-----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, PyzxstpT0uGxKHDvUhKi+dvsRYLUEKB/FKouyxfsuzQHota5chOA3tXIyZgjdhd2 Keql7T+qjjP47/AzMaCvLg== 0000950144-01-500861.txt : 20010418 0000950144-01-500861.hdr.sgml : 20010418 ACCESSION NUMBER: 0000950144-01-500861 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESPONSE ONCOLOGY INC CENTRAL INDEX KEY: 0000763098 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 621212264 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09922 FILM NUMBER: 1604816 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-K405 1 g68543e10-k405.txt RESPONSE ONCOLOGY, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period: ----------------- Commission File Number: -------------------- RESPONSE ONCOLOGY, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TENNESSEE 62-1212264 - ------------------------ ------------------------ (State of incorporation) (I.R.S. Employer ID No.) 1805 MORIAH WOODS BLVD., MEMPHIS, TN 38117 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (901) 761-7000 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - --------------------------- --------------------- Common Stock, par value $.01 per share......................OTC Bulletin Board Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 9, 2001, 12,290,764 shares of Common Stock of Response Oncology, Inc. were outstanding and the aggregate market value of such Common Stock held by non-affiliates was $1,674,731 based on the closing sale price of $0.156 as of that date. Portions of registrant's Proxy Statement for use in connection with the Annual Meeting of Shareholders to be held on July 10, 2001 are incorporated by reference into Part III of this report, to the extent set forth therein, if such Proxy Statement is filed with the Securities and Exchange Commission on or before May 1, 2001. If such Proxy Statement is not filed by such date, the information required to be presented in Part III will be filed as an amendment to this report under cover of a Form 8. The exhibits for this Form 10-K are listed on Page 21. 2 PART I ITEM 1. BUSINESS THE COMPANY Response Oncology, Inc. and its wholly-owned subsidiaries (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; compounds and dispenses pharmaceuticals to certain oncologists for a fixed or cost plus fee; and conducts outcomes research on behalf of pharmaceutical manufacturers. Approximately 300 medical oncologists are associated with the Company through these programs. As further discussed throughout this document, the Company sees important threats and opportunities for its businesses which will require management's focused attention over the near-term. The material decline in the Company's IMPACT Center volumes, coupled with continuing contractual issues in its physician practice management segment, have required and will continue to require significant and rapid strategic and operational responses to facilitate the Company's continued viability. The Company's focused business plan is currently being modified to not only incorporate such responses, but also to explore management's plans to exploit key opportunity areas and more effectively leverage important Company assets, including possibilities to expand and enhance the Company's pharmaceutical services. On March 29, 2001, the Company filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code and began operating its business as a debtor-in-possession under the supervision of the Bankruptcy Court for the Western District of Tennessee. A statutory creditors committee will be appointed in the Chapter 11 case, and substantially all of the Company's liabilities as of the filing date ("prepetition liabilities") are subject to settlement under a plan of reorganization. Generally, actions to enforce or otherwise effect repayment of all prepetition liabilities as well as all pending litigation against the Company are stayed while the Company continues to operate its business as debtor-in-possession. Schedules will be filed by the Company with the Bankruptcy Court setting forth its assets and liabilities as of the filing date as reflected in the Company's accounting records. Differences between amounts reflected in such schedules and claims filed by creditors will be investigated and either amicably resolved or subsequently adjudicated before the Bankruptcy Court. The ultimate amount and settlement terms for such liabilities are subject to a plan of reorganization, and accordingly, are not presently determinable. IMPACT SERVICES The Company presently operates 23 IMPACT Centers in 13 states which provide high dose chemotherapy with stem cell support to cancer patients on an outpatient basis. Through its IMPACT Centers, the Company has developed extensive medical information systems and databases containing clinical and patient information, analysis of treatment results and side effects and clinical care pathways. These systems and databases support the Company's clinical trials program, which involves carefully planned, uniform treatment regimens administered to a significant group of patients together with the monitoring of outcomes and side effects of these treatments. The clinical trials program allows the Company to develop a rational means of improving future treatment regimens by predicting which patients are most likely to benefit from different treatments. Each IMPACT Center is staffed by, and makes extensive use of, experienced oncology nurses, pharmacists, laboratory technologists, and other support personnel to deliver outpatient services under the direction of independent medical oncologists. IMPACT Center services include preparation and collection of stem cells, administration of high dose chemotherapy, reinfusion of stem cells and delivery of broad-based supportive care. IMPACT Center personnel extend the support mechanism into the patient's home, further reducing the dependence on hospitalization. The advantages of this system to the physician and patient include (i) convenience of the local treatment facility; (ii) specialized on-site laboratory and pharmacy services, including home pharmacy support; (iii) access to the Company's clinical trials program to provide ongoing evaluation of current cancer treatment; (iv) specially trained medical and technical staff; (v) patient education and support materials through computer, video and staff consultation; and (vi) reimbursement assistance. High dose chemotherapy is most appropriate for patients with lymphoma, acute leukemia, multiple myeloma and breast and ovarian cancer. Patients referred to the Company by the treating oncologists are placed on a treatment protocol 2 3 developed from the cumulative analysis of the Company's approximately 4,000 high dose cases. Cases conducted at the IMPACT Center begin with a drug regimen which allows for the collection and cryopreservation of stem cells. A stem cell is a cell which originates in the bone marrow and is a precursor to white blood cells. At the appropriate time, stem cells capable of restoring immune system and bone marrow functions are harvested over a two to three day period. The harvested stem cells are then frozen and stored at the IMPACT Center, and following confirmation of response to treatment and a satisfactory stem cell harvest, patients receive high dose chemotherapy followed by reinfusion of stem cells. Most patients are then admitted to an affiliated hospital for approximately 8-12 days. After discharge, the patient is monitored in the oncologist's office. The Company believes that the proprietary databases and the information gathering techniques developed from the foregoing programs enable practicing oncologists to cost effectively manage cancer cases while ensuring quality. Clinical research conducted by the Company focuses on (i) improving cancer survival rates; (ii) enhancing the cancer patient's quality of life; (iii) reducing the costs of cancer care; and (iv) developing new approaches to cancer diagnosis, treatment and post-treatment monitoring. 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 significantly, as evidenced by a 49% decrease in high dose procedures in 2000 as compared to 1999 and a 64% decrease as compared to 1998. High dose procedures in the Company's wholly owned IMPACT Centers decreased 54% in 2000 as compared to 1999, while procedures in the Company's managed and joint venture Centers decreased 43% and 34%, respectively. The Company closed 12 marginal IMPACT Centers in 1999 due to decreased patient volumes and 19 additional IMPACT Centers in 2000. On an ongoing basis, the Company evaluates the economic feasibility of the centers in its IMPACT network. The Company is generally able to re-deploy related assets throughout the IMPACT Center network. While additional data presented at the 2000 ASCO annual meeting appeared to somewhat clarify the role of high dose therapies for breast cancer and indicated favorable preliminary results, the Company has not experienced an increase in referrals for breast cancer patients nor does the Company expect this trend to reverse in the foreseeable future. Because of the significance of this negative trend to the Company's IMPACT Center volumes, the Company is actively evaluating the best fashion in which to leverage the IMPACT Center network. This evaluation includes the exploration of opportunities to deliver high dose therapies against diseases other than breast cancer; however, there can be no assurance that other such diseases and related treatment protocols can be identified, implemented, and/or effectively managed through the existing network. Continuing declines in high dose therapy volumes and/or an inability to develop new referral lines or treatment options for the network that result in increased non-breast cancer volumes will adversely affect the financial results of this line of business. Such adverse results would likely require that the Company evaluate potential additional closures of individual IMPACT Centers in the 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. 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. In addition, the Company recruited a chief medical officer and a vice president of operations in the third quarter of 2000. These individuals have operating responsibilities over the existing business segments and for the development of the specialty pharmacutical business. The Company has also engaged in discussions with potential strategic partners, including certain pharmaceutical manufacturers, partner hospitals, and affiliated physicians. Various clinical and marketing materials have also been developed. To date, these services have been marketed to select physicians and third-party payers in existing locations within the IMPACT Center network, but no patients utilizing such specialty drugs have been treated by the Company. Although the Company is still pursuing this strategy, given its current financial and operating constraints, there can be no assurances that this plan will be successfully implemented. 3 4 PHARMACEUTICAL SALES TO PHYSICIANS The Company also provides pharmacy management services for certain medical oncology practices through its IMPACT Center pharmacies. These services include compounding and dispensing pharmaceuticals for a fixed or cost plus fee. ONCOLOGY PRACTICE MANAGEMENT SERVICES During 1996, the Company adopted a strategy of diversification into physician practice management and ultimately consummated affiliations with 12 medical oncology practices, including 43 medical oncologists in Florida and Tennessee. Pursuant to management service agreements ("Service Agreements"), the Company provides management services that extend to all nonmedical aspects of the operations of the affiliated practices. As described below, the Company has recognized deterioration in the value of certain Service Agreements through financial charges and termination and modification negotiations. The Service Agreements name the Company as the sole and exclusive manager and administrator of all day-to-day business functions connected with the medical practice of an affiliated physician group. The Company is responsible for providing facilities, equipment, supplies, support personnel, and management and financial advisory services. Under the terms of the Service Agreements, the Company (among other things): (i) prepares annual capital and operating budgets; (ii) prepares financial statements; (iii) orders and purchases medical and office inventory and supplies; (iv) bills patients and third party payors as agent for the affiliated practices; (v) maintains accounting, billing, medical, and collection records; (vi) negotiates and administers managed care contracts as agent for affiliated physicians; (vii) arranges for legal and accounting services related to practice operations; (viii) recruits, hires and appoints an executive director to manage and administer all of the day-to-day business functions of each practice; and (ix) manages all non-physician professional support, administrative, clerical, secretarial, bookkeeping and billing personnel. The Company seeks to combine the purchasing power of numerous physicians to obtain favorable pricing and terms for equipment, pharmaceuticals and supplies. In return for its management services, the Company receives a service fee, depending on Service Agreement form, based on net revenue or net operating income of the practice. Pursuant to each Service Agreement, the physicians and the practice agree not to compete with the Company and the practice. Each Service Agreement has an initial term of 40 years and, after the initial term, will be automatically extended for additional five year terms unless either party delivers written notice to the other party 180 days prior to the expiration of the preceding term. The Service Agreement only provides for termination "for cause." If the Company terminates the Service Agreement for cause, the practice is typically obligated to purchase assets (which typically include intangible assets) and pay liquidated damages, which obligations are wholly or partially guaranteed by individual physician owners of the practice for a period of time. Each Service Agreement provides for the creation of an oversight committee, a majority of the members of which are designated by the practice. The oversight committee is responsible for developing management and administrative policies for the overall operation of each practice. In February 1999 and March 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 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 and other amounts owed. This dispute is scheduled for binding arbitration in the second quarter of 2001. During the same period, the Company began negotiations to terminate another Service Agreement with a single-physician practice. Since this was not a "for cause" termination initiated by the Company, the affiliated practice was 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 an impairment charge related to both Service Agreements and associated assets. The Company terminated the second Service Agreement in April of 2000. 