the Agreement or the Credit Documents, or the priority thereof; (c) the liability of any maker, endorser, surety, guarantor or other person that may now or hereafter be liable under or on account of any of the Notes or the Agreement or the Credit Documents; or (d) any other security or instrument now or hereafter held by the Agent or the Lenders as security for or as evidence of any of the above-described indebtedness. 21. To induce the Agent and the Lenders to enter into this Amendment, the Borrowers hereby release, acquit and forever discharge the Lenders, and each of their respective officers, directors, agents, employees, successors and assigns, from any and all liabilities, claims, demands, actions or causes or actions of any kind or nature (if there be any), whether absolute or contingent, disputed or undisputed, at law or in equity, or known or unknown, that the Borrowers now have or ever had against the Agent or the Lenders arising under or in connection with any of the Credit Documents or otherwise. 22. All references in the Credit Documents to "Credit Agreement" shall refer to the Agreement as amended by this Amendment, and as the Agreement may be further amended from time to time. 23. The Borrowers hereby certify that the organizational documents of the Borrowers have not been amended since June 10, 1999. 11 12 24. The Borrowers hereby represent and warrant to the Agent and the Lenders that all representations and warranties contained in the Agreement are true and correct as of the date hereof; and the Borrowers hereby certify that no Event of Default nor any event that, upon notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing. The Lenders acknowledge that they have no present actual knowledge of any Events of Default existing other than those that are addressed by the terms of this Amendment. 25. Except as hereby amended, the Agreement shall remain in full force and effect as written. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which when taken together shall constitute one and the same instrument. The covenants and agreements contained in this Amendment shall apply to and inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 26. Nothing contained herein shall be construed as a waiver, acknowledgment or consent to any breach of or Event of Default under the Agreement and the Credit Documents not specifically mentioned herein. 27. This Amendment shall be governed by the laws of the State of Alabama. [Remainder of this page intentionally blank] 12 13 IN WITNESS WHEREOF, each of the Borrowers, the Lenders and the Agent has caused this Amendment to be executed and delivered by its duly authorized corporate officer as of the day and year first above written. RESPONSE ONCOLOGY, INC. By: /s/ A. LaMacchia ---------------------------------------- Its: President --------------------------------------- RESPONSE ONCOLOGY MANAGEMENT OF SOUTH FLORIDA, INC. By: /s/ A. LaMacchia ---------------------------------------- Its: President --------------------------------------- RESPONSE ONCOLOGY OF TAMARAC, INC. By: /s/ A. LaMacchia ---------------------------------------- Its: President --------------------------------------- RESPONSE ONCOLOGY OF FORT LAUDERDALE, INC. By: /s/ A. LaMacchia ---------------------------------------- Its: President --------------------------------------- 14 AMSOUTH BANK By: /s/ Cathy M. Wind ---------------------------------------- Its: Vice President 15 UNION PLANTERS BANK, NATIONAL ASSOCIATION By: /s/ Elizabeth Rouse ---------------------------------------- Its: Senior Vice President ----------------------------------- 16 BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.) By: /s/ Elizabeth L. Knox ---------------------------------------- Its: Senior Vice President ----------------------------------- 17 AMSOUTH BANK, as Agent By: /s/ Cathy M. Wind ---------------------------------------- Its: Vice President EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RESPONSE ONCOLOGY, INC. FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 5,961 0 20,122 2,715 3,187 49,823 16,766 12,724 120,100 26,443 0 0 17 123 47,376 120,100 35,586 35,586 24,165 35,804 0 210 827 (473) (180) (293) 0 0 0 (293) (.02) (.02)
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