4 5 In the fourth quarter of 2000, the Company began negotiating, in response to certain contract disuptes, to sell the assets of Oncology/Hematology Group of South Florida, P.A. ("the OHG Group") to the existing physician group. Concurrent with the sale of the assets, the Service Agreement was terminated, and the parties signed a pharmacy management agreement for the Company to provide turnkey pharmacy management services to the practice. The sale and pharmacy management agreement were completed and effective February 1, 2001. At December 31, 2000, the Company adjusted the Service Agreement and associated assets to their net realizable value as measured by the termination and sale agreement. In the first quarter of 2001, the Company began negotiating the termination of a three-physician practice in Florida. These negotiations resulted from several contractual disagreements between the practice and the Company. Although the termination is probable, the financial terms have not been agreed upon and therefore, the financial impact of any potential termination is not currently estimable. CANCER RESEARCH SERVICES Since 1989, the Company has conducted a clinical trials program pursuant to which carefully planned, uniform treatments administered to a substantial number of IMPACT Center patients have been monitored and studied, with the results being collected in a database and utilized to predict outcomes and determine utilization of high dose chemotherapy as a treatment. In addition, the Company has recorded outcomes from over 4,000 cases in which high dose chemotherapy was utilized as a treatment and has developed and continues to refine treatment pathways, which forecast the best outcome with the lowest possible cost. Pursuant to agreements between the Company and the oncologists who supervise their patients' treatment in IMPACT Centers, such oncologists are obligated to record and monitor outcomes, collect information and report such information to the Company. The Company also utilizes its outcomes database to provide various types of data to pharmaceutical companies regarding the use of their products. The IMPACT Center network and the Company's medical information systems make the Company favorably suited to this process. The Company is currently participating in several projects with leading pharmaceutical manufacturers to furnish data in connection with FDA applications and post-FDA approval marketing studies. Revenue from these contracts helps to underwrite the Company's clinical trials expenses. Such relationships with pharmaceutical companies allow patients and physicians earlier access to drugs and therapies which enhances the Company's role as a participant in oncological developments. The Company has been very deliberate in the selection of new clinical trials in which it participates and is currently evaluating the viability of this segment. Certain financial information relating to each of the Company's reportable segments is included in Note L of the Company's consolidated financial statements. COMPETITION Most community hospitals with a commitment to cancer treatment are evaluating their need to provide high dose treatments, and other entities are competing with the Company in providing high dose services similar to those offered by the Company. Such competition has long been contemplated by the Company, and is indicative of the evolution of this field. While the Company believes that the demand for high dose chemotherapy services is sufficiently large to support several significant providers of these services, the Company is subject to increasing competitive risks from these entities. In addition, the Company is aware of at least two competitors specializing in the management of oncology practices and two other physician management companies that manage at least one oncology practice. Several health care companies with established operating histories and significantly greater resources than the Company are also providing at least some management services to oncologists. There are certain other companies, including hospitals, large group practices, and outpatient care centers, that are expanding their presence in the oncology market and may have access to greater resources than the Company. Furthermore, organizations specializing in home and ambulatory infusion care, radiation therapy, and group practice management compete in the oncology market. The Company's profitability depends in significant part on the continued success of its affiliated physician groups. These physician groups face competition from several sources, including sole practitioners, single and multi-specialty groups, hospitals and managed care organizations. 5 6 GOVERNMENT REGULATION The delivery of healthcare items and services has become one of the most highly regulated of professional and business endeavors in the United States. Both the federal government and individual state governments are responsible for overseeing the activities of individuals and businesses engaged in the delivery of healthcare services. Federal regulation of the healthcare industry is based primarily upon the Medicare and Medicaid programs, each of which is financed, at least in part, with federal funds. State jurisdiction is based upon the state's authority to license certain categories of healthcare professionals and providers, and the state's interest in regulating the quality of healthcare in the state, regardless of the source of payment and the state's level of participation in and funding of its Medicaid program. The Company believes it is in material compliance with applicable healthcare laws. During 1999, the Company adopted a formal compliance program and, as part of such program, continues to monitor ongoing developments in healthcare laws and regulations. However, the laws and regulations applicable to the Company are subject to significant change and evolving interpretations and, therefore, there can be no assurance that a review of the Company's or the affiliated physicians' practices by a court or law enforcement or regulatory authority will not result in a determination that could materially adversely affect the operations of the Company or the affiliated physicians. Furthermore, there can be no assurance that the laws applicable to the Company will not be amended in a manner that could adversely affect the Company, its permissible activities, the relative costs associated with doing business, and the amount of reimbursement by government and other third-party payers. FEDERAL LAW The federal healthcare laws apply in any case in which the Company is providing an item or service that is reimbursable under Medicare, Medicaid or other federally-funded programs ("Federal Reimbursement Programs") or is claiming reimbursement from Federal Reimbursement Programs on behalf of physicians with whom the Company has a Service Agreement. The principal federal laws include those that prohibit the filing of false or improper claims with the Federal Reimbursement Programs, those that prohibit unlawful inducements for the referral of business reimbursable under Federal Reimbursement Programs and those that prohibit the provision of certain services by a provider to a patient if the patient was referred by a physician with whom the provider has certain types of financial relationships. FALSE AND OTHER IMPROPER CLAIMS The federal government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for reimbursement from any of the Federal Reimbursement Programs. Criminal penalties are also available in the case of claims filed with private insurers if the government can show that the claims constitute mail fraud or wire fraud or violate state false claims prohibitions. While the criminal statutes are generally reserved for instances involving fraudulent intent, the civil and administrative penalty statutes are being applied by the government in an increasingly broader range of circumstances. By way of example, the federal government recently has brought suits which maintain that a pattern of claiming reimbursement for unnecessary services where the claimant should have known that the services were unnecessary, and that claiming reimbursement for substandard services where the claimant knows the care was substandard, are actionable claims. In addition, at least one federal appellate court has affirmed a finding of liability under the false claims statutes based upon reckless disregard of the factual basis of claims submitted, falling short of actual knowledge. Severe sanctions under these statutes, including exclusion from Federal Reimbursement Programs, have been levied even in situations not resulting in criminal convictions. The Company believes that its billing activities on behalf of affiliated practices through Service Agreements are in material compliance with such laws, but there can be no assurance that the Company's activities will not be challenged or scrutinized by governmental authorities. A determination that the Company or any affiliated practice has violated such laws could have a material adverse effect on the Company. ANTI-KICKBACK LAW Federal law commonly known as the "Anti-kickback Statute" prohibits the knowing or willful offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) which is intended to induce the referral of patients covered by Federal Reimbursement Programs, or the ordering of items or services reimbursable under those programs. The law also prohibits remuneration that is intended to induce the recommendation of, or furnishing, or the arranging for, the provision of items or services reimbursable under Federal Reimbursement Programs. The law has been broadly interpreted by a number of courts to prohibit remuneration which is offered or paid for otherwise legitimate purposes if the circumstances show that one purpose of the arrangement is to induce referrals. Even bona fide investment interests in a healthcare provider may be questioned under the Anti-kickback 6 7 Statute if the government concludes that the opportunity to invest was offered as an inducement for referrals. The penalties for violations of this law include criminal sanctions and exclusion from the federal healthcare program. In part to address concerns regarding the implementation of the Anti-kickback Statute, the federal government has promulgated regulations that provide exceptions, or "safe harbors," for certain transactions that will not be deemed to violate the Anti-kickback Statute. Among the safe harbors included in the regulations were provisions relating to the sale of physician practices, management and personal services agreements and employee relationships. Subsequently, regulations were published offering safe harbor protection to additional activities, including referrals within group practices consisting of active investors. Further regulatory "safe harbors" relating to the Anti-kickback Statute are under consideration which, if ultimately adopted, may result in substantive changes to existing regulations. The failure to qualify under a safe harbor provision, while potentially subjecting the activity to greater regulatory scrutiny, does not render the activity illegal per se. There are several aspects of the Company's relationships with physicians to which the Anti-kickback Statute may be relevant. In some instances, the Company itself may become a provider of services for which it will claim reimbursement from Federal Reimbursement Programs, and physicians who are investors in the Company may refer patients to the Company for those services. Furthermore, the government may construe some of the marketing and managed care contracting activities of the Company as arranging for the referral of patients to the physicians with whom the Company has a Service Agreement. Finally, at the request of a physician or medical practice with which the Company has a Service Agreement, the Company will manage the provision of ancillary services which the physician desires to make available to his patients in the physician's office. At the present time, the services provided by the Company in its IMPACT Centers are generally not reimbursable by Federal Reimbursement Programs. Although neither the investments in the Company by physicians nor the Service Agreements between the Company and physicians qualify for protection under the safe harbor regulations, the Company does not believe that these activities fall within the types of activities the Anti-kickback Statute was intended to prohibit. A determination that the Company had violated or is violating the Anti-kickback Statute would have a material adverse effect on the Company's business. THE STARK SELF-REFERRAL LAW The Stark Self-Referral Law ("Stark Law") prohibits a physician from referring a patient to a healthcare provider for certain designated health services reimbursable by the Medicare or Medicaid programs if the physician has a financial relationship with that provider, including an investment interest, a loan or debt relationship or a compensation relationship. The designated services covered by the law include radiology services, infusion therapy, radiation therapy, outpatient prescription drugs and hospital services, among others. In addition to the conduct directly prohibited by the law, the statute also prohibits "circumvention schemes" that are designed to obtain referrals indirectly that cannot be made directly. The penalties for violating the law include (i) a refund of any Medicare or Medicaid payments for services that resulted from an unlawful referral; (ii) civil fines; and (iii) exclusion from the Medicare and Medicaid programs. The Stark Law contains a number of exceptions potentially applicable to the Company's operations. These include exceptions for a physician's ownership of certain publicly traded securities, certain in-office ancillary services, certain employment relationships, and certain personal services arrangements. On January 4, 2001, the Health Care Financing Administration ("HCFA") issued a partial final rule (the "Phase I Final Regulations") regarding certain provisions of the Stark Law with an effective date for the relevant portions of January 4, 2002. Certain administrative review initiatives may have the effect of postponing the effective date until March 5, 2002. A second rulemaking, Phase II of the Stark Law regulations, that would address the remaining sections of the Stark Law is pending. It is not known when these additional final regulations will be promulgated. The Phase I Final Regulations expand upon the statutory exceptions and contemplate that designated health services may be provided by a physician practice or by another corporation if the relevant exceptions delineated in the regulations apply. In any event, the federal regulatory authorities have indicated through various charges that recently have been brought against providers that they consider the Stark Law to be sufficiently self-implementing that charges may be brought when violations of unambiguous elements of the Stark Law are found. The Company believes that in the vast majority of situations it would not be construed as a provider of any designated health service under the Stark Law for which the Company claims reimbursement from Medicare or Medicaid. However, there can be no certainty that the Company will not be deemed to be the provider for designated health services in at least some circumstances. In that event, referrals from the physicians for designated health services will be permissible only if the relevant contractual relationship(s) meets an exception to the Stark Law prohibitions. To qualify for such exception, the payments made under the 7 8 relevant contract must be set at fair market value as well as meeting other requirements of the relevant Stark Law exception. The Company intends to structure its arrangements so as to qualify for applicable exceptions under the Stark Law; however, there can be no assurance that a review by courts or regulatory authorities would not result in a contrary determination. A finding of noncompliance with the Stark Law could have a material adverse effect upon the Company and subject it and the Company's affiliated physicians to penalties and sanctions. STATE LAW STATE ANTI-KICKBACK LAWS Many states have laws that prohibit the payment of kickbacks in return for the referral of patients. Some of these laws apply only to services reimbursable under the state Medicaid program. However, a number of these laws apply to all healthcare services in the state, regardless of the source of payment for the service. The Company pays oncologists who supervise their patients' treatment at the IMPACT Centers certain professional fees for collecting and monitoring treatment and outcomes data and reporting such data to the Company. The Company believes such fees reflect the fair market value of the services rendered by such physicians to the Company. However, the laws in most states regarding kickbacks have been subjected to limited judicial and regulatory interpretation and, therefore, no assurances can be given that the Company's activities will be found to be in compliance. Noncompliance with such laws could have a material adverse effect upon the Company and subject it and such physicians to penalties and sanctions. STATE SELF-REFERRAL LAWS A number of states have enacted self-referral laws that are similar in purpose to the Stark Law. However, each state law is unique. For example, some states only prohibit referrals where the physician's financial relationship with a healthcare provider is based upon an investment interest. Other state laws apply only to a limited number of designated health services. Finally, some states do not prohibit referrals, but merely require that a patient be informed of the financial relationship before the referral is made. The Company believes that it is in compliance with the self-referral law of any state in which the Company has a financial relationship with a physician. FEE-SPLITTING LAWS Many states prohibit a physician from splitting with a referral source the fees generated from physician services. Other states have a broader prohibition against any splitting of a physician's fees, regardless of whether the other party is a referral source. In most cases, it is not considered to be fee-splitting when the payment made by the physician is reasonable reimbursement for services rendered on the physician's behalf. The Company will be reimbursed by physicians on whose behalf the Company provides management services. The Company intends to structure the reimbursement provisions of its management contracts with physicians in order to comply with applicable state laws relating to fee-splitting. However, there can be no certainty that, if challenged, the Company and its affiliated physicians will be found to be in compliance with each state's fee-splitting laws. Noncompliance would have an adverse impact upon such physician and thus upon the Company. The Florida Board of Medicine recently ruled in a declaratory statement that payments of 30% of a physician group's net income to a practice management company in return for a number of services, including expansion of the practice by increasing patient referrals through the creation of provider networks, affiliation with other networks, and the negotiation of managed care contracts, constituted fee-splitting arrangements in violation of the Florida law prohibiting fee-splitting and could subject the physicians engaged in such arrangements to disciplinary action. This order has been affirmed by a Florida appellate court, though the order itself only applies to the physician practice management company and the individual physicians whose fact situation was presented to the Florida Board of Medicine for a declaratory statement. While the Company believes that its Service Agreements are substantially different from the management services agreement that the Florida Board of Medicine ruled on, there is a risk that the adverse decision by the Florida court on the case presented could have an adverse precedential impact on the Company's Service Agreements with Florida affiliated practices. The Company's Service Agreements contain provisions requiring modification of the Service Agreements in such event in a manner that preserves the economic value of the Service Agreement, but there can be no assurance that Florida courts would specifically enforce such contractual provisions. The adverse determinations of the Florida court could have a material adverse effect on the Company. CORPORATE PRACTICE OF MEDICINE Most states prohibit corporations from engaging in the practice of medicine. Many of these state doctrines prohibit a business corporation from employing a physician. However, states differ with respect to the extent to which a licensed physician can affiliate with corporate entities 8 9 for the delivery of medical services. Some states interpret the "practice of medicine" broadly to include decisions that have an impact on the practice of medicine, even where the physician is not an employee of the corporation and the corporation exercises no discretion with respect to the diagnosis or treatment of a particular patient. The Company's standard practice under its Service Agreements is to avoid the exercise of any responsibility on behalf of its physicians that could be construed as affecting the practice of medicine. Accordingly, the Company believes that it is not in violation of applicable state laws relating to the corporate practice of medicine. However, because such laws and legal doctrines have been subjected to only limited judicial and regulatory interpretation, there can be no assurance that, if challenged, the Company will be adjudicated to be in compliance with all such laws and doctrines. INSURANCE LAWS Laws in all states regulate the business of insurance and the operation of HMOs. Many states also regulate the establishment and operation of networks of health care providers. While these laws do not generally apply to companies that provide management services to networks of physicians, there can be no assurance that regulatory authorities of the states in which the Company operates would not apply these laws to require licensure of the Company's operations as an insurer, as an HMO or as a provider network. The Company believes that it is in compliance with these laws in the states in which it does business, but there can be no assurance that future interpretations of insurance and health care network laws by regulatory authorities in these states or in the states into which the Company may expand will not require licensure or a restructuring of some or all of the Company's operations. STATE LICENSING The Company's laboratories operated in conjunction with certain IMPACT Centers are registered with the U.S. Food & Drug Administration and are certified pursuant to the Clinical Laboratory Improvement Amendments of 1988. In addition, the Company maintains pharmacy licenses for all IMPACT Centers having self-contained pharmacies, and state health care facility licenses, where required. REIMBURSEMENT AND COST CONTAINMENT Approximately 50% of the net revenue of the Company's practice management division and less than 5% of the revenue of the Company's IMPACT division are derived from payments made by government sponsored health care programs (principally Medicare and Medicaid). As a result, any change in reimbursement regulations, policies, practices, interpretations or statutes could adversely affect the operations of the Company. The Company expects that the Federal Government will continue to constrain the growth of spending in the Medicare and Medicaid programs. To the extent the Company's volume adjusted costs increase, the Company will not be able to recover such cost increases from government reimbursement programs. In addition, because of cost containment measures and market changes in non governmental insurance plans, it is increasingly unlikely that the Company will be able to shift cost increases to non governmental payors. Rates paid by private third party payors, including those that provide Medicare supplemental insurance, are based on established physician, clinic and hospital charges and are generally higher than Medicare payment rates. Changes in the mix of the Company's patients among the non-governmental payors and government sponsored health care programs, and among different types of non-government payor sources, could have a material adverse effect on the Company. EMPLOYEES As of March 1, 2001, the Company employed approximately 393 persons, approximately 298 of whom were full-time employees. Under the terms of the Service Agreements with the affiliated physician groups, the Company is responsible for the practice compensation and benefits of the groups' non-physician medical personnel. No employee of the Company or of any affiliated physician group is a member of a labor union or subject to a collective bargaining agreement. The Company believes that its labor relations are good. ITEM 2. PROPERTIES As of March 1, 2001, the Company leased approximately 24,000 square feet of space at 1805 and 1835 Moriah Woods Boulevard, in Memphis, Tennessee, where the Company's headquarters and central business office are located. The leases expire in 2002. The Company also leases all facilities housing the Company's operating facilities. Management believes that the Company's properties are well 9 10 maintained and suitable for its business operations. The Company may lease additional space in connection with the development of future treatment facilities or practice affiliations. ITEM 3. LEGAL PROCEEDINGS The Company filed voluntary petitions seeking reorganization under Chapter 11 of the United States Bankruptcy Code on March 29, 2001. Additional information related to the filing is set forth under Part I, Item 1 and Part II, Item 7 of this Form 10-K and Note B of the Notes to Consolidated Financial Statements. Such information is incorporated herein by reference. No material litigation is currently pending against the Company, and the Company is not aware of any outstanding claims against any affiliated physician group that would have a material adverse effect on the Company's financial condition or results of operations. The Company expects its affiliated physician groups to be involved in legal proceedings incident to their business, most of which are expected to involve claims related to the alleged medical malpractice of its affiliated oncologists. ITEM 4. MATTERS SUBMITTED TO STOCKHOLDERS' VOTE Not applicable. 10 11 PART II ITEM 5. MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS The Company's common stock traded on The Nasdaq Stock Market under the symbol "ROIX" through March 14, 2001. As of this date, the Company's common stock was held by approximately 1,874 shareholders of record. The Company's common stock was delisted from the Nasdaq Stock Market effective March 15, 2001 due to non-compliance with the listing standard that requires the Company's stock to maintain a minimum bid price of $1.00 or more. The Company does not plan to further appeal the delisting. The Company's common stock is currently traded on the OTC Bulletin Board. The high and low closing sale prices of the Company's common stock, as listed on the Nasdaq National Market System, were as follows for the quarterly periods indicated.
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 1999 - ---------------------------------------------------------------- ------------------------------------------------------ HIGH LOW HIGH LOW ---- --- ---- --- First Quarter $ 3 1/16 $ 1 1/8 First Quarter $ 4 3/8 $ 2 3/8 Second Quarter $ 1 3/8 $ 25/32 Second Quarter $ 3 1/2 $ 2 1/2 Third Quarter $ 1 7/8 $ 7/8 Third Quarter $ 3 $ 23/32 Fourth Quarter $ 31/32 $ 5/32 Fourth Quarter $ 1 7/8 $ 3/8
The Company has not paid any cash dividends on the common stock since its inception. The Board of Directors does not intend to pay cash dividends on the common stock in the foreseeable future, but intends to retain all earnings, if any, for use in the Company's business. RECENT SALES OF UNREGISTERED SECURITIES In April 1999, the Company issued 36,870 shares of its common stock and unsecured and subordinated 4% promissory notes in the aggregate principal amount of $244,000, payment of which may be made, at the option of the holders, in shares of common stock at a conversion price equal to 120% of the ten day average closing price per share on the Nasdaq on the election date (collectively, the "Unregistered Securities"), in one acquisition transaction pursuant to which the Company acquired the operating assets of a medical oncology practice from the physician owners ("Physician Owners") thereof. The Unregistered Securities were issued in exchange for certain assets of the professional association owned by the Physician Owners. The Unregistered Securities were offered and issued to the Physician Owners in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933. Each of the Physician Owners was an accredited investor, as that term is defined in Rule 501 under Regulation D. 11 12 ITEM 6. SELECTED FINANCIAL DATA (in thousands except per share data) The following table sets forth certain selected consolidated financial data and should be read in conjuction with the Company's consolidated financial statements and related notes appearing elsewhere in this report.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Net revenue $ 130,833 $ 135,567 $ 128,246 $ 101,920 $ 67,353 Net earnings (loss) (14,419) (1,693) (17,448) 4,202 910 Net earnings (loss) to common stockholders (14,419) (1,693) (17,449) 4,199 907 Total assets 92,413 119,645 126,753 149,075 142,950 Long-term debt and capital lease obligations 303 36,025 33,252 35,443 62,230 Earnings (loss) per common share: Basic ($ 1.17) ($ 0.14) ($ 1.45) $ 0.36 $ 0.11 ========= ========= ========= ========= ========= Diluted ($ 1.17) ($ 0.14) ($ 1.45) $ 0.36 $ 0.11 ========= ========= ========= ========= =========
On March 29, 2001, the Company filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court. Although the Company is currently operating its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of its business as a going concern is contingent upon, among other things, resolution of matters related to the bankruptcy filing as described in Note B. Chief among these matters is the status of the Company's credit facility and revisions to the credit facility that might result from resolution of the bankruptcy matters, as further described in Note F. The selected financial data above, was derived from consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties, nor do the consolidated financial statements include any adjustments that might result from the establishment, settlement and classification of liabilities that may be required in connection with restructuring the Company as it reorganizes under Chapter 11 of the United States Bankruptcy Code. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a comprehensive cancer management company. The Company provides advanced cancer treatment services through outpatient facilities known as IMPACT Centers under the direction of practicing oncologists; owns the assets of and manages the nonmedical aspects of oncology practices; compounds and dispenses pharmaceuticals to certain medical oncology practices for a fixed or cost plus fee; and conducts outcomes research on behalf of pharmaceutical manufacturers. Approximately 300 medical oncologists are associated with the Company through these programs. As further discussed throughout this document, the Company sees important threats and opportunities for its businesses which will require management's focused attention over the near-term. The material decline in the Company's IMPACT Center volumes, coupled with continuing contractual issues in its physician practice management segment, have required and will continue to require significant and rapid strategic and operational responses to facilitate the Company's continued viability. The Company's focused business plan is currently being modified to not only incorporate such responses, but also to explore management's plans to exploit key opportunity areas and more effectively leverage important Company assets, including possibilities to expand and enhance the Company's pharmaceutical services. In order to preserve its operational strength and the assets of its businesses, the Company sought protection of the federal bankruptcy laws by filing a voluntary petition for relief on March 29, 2001, under Chapter 11 of the United 12 13 States Bankruptcy Code. Under Chapter 11, the Company continues to conduct business in the ordinary course under the protection of the Bankruptcy Court, while a reorganization plan is developed to restructure its obligations and its operations. KPMG, L.L.P., the Company's financial statement auditors, have included an explanatory paragraph to their opinion dated March 30, 2001, stating that the bankruptcy filing and related matters raise substantial doubt about the Company's ability to continue as a going concern. There can be no assurance that any reorganization plan that is effected will be successful. In 1990 the Company began development of a network of specialized IMPACT Centers to provide complex outpatient chemotherapy services under the direction of practicing oncologists. The majority of the therapies provided at the IMPACT Centers entail the administration of high dose chemotherapy coupled with peripheral blood stem cell support of the patient's immune system. At December 31, 2000, the Company's network consisted of 23 IMPACT Centers, including 14 wholly-owned, 7 managed programs, and 2 owned and operated in joint venture with a host hospital. Prior to January 1997, the Company derived substantially all of its revenues from outpatient cancer treatment services through reimbursements from third party payors on a fee-for-service or discounted fee-for-service basis. During 1997, the Company began concentrating its efforts on contracting on a "global case rate" basis where the Company contracts with the appropriate third-party payor to receive a single payment that covers the patient's entire course of treatment at the center and any necessary in-patient care. 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 significantly, as evidenced by a 49% decrease in high dose procedures in 2000 as compared to 1999 and a 64% decrease as compared to 1998. High dose procedures in the Company's wholly-owned IMPACT Centers decreased 54% in 2000 as compared to 1999, while procedures in the Company's managed and joint venture Centers decreased 43% and 34%, respectively. The Company closed 12 marginal IMPACT Centers in 1999 due to decreased patient volumes and 19 additional IMPACT Centers in 2000. On an ongoing basis, the Company evaluates the economic feasibility of the centers in its IMPACT network. The Company is generally able to re-deploy related assets throughout the IMPACT Center network. While additional data presented at the 2000 ASCO annual meeting appeared to somewhat clarify the role of high dose therapies for breast cancer and indicated favorable preliminary results, the Company has not experienced an increase in referrals for breast cancer patients nor does the Company expect this trend to reverse in the foreseeable future. Because of the significance of this negative trend to the Company's IMPACT Center volumes, the Company is actively evaluating the best fashion in which to leverage the IMPACT Center network. This evaluation includes the exploration of opportunities to deliver high dose therapies against diseases other than breast cancer; however, there can be no assurance that other such diseases and related treatment protocols can be identified, implemented, and/or effectively managed through the existing network. Continuing declines in high dose therapy volumes and/or an inability to develop new referral lines or treatment options for the network that result in increased non-breast cancer volumes will adversely affect the financial results of this line of business. Such adverse results would likely require that the Company evaluate potential additional closures of individual IMPACT Centers in the 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. 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. In addition, the Company recruited a chief medical officer and a vice president of operations in the third quarter of 2000. These individuals have operating responsibilities over the existing business segments and for the development of the specialty pharmacutical business. The Company has also engaged in discussions with potential strategic partners, including certain pharmaceutical manufacturers, partner hospitals, and affiliated physicians. Various clinical and marketing materials have also been developed. To date, these services have been marketed to select physicians and third-party payers in existing locations within the IMPACT Center network, but no patients utilizing such specialty drugs have been treated by the Company. Although the Company is still pursuing this strategy, given its current financial and operating constraints, there can be no assurances that this plan will be successfully implemented. 13 14 The Company also provides pharmacy management services for certain medical oncology practices through its IMPACT Center pharmacies. These services include compounding and dispensing pharmaceuticals for a fixed or cost plus fee. During 1996, the Company executed a strategy of diversification into physician practice management and subsequently affiliated with 43 physicians in 12 medical oncology practices in Florida and Tennessee. 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. 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 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 was not a "for cause" termination initiated by the Company, the affiliated practice was not responsible for liquidated damages. The Company experienced deteriorating returns on this particular Service Agreement and concluded that continuing the 14 15 relationship was not economically feasible. At December 31, 1999, the Company had recorded an impairment charge related to both Service Agreements and associated assets. The Company terminated the second Service Agreement in April of 2000. In the fourth quarter of 2000, the Company began negotiating, in response to certain contract disuptes, to sell the assets of the OHG Group, to the existing physician group. Concurrent with the sale of the assets, the Service Agreement was terminated, and the parties signed a pharmacy management agreement for the Company to provide turnkey pharmacy management services to the practice. The sale and pharmacy management agreement were completed and effective February 1, 2001. At December 31, 2000, the Company adjusted the Service Agreement and associated assets to their net realizable value as measured by the termination and sale agreement. In the first quarter of 2001, the Company began negotiating the termination of a three-physician practice in Florida. These negotiations resulted from several contractual disagreements between the practice and the Company. Although the termination is probable, the financial terms have not been agreed upon and therefore, the financial impact of any potential termination is not currently estimable. From time to time, the Company and its affiliated physicians disagree on the interpretation of certain provisions of the Service Agreements. The Company has one pending arbitration proceeding and recently received a ruling on another case. The pending arbitration matter relates to a dispute over the methodology utilized for certain financial calculations provided for in the Service Agreement. The dispute is generally related to the timing of recording certain adjustments that affect the calculation of the Company's service fee and physician compensation. The Company believes that it has a contractual basis for its position, but there can be no assurances that the Company will prevail in arbitration. In such event, the Company's service fee and the physician's compensation would be increased. The arbitration ruling received by the Company addressed issues related to the economic feasibility of certain capital expenditures. In this matter, the arbitrator ruled that outlays by the Company for capital expenditures are subject to economic feasibility standards. However, the Company was required to expand the office space for this particular practice. In January 2001, the Company received a notice of default from one of its affiliated physician practices alleging a breach of contract for failure to obtain or take adequate steps to develop certain ancillary services. The Company has negotiated a forbearance agreement with the practice to prevent issuance of a notice of termination while it works to develop the project. These activities have included negotiations related to building construction and the purchase of land and equipment. While the Company has made progress on the development of these services, there can be no assurance that the Company will satisfy all requirements of the project in the agreed upon timeframe. If the practice issues a notice of termination, the Company will invoke mandatory arbitration to try to avoid termination and obtain a ruling that the Company has not breached the contract or has made sufficient progress towards a cure. During the second quarter of 2000, the Health Care Financing Administration ("HCFA"), which runs the Medicare program, announced its intent to adjust certain pharmaceutical reimbursement mechanisms. HCFA targeted dozens of drugs, principally those used for the treatment of cancer and AIDS. More specifically, Medicare utilizes the average wholesale price ("AWP") of pharmaceuticals as the benchmark for reimbursement. It is HCFA's stated position that some drug companies are reporting artificially inflated AWPs to industry guides that are used for government-reimbursement purposes resulting in overpayments by Medicare and excess profits for physicians and other providers. HCFA's investigation into inflated AWPs is ongoing. On September 8, 2000, HCFA announced that the previously reported reductions in reimbursement rates for oncology drugs would not be fully implemented pending a comprehensive study to develop more accurate reimbursement methodologies for cancer therapy services. However, HCFA did encourage its intermediaries to adopt a new fee schedule for selected chemotherapy agents. To date, the Company has not experienced any reduction in reimbursement levels related to these chemotherapy agents. However, should any of these reimbursement changes occur, it could have a material adverse effect on reimbursement for certain pharmaceutical products utilized by the Company's affiliated physicians in the practice management division. Consequently, the Company's management fee in its practice management relationships could be materially reduced. Given the dynamic nature of the proposed changes, the Company is currently not able to reasonably estimate their financial impact. On December 1, 2000, the Company received a delisting notification from the Nasdaq Stock Market for failure to maintain a minimum bid price of $1.00 over 15 16 the last 30 consecutive trading days as required under the maintenance standards of the Nasdaq National Market. The Company had 90 calendar days, or until January 30, 2001, to regain compliance with this rule by obtaining a bid price on its common stock of at least $1.00 for a minimum of 10 consecutive trading days. On March 15, 2001, the Company's common stock was delisted from the Nasdaq Stock Market. The decision was issued following a written appeal and hearing before the Nasdaq Listing Qualifications Panel due to the non-compliance with the listing standard that requires the Company's stock to maintain a minimum bid price of $1.00 or more. The Company's common stock is currently traded on the OTC Bulletin Board. RESULTS OF OPERATIONS 2000 COMPARED TO 1999 Net revenue decreased 3% to $130.8 million for the year ended December 31, 2000, compared to $135.6 million for the year ended December 31, 1999. The $14.1 million, or 50%, decrease in IMPACT Center revenue continues to reflect the confusion and related pullback in breast cancer admissions resulting from high dose chemotherapy/breast cancer study results presented at ASCO in May 1999. In addition, the Company experienced a decline in insurance approvals on the high dose referrals obtained. Since the release of the study results, the Company's high dose business has slowed significantly, as evidenced by a 49% decrease in high dose procedures in 2000 as compared to 1999. Practice management service fees were $77.7 million in 2000 compared to $68.4 million in 1999 for a 14% increase. This increase was due to growth in patient volumes for both non-ancillary and ancillary services and pharmaceutical utilization, and occurred despite a 7% decrease in the number of physicians under management agreements during the year ended December 31, 2000 as compared to 1999. Additionally, pharmaceutical sales to physicians increased $1 million, or 3%, from $37.5 million in 1999 to $38.5 million in 2000. This increase is due to increased drug utilization by the physicians serviced under these agreements, but was tempered by the termination of pharmaceutical sales agreements with two physician practices effective July 1, 2000. As described earlier, management believes that enhanced pharmaceutical services represent a significant area of opportunity for revenue growth. Salaries and benefits costs decreased $4.5 million, or 17%, from $25.8 million in 1999 to $21.3 million in 2000. The decrease was primarily due to the termination of certain Service Agreements in 1999, 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. Salaries and benefits expense as a percentage of net revenue was 16% in 2000 and 19% in 1999. Supplies and pharmaceuticals expense increased $9.2 million, or 12%, from 1999 to 2000. The increase was primarily related to greater utilization of new chemotherapy agents with higher costs in the practice management division and increased volume in pharmaceutical sales to physicians. Supplies and pharmaceuticals expense as a percentage of net revenue was 68% and 59% for the years ended 2000 and 1999, respectively. The increase as a percentage of net revenue was due to the increase in pharmaceutical sales to physicians as well as general price increases in pharmaceuticals used in the practice management division. Pharmaceutical sales to physicians have lower margins than high dose treatment and physician practice management pharmaceutical margins. Other operating expenses decreased $2.8 million, or 24%, from $11.5 million in 1999 to $8.7 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 was 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 year ended December 31, 1999. General and administrative expense increased $.4 million or 7%, from $6.5 million in 1999 to $6.9 million in 2000. The increase was primarily due to the net effect of increased expenses for professional services, principally consulting fees related to the Company's restructuring efforts, and decreased administrative expenses due to the closure of various IMPACT Centers and the termination of certain Service Agreements. For the year ended December 31, 2000, all operating and general expenses other than those related to pharmaceuticals and supplies were reduced by $6.9 million, 16 17 or 16%, as compared with those for the year ended December 31, 1999. These reductions reflect cost reduction and containment steps put in place in the first quarter of 2000, the closure of 19 IMPACT Centers, lower patient volumes and the termination of certain Service Agreements. Depreciation and amortization increased $.1 million from $4.5 million in 1999 to $4.6 million in 2000. Had the Oncology/Hematology Group sales transaction been effected as of January 1, 2000, depreciation and amortization would have declined to $3.6 million on a pro forma basis in 2000. EBITDA (earnings before interest, taxes, depreciation and amortization) decreased $19.8 million to ($13.4) million for the year ended December 31, 2000 in comparison to $6.4 million for the year ended December 31, 1999. EBITDA from the IMPACT services segment decreased $6.8 million, or 103%, for the year ended December 31, 2000 as compared to the year ended December 31, 1999. The decrease is primarily due to a decrease in referral volumes and high dose chemotherapy procedures. In addition, during the second quarter of 2000, the Company received notices of termination of pharmaceutical sales agreements from two physician practices effective July 1, 2000. EBITDA from the physician practice management segment decreased $14.1 million, or 193%, for the year ended December 31, 2000 as compared to the year ended December 31, 1999. This decrease is primarily due to the charge of $16.0 million recorded in the fourth quarter of 2000 to adjust the Service Agreement and associated assets to their net realizable value related to the sale of a physician practice. 1999 COMPARED TO 1998 Net revenue increased 6% to $135.6 million for the year ended December 31, 1999, compared to $128.2 million for the year ended December 31, 1998. Practice management service fees were $68.4 million in 1999 compared to $59.5 million in 1998 for a 15% increase. This increase was due to growth in utilization of both non-ancillary and ancillary services. Pharmaceutical sales to physicians increased $10.7 million or 40% from $26.8 million in 1998 to $37.5 million in 1999. Additionally, net patient service revenues from IMPACT services decreased $9.8 million or 26% from $38.0 million in 1998 to $28.2 million in 1999. This decrease in IMPACT services revenues was primarily due to reduced breast cancer patient referrals subsequent to research study data released at the annual meeting of ASCO in May 1999. Salaries and benefits increased $.6 million, or 2%, from $25.2 million in 1998 to $25.8 million in 1999. The increase was primarily attributable to the addition of personnel in the practice management division and general increases in salaries and benefits. Salaries and benefits as a percentage of net revenue was 19% and 20% in 1999 and 1998, respectively. Supplies and pharmaceuticals expense increased $12.9 million, or 19%, from 1998 to 1999. The increase was primarily related to greater utilization of new chemotherapy agents with higher costs in the practice management division and increased volume in pharmaceutical sales to physicians. Supplies and pharmaceuticals expense as a percentage of net revenue was 59% and 52% for the years ended 1999 and 1998, respectively. The increase as a percentage of net revenue was 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. Other operating expenses decreased $2.4 million, or 17%, from $13.9 million in 1998 to $11.5 million in 1999. Other operating expenses consist primarily of medical director fees, rent expense, and other operational costs. The decrease was primarily due to lower purchased services and physician fees as a result of lower IMPACT and cancer research patient volumes as compared to 1998. General and administrative expenses decreased $.8 million, or 11%, from $7.3 million in 1998 to $6.5 million in 1999. The decrease was primarily due to expenses recognized in 1998 for various aborted mergers and acquisitions and the termination of the Service Agreements with two of the Company's three underperforming net revenue model relationships. Depreciation and amortization decreased $1.1 million from $5.6 million in 1998 to $4.5 million in 1999. The decrease was primarily attributable to the impairment of management service agreements recognized in the fourth quarter of 1998. EBITDA (earnings before interest, taxes, depreciation and amortization) increased $20.4 million or 146% to $6.4 million for the year ended December 31, 1999 in comparison to ($14.0) million for the year ended December 31, 1998. EBITDA from the IMPACT services segment decreased $4.4 million, or 40%, for the 17 18 year ended December 31, 1999 as compared to the year ended December 31, 1998. The decrease in IMPACT services revenues was primarily due to reduced breast cancer patient referrals subsequent to research study data released at the annual meeting of ASCO in May 1999. EBITDA from the physician practice management segment increased $36.8 million, or 125%, for the year ended December 31, 1999 as compared to the year ended December 31, 1998. This increase is primarily due to the reserve for impairment of Service Agreements established in the fourth quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had a working capital deficit of ($9.7) million with current assets of $44.3 million and current liabilities of $54.0 million. Cash and cash equivalents represented $7.3 million of the Company's current assets. Negative working capital is primarily attributable to the current balance sheet classification of amounts due under the Company's Credit Facility, as further described below. Cash provided by operating activities was $5.1 million in 2000 as compared to cash provided by operating activities of $12.8 million in 1999. The decrease in operating cash flow is largely attributable to the increased net losses incurred by the Company in 2000 as compared to 1999. This decrease is also due to the timing of inventory purchases and amounts due from affiliated physician groups, tempered by increased collections on accounts receivable and the timing of payments of accounts payable and accrued expenses. Cash used in investing activities was $.6 million and $.7 million in 2000 and 1999, respectively. This decrease is primarily the result of lower expenditures for equipment. Cash used in financing activities was $4.4 million in 2000 and $5.9 million in 1999. This decrease is primarily attributable to additional payments on notes payable in 1999 as compared to 2000, a decrease in distributions to joint venture partners, and no financing costs being incurred in 2000, as compared to 1999. The terms of the Company's original lending agreement provided for a $42.0 million Credit Facility, to mature in June 2002, to fund the Company's acquisition and working capital needs. The Credit Facility, originally 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 an original spread between 1.375% and 2.5%, depending upon borrowing levels. The Company was also obligated to a commitment fee of .25% to .5% of the unused portion of the Revolving Credit Facility. At December 31, 2000, $33.7 million aggregate principal was outstanding under the Credit Facility with a current interest rate of approximately 12.7%. The Company is subject to certain affirmative and negative covenants which, among other things, originally required that the Company maintain certain financial ratios, including minimum fixed charge coverage, funded debt to EBITDA and minimum net worth. This original lending agreement was subsequently and significantly amended in November 1999, and March 2000, as described below. 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. Compliance with certain covenants was also waived for the quarters ending September 30, 1999 and December 31, 1999. On March 30, 2000, the Company and its lenders again 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. During the third quarter of 2000, the Company did not meet certain financial covenants of the Credit Facility, including those related to minimum cash flow requirements. This occurred primarily due to further erosion in high dose chemotherapy volumes. As a result of this event of default, the Company's lenders adjusted the interest rates on the outstanding principal to the default rate of prime plus 3% (12.5% at the time of default) and terminated any 18 19 obligation to advance additional loans or issue letters of credit. As a result of this termination, the Company has not experienced an impact on operating cash flow. Under the terms of the Credit Facility, additional remedies available to the lenders (as long as an event of default exists and has not been cured) include acceleration of all principal and accrued interest outstanding, the right to foreclose on related security interests in the assets of the Company and stock of its subsidiaries, and the right of setoff against any monies or deposits that the lenders have in their possession. Effective December 29, 2000, the Company executed a forbearance agreement with its lenders. Under the terms of the forbearance agreement, the lenders agreed to forbear from enforcing their rights or remedies pursuant to the Credit Facility documents until the earlier of (i) March 30, 2001 (as amended), or (ii) certain defined events of default. During this period, the interest rate was adjusted to prime plus 2%. The forbearance agreement also required that the Company retain a financial advisor to assist in the development of a restructuring plan and perform certain valuation analyses. The Company has submitted the restructuring plan to its lenders and is negotiating an extension to the Credit Facility. With the Company's March 29, 2001 Chapter 11 bankruptcy filing, any potential future revisions to the Credit Facility are subject to Chapter 11 reorganization processes (described elsewhere in conjunction with discussion of the filing). There can be no assurances as to the form of such revisions (if any) or their impact on the Company's financial position or continued business viability. Additionally, as of the date of the bankruptcy filing, the Company was in technical default under the terms of the Credit Facility. The Company enters into LIBOR-based interest rate swap agreements ("Swap Agreement") with the Company's lender as required by the terms of the Credit Facility. In June 2000, the Company entered into a new Swap Agreement effective July 1, 2000. Amounts hedged under this most recent Swap Agreement accrue interest at the difference between 7.24% and the ninety-day LIBOR rate and are settled quarterly. The Company has hedged $17.0 million under the terms of the Swap Agreement. The Swap Agreement matures on July 1, 2001. 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 $.8 million at December 31, 2000. The Company is committed to future minimum lease payments under operating leases of $15.3 million for administrative and operational facilities. 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 proposed detailed regulations to protect individual health information that is maintained or transmitted electronically from improper access, alteration or loss. To date, only the transactions and code sets standards have been finalized. However, privacy standards are expected to be finalized effective April 14, 2001. 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 is currently assessing preliminary HIPAA issues, with detailed compliance and integration measures taking place in 2001 and 2002. Because only certain elements of the HIPAA regulations have 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 its financial position and operations. NEW ACCOUNTING STANDARD The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires all entities to report derivative securities at fair value on the balance sheet. The Company has 19 20 reviewed the applicability and implications of SFAS No. 133 for the Company's financial statements. The sole derivative instrument to which the accounting prescribed by the Statement is applicable is the Swap Agreement described above. The Company recorded a cumulative adjustment charge in implementing the Statement on January 1, 2001 of approximately $111,000 in recognition of the reported fair value of the Swap Agreement. 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 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; (xi) uncertainty pertaining to the outcome of the Chapter 11 filing by the Company; and (xii) issues related to the implementation of the Company's new business plan. 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 7A. 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 7.24% and the ninety-day LIBOR rate and are settled quarterly. As of December 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 2001. The Company does not enter into derivative or interest rate transactions for speculative purposes. At December 31, 2000, $33.7 million aggregate principal was outstanding under the Credit Facility with a default interest rate of approximately 12.7%. The Company does not have any other material market-sensitive financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item is submitted in a separate section of this report (see pages 25 through 42). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 20 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item with respect to the executive officers and directors of the Company is incorporated herein by reference to the sections entitled "Executive Officers" and "Nominees for Election as Directors" in the Company's definitive proxy statement for its Annual Meeting of Shareholders to be held July 10, 2001. ITEM 11. EXECUTIVE COMPENSATION The information required by this item with respect to executive compensation is incorporated herein by reference to the section entitled "Executive Compensation" in the Company's definitive proxy statement for its Annual Meeting of Shareholders to be held July 10, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners, Directors and Management" in the Company's definitive proxy statement for its Annual Meeting of Shareholders to be held July 10, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section entitled "Certain Transactions" in the Company's definitive proxy statement for its Annual Meeting of Shareholders to be held July 10, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) -- The response to this portion of Item 14 is submitted as a separate section of this report (a)(3) LISTING OF EXHIBITS 2(a) Stock Purchase Agreement between the Registrant and stockholders of Oncology Hematology Group of South Florida (filed as Exhibit 10(m) to Registrant's Form 8-K filed January 17, 1996 (File No. 0-15416) and incorporated herein by reference) 2(b) Purchase and Sale Agreement between the Registrant, Knoxville Hematology Oncology Associates and Partners of Knoxville Hematology Oncology Associates (filed as Exhibit 10(q) to Registrant's Form 8-K filed April 15, 1996 (File No. 0-15416) and incorporated herein by reference) 2(c) Stock Purchase Agreement between the Registrant and stockholders of Jeffrey L. Paonessa, M.D., P.A. (filed as Exhibit 10(s) to Registrant's Form 8-K filed July 5, 1996 (File No. 0-15416) and incorporated herein by reference) 2(d) Stock Purchase Agreement between the Registrant and stockholders of Southeast Florida Hematology Oncology Group, P.A. (filed as Exhibit 2(d) to Registrant's Form 8-K filed July 15, 1996 (File No. 0-15416) and incorporated herein by reference) 2(e) Asset Purchase Agreement by and among the Registrant, stockholders of The Center for Hematology-Oncology, P.A. and the Registrant's Form 8-K filed October 21, 1996 (File No. 1-09922) and incorporated herein by reference 2(f) Stock Purchase Agreement by and among the Registrant, stockholders of Hematology Oncology Associates of the Treasure Coast, P.A., and Hematology Oncology Associates of the Treasure Coast, P.A. (filed as Exhibit 10(z) to the Registrant's Form 8-K filed November 5, 1996 (File No 1-09922) and incorporated herein by reference) 3(a) Charter (1) 3(b) Bylaws (2) 4 Trust Indenture, Deed of Trust and Security Agreement dated April 3, 1990 (3) 10(a) Registrant's 1985 Stock Option Plan, as amended (4) 21 22 10(b)* Registrant's 1990 Non-Qualified Stock Option Plan, as amended** (6)(8) 10(c)* Employment agreement between the Registrant and William H. West, M.D. dated January 1, 1995* 10(d)* Employment agreement between the Registrant and Joseph T. Clark dated July 1, 1995**(7) 10(e) Service Agreement between the Registrant and stockholders of Oncology Hematology Group of South Florida (filed as Exhibit 10(n) to Registrant's Form 8-K filed January 17, 1996 (File No. 0-15416) and incorporated herein by reference) 10(f)** Amendment to 1990 Registrant's Non-Qualified Stock Option Plan adopted April 20, 1995 (7) 10(g) Service Agreement between the Registrant and stockholders of Jeffrey L. Paonessa, M.D., P.A. (filed as Exhibit 10(t) to Registrant's Form 8-K filed July 5, 1996 (File No. 0-15416) and incorporated herein by reference) 10(h) Service Agreement between the Registrant and stockholders of Southeast Florida Hematology Oncology Group, P.A. (filed as Exhibit 10(u) to Registrant's Form 8-K filed July 15, 1996 (File No 0-15416) and incorporated herein by reference) 10(i)** Amendment No. 3 to 1990 Registrant's Non-qualified Stock Option Plan adopted December 16, 1995 (8) 10(j) Service Agreement between the Registrant, Rosenberg & Kalman, M.D., P.A., and stockholders of R&K, M.D., P.A. (filed as Exhibit 10(x) to Registrant's Form 8-K filed September 18, 1996 (File No. 1-09922) and incorporated herein by reference) 10(k) Loan Agreement dated April 21, 1997 between Registrant, NationsBank of Tennessee, N.A., AmSouth Bank of Tennessee and Union Planters National Bank (10) 10(l) Registrant's 1996 Stock Incentive Plan (9) 10(m) Second amendment to First Amended and Restated Loan Agreement dated March 31, 1999 between Registrant, NationsBank of Tennessee, N.A., AmSouth Bank of Tennessee and Union Planters National Bank (11) 10(n) First Amendment to Revolving Credit Note dated March 31, 1999 between Registrant, NationsBank of Tennessee, N.A., AmSouth Bank of Tennessee and Union Planters National Bank (11) 10(o) Credit Agreement dated June 10, 1999 between Registrant, AmSouth Bank, Union Planters National Bank and NationsBank, N.A. (12) 10(p) Swap Agreement dated June 25, 1999 between Registrant and NationsBank, N.A. (12) 10(q) Employment Agreement between Registrant and Anthony M. LaMacchia (13) 10(r) First Amendment to Credit Agreement dated September 30, 1999, between Registrant, AmSouth Bank, Union Planters Bank, N.A. and Bank of America, N.A. (14) 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 (15) 10(t) Employment Agreement between Registrant and Patrick J. McDonough (16) 10(u) Swap Agreement dated June 29, 2000 between Registrant and Bank of America, N.A. (16) 10(v) Employment Agreement between Registrant and Nelson M. Braslow, M.D. (17) 10(w) Forbearance Agreement dated December 29, 2000, between Registrant, AmSouth Bank, Union Planters Bank, N.A. and Bank of America, N.A. 10(x) First Amendment to Forbearance Agreement dated February 28, 2001, between Registrant, AmSouth Bank, Union Planters Bank, N.A. and Bank of America, N.A. 11 Statement regarding Computation of Per Share Earnings 13 Annual Report to Shareholders for the year ended December 31, 2000 -- to be filed 21 List of Subsidiaries 23 Consent of Independent Auditors - -------------------------------------------- * These documents may be obtained by stockholders of Registrant upon written request to: Response Oncology, Inc., 1805 Moriah Woods Blvd., Memphis, Tennessee 38117 ** Management Compensatory Plan (1) Incorporated by reference to the Registrant's 1989 10-K, dated July 31, 1989 (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 under the Securities Act of 1933 (File No. 33-5016) effective April 21, 1986 (3) Incorporated by reference in the initial filing of the Registrants' 1990 10-K, dated July 18, 1990, filed July 20, 1990 and amended on September 19, 1990 22 23 (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 under the Securities Act of 1933 (File No. 33-21333) effective April 26, 1988 (5) Incorporated by reference to the Registrant's 1991 10-K, dated July 26, 1991 (6) Incorporated by reference to the Registrant's Registration Statement on Form S-8 under the Securities Act of 1933 (File No. 33-45616) effective February 11, 1992 (7) Incorporated by reference to the Registrant's 1995 10-K, dated March 29, 1996 (8) Incorporated by reference to the Registrant's Registration Statement on Form S-8 under the Securities Act of 1933 (File No. 333-14371) effective October 11, 1996 (9) Incorporated by reference to the Registrant's Statement on Form S-8 under the Securities Act of 1933 (File No. 333-28973) effective June 11, 1997 (10) Incorporated by reference to the Registrant's 1997 10-K dated March 31, 1998 (11) Incorporated by reference to the Registrant's 1998 10-K dated March 31, 1999 (12) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (13) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (14) Incorporated by reference to the Registrant's 1999 10-K, dated March 30, 2000 (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (b) Reports on Form 8-K filed in the fourth quarter of 2000 - None (c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report 23 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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/ ANTHONY M. LAMACCHIA -------------------------- Anthony M. LaMacchia President, Chief Executive Officer, and Director Date: April 17, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. By: /s/ FRANK M. BUMSTEAD By:/s/ PETER A. STARK ----------------------------- ----------------------------------- Frank M. Bumstead Peter A. Stark Vice-Chairman of the Board Executive Vice President, Chief Financial Officer Date: April 17, 2001 Date: April 17, 2001 By: /s/ ANTHONY M. LAMACCHIA By:/s/ P. ANTHONY JACOBS -------------------------- ------------------------------------- Anthony M. LaMacchia P. Anthony Jacobs President, Chief Executive Director Officer, and Director Date: April 17, 2001 Date: April 17, 2001 By: /s/JAMES R. SEWARD By:/s/ WILLIAM H. WEST, M.D. ----------------------------- -------------------------- James R. Seward William H. West, M.D. Director Chairman of the Board Date: April 17, 2001 Date: April 17, 2001 By: /s/LAWRENCE N. KUGELMAN By:/s/ W. THOMAS GRANT II ----------------------------- -------------------------- Lawrence N. Kugelman W. Thomas Grant II Director Director Date: April 17, 2001 Date: April 17, 2001 24 25 Independent Auditors' Report The Board of Directors Response Oncology, Inc.: We have audited the accompanying consolidated balance sheets of Response Oncology, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Response Oncology, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note B, on March 29, 2001, the Company filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court. This event and related circumstances, including those discussed in Note F, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements and financial statements schedule do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP Memphis, Tennessee March 30, 2001 25 26 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
DECEMBER 31, ------------------------- 2000 1999 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,327 $ 7,195 Accounts receivable, less allowance for doubtful accounts of $3,489 and $2,632 9,469 16,007 Supplies and pharmaceuticals 3,702 3,485 Prepaid expenses and other current assets 3,529 4,778 Due from affiliated physician groups 19,121 16,884 Deferred income taxes 1,168 114 --------- --------- TOTAL CURRENT ASSETS 44,316 48,463 Property and equipment, net 3,212 4,222 Deferred charges, less accumulated amortization of $320 and $86 156 380 Management service agreements, less accumulated amortization of $7,685 and $8,206 44,231 66,113 Other assets 498 467 --------- --------- TOTAL ASSETS $ 92,413 $ 119,645 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 14,665 $ 15,665 Accrued expenses and other liabilities 4,581 5,440 Current portion of notes payable 34,509 3,745 Current portion of capital lease obligations 277 267 --------- --------- TOTAL CURRENT LIABILITIES 54,032 25,117 --------- --------- Notes payable, less current portion -- 35,445 Capital lease obligations, less current portion 303 580 Deferred income taxes 3,525 9,802 Minority interest 1,164 924 STOCKHOLDERS' EQUITY Series A convertible preferred stock, $1.00 par value (aggregate 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 12,290,764 and 12,270,406 shares 123 123 Paid-in capital 102,011 101,980 Accumulated deficit (68,762) (54,343) --------- --------- TOTAL NET STOCKHOLDERS' EQUITY 33,389 47,777 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,413 $ 119,645 ========= =========
See accompanying notes to consolidated financial statements. 26 27 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollar amounts in thousands except for share data)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ NET REVENUE $ 130,833 $ 135,567 $ 128,246 COSTS AND EXPENSES Salaries and benefits 21,308 25,810 25,227 Pharmaceuticals and supplies 89,444 80,210 67,290 Other operating costs 8,683 11,529 13,887 General and administrative 6,927 6,487 7,315 Depreciation and amortization 4,610 4,509 5,579 Interest 3,680 3,305 2,946 Provision for doubtful accounts 1,309 2,625 2,947 Impairment of management service agreements and associated assets 15,951 1,921 35,489 ------------ ------------ ------------ 151,912 136,396 160,680 ------------ ------------ ------------ LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (21,079) (829) (32,434) Minority owners' share of net earnings (633) (700) (749) ------------ ------------ ------------ LOSS BEFORE INCOME TAXES (21,712) (1,529) (33,183) Income tax provision (benefit) (7,293) 164 (15,735) ------------ ------------ ------------ NET LOSS (14,419) (1,693) (17,448) Dividend to preferred stockholders -- -- (1) ------------ ------------ ------------ NET LOSS TO COMMON STOCKHOLDERS $ (14,419) $ (1,693) $ (17,449) ============ ============ ============ LOSS PER COMMON SHARE: Basic $ (1.17) $ (0.14) $ (1.45) ============ ============ ============ Diluted $ (1.17) $ (0.14) $ (1.45) ============ ============ ============ Weighted average number of common shares: Basic 12,288,352 12,014,153 12,039,480 ============ ============ ============ Diluted 12,288,352 12,014,153 12,039,480 ============ ============ ============
See accompanying notes to consolidated financial statements. 27 28 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollar amounts in thousands except for share data)
SERIES A CONVERTIBLE PREFERRED STOCK COMMON STOCK ----------------------- ----------------------- PAR VALUE PAR VALUE TOTAL $1.00 PER $.01 PER PAID-IN ACCUMULATED STOCKHOLDERS' SHARES SHARE SHARES SHARE CAPITAL DEFICIT EQUITY --------- ----------- ---------- --------- ----------- ------------ ----------- Balances at December 31, 1997 27,233 $ 27 11,972,358 $ 120 $ 101,402 ($ 35,201) $ 66,348 Net loss (17,448) (17,448) Exercise of common stock options 54,164 320 320 Common stock issued in connection with practice affiliations 22,406 190 190 Conversion of preferred stock (602) 110 Dividend on preferred stock 293 1 (1) -- ------- --------- ----------- ------- ----------- --------- --------- Balances at December 31, 1998 26,631 27 12,049,331 120 101,913 (52,650) 49,410 Net loss (1,693) (1,693) Common stock issued in connection with practice affiliations 36,870 1 112 113 Common stock issued under compensation plan 300,000 3 297 300 Common stock received in connection with practice termination (117,811) (1) (352) (353) Conversion of preferred stock (10,000) (10) 1,833 10 Dividend on preferred stock 183 ------- --------- ----------- ------- ----------- --------- --------- Balances at December 31, 1999 16,631 17 12,270,406 123 101,980 (54,343) 47,777 Net loss (14,419) (14,419) Exercise of common stock options 20,175 31 31 Dividend on preferred stock 183 ------- --------- ----------- ------- ----------- --------- --------- Balances at December 31, 2000 16,631 $ 17 12,290,764 $ 123 $ 102,011 ($ 68,762) $ 33,389 ======= ========= =========== ======= =========== ========= =========
See accompanying notes to consolidated financial statements. 28 29 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- OPERATING ACTIVITIES Net loss ($14,419) ($ 1,693) ($17,448) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 4,610 4,509 5,579 Impairment of management service agreements and associated assets 15,951 1,921 35,489 Deferred income taxes (7,331) 1,920 (16,367) Provision for doubtful accounts 1,309 2,625 2,947 Gain on sale of property and equipment (67) -- -- Minority owners' share of net earnings 633 700 749 Changes in operating assets and liabilities net of effect of acquisitions: Accounts receivable 5,229 4,212 (8,881) Supplies and pharmaceuticals, prepaid expenses and other current assets 880 1,359 (2,624) Deferred charges and other assets 193 (178) (175) Due from affiliated physician groups (1,067) (108) (4,955) Accounts payable and accrued expenses (800) (2,472) 8,467 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,121 12,795 2,781 -------- -------- -------- INVESTING ACTIVITIES Purchase of equipment (645) (741) (1,702) Proceeds from sale of property and equipment 87 -- -- Acquisition of nonmedical assets of affiliated physician groups -- -- (1,011) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (558) (741) (2,713) -------- -------- -------- FINANCING ACTIVITIES Financing costs incurred -- (416) -- Proceeds from exercise of stock options and warrants 32 -- 320 Distributions to joint venture partners (392) (757) (805) Proceeds from notes payable -- 1,734 8,191 Principal payments on notes payable (3,804) (6,202) (8,907) Principal payments on capital lease obligations (267) (301) (209) -------- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (4,431) (5,942) (1,410) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 132 6,112 (1,342) Cash and cash equivalents at beginning of period 7,195 1,083 2,425 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,327 $ 7,195 $ 1,083 ======== ======== ========
Continued: 29 30
YEARS ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------ ------- ------- Supplemental schedule of noncash investing and financing activities: Effect of practice affiliations: Intangible assets -- $ 1,036 $ 1,040 Property and equipment -- 15 20 Acquired accounts receivable, net -- -- 139 Other assets -- (695) -- ------ ------- ------- Total assets acquired, net of cash -- 356 1,199 ------ ------- ------- Liabilities assumed -- -- -- Issuance of notes payable -- (244) -- Issuance of common stock -- (112) (188) ------ ------- ------- Payments for practice affiliation operating assets -- -- $ 1,011 ====== ======= ======= Cash paid for interest $3,500 $ 3,831 $ 3,010 ====== ======= ======= Cash paid for income taxes $ 280 $ 55 $ 2,202 ====== ======= =======
See accompanying notes to consolidated financial statements. 30 31 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE A--ORGANIZATION AND DESCRIPTION OF BUSINESS Response Oncology, Inc. (the "Company") is a comprehensive cancer management company which owns and/or operates a network of outpatient treatment centers ("IMPACT(R) Centers"), that provide stem cell supported high dose chemotherapy and other advanced cancer treatment services under the direction of practicing oncologists; compounds and dispenses pharmaceuticals to certain oncologists for a fixed or cost plus fee; owns the assets of and manages oncology practices; and conducts outcomes research on behalf of pharmaceutical manufacturers. NOTE B--BANKRUPTCY PROCEEDINGS On March 29, 2001, the Company filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code and began operating its business as a debtor-in-possession under the supervision of the Bankruptcy Court. A statutory creditors committee will be appointed in the Chapter 11 case, and substantially all of the Company's liabilities as of the filing date ("prepetition liabilities") are subject to settlement under a plan of reorganization. Generally, actions to enforce or otherwise effect repayment of all prepetition liabilities as well as all pending litigation against the Company are stayed while the Company continues to operate its business as debtor-in-possession. Schedules will be filed by the Company with the Bankruptcy Court setting forth its assets and liabilities as of the filing date as reflected in the Company's accounting records. Differences between amounts reflected in such schedules and claims filed by creditors will be investigated and either amicably resolved or subsequently adjudicated before the Bankruptcy Court. The ultimate amount and settlement terms for such liabilities are subject to a plan of reorganization, and accordingly, are not presently determinable. NOTE C--SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and majority-owned or controlled joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS: All highly liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents. ACCOUNTS RECEIVABLE: Accounts receivable primarily consists of receivables from patients, insurers, government programs and other third-party payors for medical services provided. Such amounts are reduced by an allowance for contractual adjustments and other uncollectible amounts. Contractual adjustments result from the differences between the amounts charged for services performed and the amounts allowed by the Medicare and Medicaid programs and other public and private insurers. DUE FROM AFFILIATED PHYSICIANS: Due from affiliated physicians consists of management fees earned and due pursuant to related Management Service Agreements ("Service Agreements" - see below). In addition, the Company may also fund certain working capital needs of affiliated physicians from time to time. A significant portion of the affiliated physicians' medical service revenues are related to third-party reimbursement agreements, primarily Medicare and other governmental programs. Medicare and other governmental programs reimburse physicians based on fee schedules which are determined by the related governmental agency. In the ordinary course of business, affiliated physicians receiving reimbursement from Medicare and other governmental programs are potentially subject to a review by regulatory agencies concerning the accuracy of billings and sufficiency of supporting documentation of procedures performed. SUPPLIES AND PHARMACEUTICALS: Supplies and pharmaceuticals are recorded at lower of cost (first-in, first-out) or market. 31 32 PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives which range from three to ten years. Equipment under capital lease obligations is amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the consolidated financial statements. MANAGEMENT SERVICE AGREEMENTS: The recorded value of Service Agreements results from the excess of the purchase price over the fair value of net assets of acquired practices. The Service Agreements are noncancelable except for performance defaults, as defined. In the event a practice breaches the agreement, or if the Company terminates with cause, the practice is required to purchase all tangible assets at fair value and pay substantial liquidated damages. At each reporting period, the Company reviews the carrying value of Service Agreements on a practice-by-practice basis to determine if facts and circumstances exist which would suggest that the value of the Service Agreements may be impaired or that relevant amortization periods need to be modified. Among the factors considered by the Company in making the evaluation are changes in the practices' market position, reputation, profitability and geographical penetration. Using these factors, if circumstances are present which may indicate impairment is probable, the Company will prepare a projection of the undiscounted cash flows before interest charges of the specific practice and determine if the Service Agreements are recoverable based on these undiscounted cash flows. Additionally, the impairment evaluation also routinely considers the Company's current strategic and operational plans with respect to its Service Agreement portfolio, including active and/or contemplated negotiations with related physicians, and assesses implications for the fair value of Service Agreement and associated assets. If impairment is indicated, then an adjustment will be made to reduce the carrying value of intangible and, if applicable, associated net assets to fair value. Certain Service Agreements were determined to be impaired during 2000, 1999 and 1998, as more fully discussed in Note D. DEFERRED CHARGES: Deferred charges includes costs capitalized in connection with obtaining long-term financing and are being amortized using the interest method over the terms of the related debt. 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' practices. Revenue recorded for these contracts represents the cost of pharmaceuticals plus a fixed or percentage fee. Clinical research revenue is recorded based upon the Company's contracts with certain pharmaceutical companies to manage clinical trials and is generally measured on a per patient basis for monitoring and collection of data. 32 33 The following table is a summary of net revenue by source. YEARS ENDED DECEMBER 31, (IN THOUSANDS) ------------------------------ 2000 1999 1998 -------- -------- -------- Net patient service revenue $ 14,105 $ 28,179 $ 37,957 Practice management service fees 77,671 68,413 59,527 Pharmaceutical sales to physicians 38,510 37,530 26,849 Clinical research revenue 547 1,445 3,913 -------- -------- -------- $130,833 $135,567 $128,246 ======== ======== ======== Revenue is recognized when earned. Revenues and related cost of revenues are generally recognized upon delivery of goods or performance of services. INCOME TAXES: The asset and liability method is used whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. LOSS PER COMMON SHARE: Loss per common share has been computed based upon the weighted average number of shares of common stock outstanding during the period, plus (in periods in which they have a dilutive effect) common stock equivalents, primarily stock options and warrants. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of a financial instrument is defined as the amount at which such an instrument could be exchanged in a current transaction between willing parties. Given the circumstances outlined in Notes B and F, it is not practicable to estimate the fair value of any such instruments in the Company's consolidated balance sheet at December 31, 2000. USE OF ESTIMATES: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain reclassifications have been made in the 1999 and 1998 consolidated financial statements to conform with the 2000 presentation, with no impact on the consolidated results of the Company. NOTE D - IMPAIRMENT OF MANAGEMENT SERVICE AGREEMENTS AND ASSOCIATED ASSETS The Company recognized a pretax impairment charge during the fourth quarter of 1998, based on the criteria described in Note C, totaling $35,489,000. This charge was principally related to the poor performance of three specific Physician Practice Management Service Agreements as further described below. Of the total charge, $33,094,000 related to the impairment of Service Agreement assets and $2,395,000 related to the write-off of certain net tangible assets associated with the individual physician practices. Certain significant economic issues, especially the introduction of new and more costly cancer drugs and the Company's related inability to convert the subject physician practices to a more equitable revenue sharing model, began to materially and negatively impact these practices during 1998. Practice operating losses and other factors led the Company to evaluate the recoverability of related Service Agreements and other assets. This evaluation and the factors described in the following paragraph led to the recognition of impairment charges in the accompanying 1998 financial statements, which included the complete write-off of the subject Service Agreement assets. Given the results of the evaluation described above, the Company began actively negotiating with the subject physician practices, principally regarding potential exit strategies and/or Service Agreement modifications. On February 1, 1999 and March 31, 1999, the Company executed termination agreements with two of 33 34 the three physician practices. The terms of the agreements provided for the termination of the Service Agreements and return of certain net tangible assets to the physician practices. 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. During the same period, the Company began negotiations to terminate another Service Agreement with a single-physician practice. 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 an impairment charge, based on similar evaluation processes as described above, related to the Service Agreements and associated assets totaling $1,185,000. The Company terminated the second Service Agreement in the second quarter of 2000. In the fourth quarter of 2000, the Company began negotiating, in response to certain contract disputes, to sell the assets of the OHG Group, to the existing physician group. Concurrent with the sale of the assets, the Service Agreement was terminated, and the parties signed a pharmacy management agreement for the Company to provide turnkey pharmacy management services to the practice. The sale and pharmacy management agreement were completed and effective February 1, 2001. At December 31, 2000, the Company has recorded an impairment charge totaling $15,951,000 related to the Service Agreement and associated assets, based on the terms of the related agreement. NOTE E--PROPERTY AND EQUIPMENT Balances of major classes of property and equipment at December 31, 2000 and 1999 are as follows: (In thousands) 2000 1999 -------- -------- Lab and pharmacy equipment $ 5,480 $ 5,423 Furniture and office equipment 5,532 5,666 Equipment under capital leases 2,597 2,597 Leasehold improvements 2,292 2,902 -------- -------- 15,901 16,588 Less accumulated depreciation and amortization (12,689) (12,366) -------- -------- $ 3,212 $ 4,222 ======== ======== NOTE F--NOTES PAYABLE Notes payable at December 31, 2000 and 1999 consist of the following: (In thousands)
2000 1999 -------- -------- Credit Facility (see below) $ 33,749 $ 36,667 Various subordinated notes payable to affiliated physicians and physician practices, bearing interest ranging from 4% to 9%, with maturity dates through 2001 758 2,457 Other notes payable collateralized by furniture and equipment, with interest rates between 8% and 10%, payable in monthly installments of principal and interest through 2001 2 66 -------- -------- Total notes payable 34,509 39,190 Less current portion (34,509) (3,745) -------- -------- -- $ 35,445 ======== ========
The terms of the Company's original lending agreement provided for a $42.0 million Credit Facility, to mature in June 2002, to fund the Company's acquisition and working capital needs. The Credit Facility, originally 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 an original spread between 1.375% and 2.5%, depending upon borrowing levels. The Company was also obligated to a commitment fee of .25% to .5% of the unused portion of the Revolving Credit Facility. At December 31, 2000, $33.7 million aggregate principal was outstanding under the Credit Facility with a default interest rate of approximately 12.7%. The Company is subject to certain affirmative and negative covenants which, among other things, originally 34 35 required that the Company maintain certain financial ratios, including minimum fixed charge coverage, funded debt to EBITDA and minimum net worth. This original lending agreement was subsequently and significantly amended in November 1999, and March 2000, as described below. 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. Compliance with certain covenants was also waived for the quarters ended September 30, 1999 and December 31, 1999. On March 30, 2000, the Company and its lenders again 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. During the third quarter of 2000, the Company did not meet certain financial covenants of the Credit Facility, including those related to minimum cash flow requirements. This occurred primarily due to further erosion in high dose chemotherapy volumes. As a result of this event of default, the Company's lenders adjusted the interest rates on the outstanding principal to the default rate of prime plus 3% (12.5% at the time of default) and terminated any obligation to advance additional loans or issue letters of credit. The Company does not anticipate that the termination of the lenders obligation to advance additional loans or letters of credit will have an immediate impact on operations. Under the terms of the Credit Facility, additional remedies available to the lenders (as long as an event of default exists and has not been cured) include acceleration of all principal and accrued interest outstanding, the right to foreclose on related security interests in the assets of the Company and stock of its subsidiaries, and the right of setoff against any monies or deposits that the lenders have in their possession. Effective December 29, 2000, the Company executed a forbearance agreement with its lenders. Under the terms of the forbearance agreement, the lenders agreed to forbear from enforcing their rights or remedies pursuant to the Credit Facility documents until the earlier of (i) March 30, 2001 (as amended), or (ii) certain defined events of default. During this period, the interest rate was adjusted to prime plus 2%. The forbearance agreement also provided that a financial advisor be retained by the Company to assist in the development of a restructuring plan and perform certain valuation analyses. The Company has submitted the restructuring plan to its lenders and is negotiating an extension to the Credit Facility. With the Company's March 29, 2001 Chapter 11 bankruptcy filing, any potential future revisions to the Credit Facility are subject to Chapter 11 reorganization processes (described elsewhere in conjunction with discussion of the filing). There can be no assurances as to the form of such revisions (if any) or their impact on the Company's financial position or continued business viability. Additionally, as of the date of the bankruptcy filing, the Company was in technical default under the terms of the Credit Facility. The Company enters into LIBOR-based interest rate swap agreements ("Swap Agreement") with the Company's lender as required by the terms of the Credit Facility. In June 2000, the Company entered into a new Swap Agreement effective July 1, 2000. Amounts hedged under this most recent Swap Agreement accrue interest at the difference between 7.24% and the ninety-day LIBOR rate and are settled quarterly. The Company has hedged $17.0 million under the terms of the Swap Agreement. The Swap Agreement matures on July 1, 2001. The Company has reviewed the applicability and implications of SFAS No. 133 for the Company's financial statements. The sole derivative instrument to which the accounting prescribed by the Statement is applicable is the Swap Agreement described above. The Company recorded a cumulative adjustment charge in implementing the Statement on January 1, 2001 of approximately $111,000 in recognition of the reported fair value of the Swap Agreement. 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. 35 36 Amounts due under the Credit Facility have been classified in the consolidated balance sheet at December 31, 2000 in a fashion consistent with the contractual maturities in effect as of the balance sheet date. The aggregate maturities of long-term debt at December 31, 2000 are as follows: (In thousands) 2001 $34,509 2002 -- 2003 -- 2004 -- 2005 -- Thereafter -- -------------- $34,509 ============== NOTE G -- LEASES The Company leases certain office facilities and equipment under lease agreements with original terms ranging from one to forty years that generally provide for one or more renewal options. Interest has been imputed on capital leases at rates of 6% to 12%. Accumulated amortization of assets recorded under capital leases totaled $2,063,000 and $1,821,000 at December 31, 2000 and 1999, respectively. Amortization of leased assets is included in depreciation and amortization expense. Total rental expense under operating leases amounted to $3,331,000, $3,838,000, and $3,527,000 for the years ended December 31, 2000, 1999, and 1998 respectively. The Company is generally obligated to the lessors for its proportionate share of operating expenses of the leased premises. At December 31, 2000, future minimum lease payments under capital and operating leases with initial terms of one year or more are as follows (in thousands):
CAPITAL LEASES OPERATING LEASES ----------------- -------------------- Year ending December 31: 2001 $306 $2,101 2002 284 1,595 2003 31 1,244 2004 -- 1,131 2005 -- 828 Thereafter -- 8,416 ---------------- -------------------- Total minimum payments 621 $15,315 ==================== Less imputed interest 41 ---------------- Present value of minimum rental payments 580 Less current portion 277 ---------------- Capital lease obligations, less current portion $303 ================
NOTE H --- INCOME TAXES The components of the actual expense or benefit for the years ended 2000, 1999, and 1998 are as follows (in thousands): 36 37 2000 1999 1998 -------- -------- -------- Federal current tax expense (benefit) -- ($ 1,756) $ 500 State current tax expense 38 -- 132 Deferred federal tax expense (benefit) (6,201) 1,914 (13,780) Deferred state tax expense (benefit) (1,130) 6 (2,587) -------- -------- -------- ($ 7,293) $ 164 ($15,735) ======== ======== ======== The actual tax expense or benefit for the years ended December 31, 2000, 1999, and 1998 respectively, differs from the expected tax expense or benefit for those years (computed by applying the federal corporate tax rate of 34% to earnings or loss before income taxes) as follows (in thousands):
2000 1999 1998 -------- -------- -------- Computed expected tax benefit ($ 7,382) ($ 520) ($11,282) Permanent benefit of stock loss -- -- (4,855) Non-deductible expenses 4 19 25 Utilization of net operating loss carryforwards -- -- -- State tax expense (benefit) (721) 4 (1,620) Valuation allowance 1,200 779 2,238 Other (394) (118) (241) -------- -------- -------- Actual income tax expense (benefit) ($ 7,293) $ 164 ($15,735) ======== ======== ========
The approximate tax effects of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows (in thousands): 2000 1999 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 4,929 $ 3,974 Reserve for bad debts 887 105 Excess book depreciation/amortization 546 620 Minimum tax credit 181 -- Accrued expenses 228 -- Impairment of management service agreements and associated assets 3,369 3,541 -------- -------- Total deferred assets 10,140 8,240 Valuation allowance (4,217) (3,017) -------- -------- Net deferred tax assets 5,923 5,223 -------- -------- Deferred tax liability: Management service agreements 8,268 14,876 Other 12 35 -------- -------- Total deferred tax liability 8,280 14,911 -------- -------- Net deferred tax liability $ 2,357 $ 9,688 ======== ======== The valuation allowance for the deferred tax assets as of December 31, 2000 is $4,217,000. The net change in the total valuation allowance for the year ended December 31, 2000, was an increase of $1,200,000. Management believes that a valuation allowance is necessary with respect to certain losses which will expire. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not some portion or all of the deferred tax assets will be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, income taxes paid in prior years eligible to be offset by net operating loss carrybacks, and tax planning strategies in making this assessment. Based upon these factors, management believes it is more likely than not the Company will realize the benefits of ordinary deductible differences related to the net deferred tax asset of $5,923,000. 37 38 As of December 31, 2000, the Company had available for federal income tax purposes net operating loss carryforwards totaling approximately $12.3 million. Of this amount, $3.0 million of the net operating loss carryforward is subject to annual limitations and is likely to expire. In addition, as of December 31, 2000, the Company had approximately $17.5 million of state net operating loss carryforwards available. In addition to the net operating losses available to offset future taxable income, the Company has a minimum tax credit of $181,000 that can be carried forward indefinitely. NOTE I -- COMMON STOCK, CONVERTIBLE PREFERRED STOCK, WARRANTS, AND OPTIONS CONVERTIBLE PREFERRED STOCK: The shares of Series A Convertible Preferred Stock have the following rights and restrictions: (a) a preference in the event of liquidation equal to $11.00 per share; (b) the right to convert into the number of shares of common stock equal to the stated value of shares surrendered ($11.00) divided by the conversion price of $60.00 -- subject to certain adjustments; (c) the right to receive payment-in-kind dividends in the form of shares of common stock at the rate of .011 share of common stock per annum per share payable annually each year commencing January 15, 1988; (d) the shares are redeemable at the Company's option at $11.00 per share; and (e) holders of the preferred stock will not be entitled to vote. During the years ended December 31, 1999 and 1998, 10,000 and 602 shares of Series A Convertible Preferred Stock were converted into 1,833 and 110 shares of common stock, respectively. In December 2000, 1999, and 1998, the Board of Directors approved a common stock dividend of 183, 183 and 293 shares to the holders of the Series A Convertible Preferred Stock of record as of December 15, 2000, 1999, and 1998, respectively, that was paid January 2001, 2000, and 1999, respectively. The market value of the common stock distributed was approximately $34, $297 and $1,000 at December 15, 2000, 1999 and 1998, respectively.. The dividends have been reflected in the "Statement of Operations," and the weighted average number of common shares in the determination of net loss to common stockholders and the loss per common share calculations. The par value of the common stock distributed was recorded to paid-in capital. OPTIONS: The 1985 Stock Option Plan (the "1985 Plan"), as amended in fiscal year 1988, allows for granting of incentive stock options, non qualified stock options, and stock appreciation rights for up to 122,000 shares of common stock to eligible officers and key employees of the Company at an exercise price of not less than the market price of the common stock on the date of grant for an incentive stock option and not less than 85% of the market price of the common stock on the date of grant for a non qualified stock option. The 1985 Plan expired in 1995; no additional shares are available for grant. The 1990 Non Qualified Stock Option Plan (the "1990 Plan"), as amended in 1995, allows for the granting of up to 1,125,000 non qualified stock options to eligible officers, directors, key employees, and consultants of the Company at an exercise price of not less than the market price of the common stock on the date of grant with an option period up to 10 years. The 1996 Incentive and Non Qualified Stock Option Plan (the "1996 Plan"), as amended in 1997 and 2000, allows for the granting of up to 1,630,000 options to eligible officers, directors, advisors, medical directors, consultants, and key employees of the Company at an exercise price of not less than the market price of the common stock on the date of grant with an option period up to 10 years. 38 39 A summary status of the 1985 Plan as of December 31, 2000, 1999, and 1998 and changes during the years then ended is presented below:
2000 1999 1998 ---------------------------- ------------------------------ ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE FIXED OPTIONS OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ------------- ------------ -------------- ------------- ------------- ----------- ------------ Outstanding at beginning of year 51,100 $3.79 60,203 $3.85 61,203 $3.81 Exercised -- -- -- -- (1,000) 1.88 Forfeited (50,900) 3.75 (9,103) 3.59 -- -- ------------ ------------ ---------- Outstanding at end of year 200 11.88 51,100 3.79 60,203 3.85 ============ ============ ========== Options exercisable end of year 200 51,100 60,006 ============ ============ ==========
A summary status of the 1990 Plan as of December 31, 2000, 1999, and 1998 and changes during the years then ended is presented below:
2000 1999 1998 --------------------------- ---------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE FIXED OPTIONS OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ------------- ------------ ------------- ------------ ------------ ------------ ------------ Outstanding at beginning of year 783,972 $4.86 779,108 $6.34 810,034 $6.75 Granted -- -- 220,000 .69 54,500 6.75 Exercised (20,175) 1.56 -- -- (47,103) 6.00 Forfeited (114,732) 3.61 (215,136) 5.96 (38,323) 6.00 ------------ ------------ ------------ Outstanding at end of year 649,065 5.18 783,972 4.86 779,108 6.34 ============ ============ ============ Options exercisable end of year 530,736 569,609 754,420 ============ ============ ============
A summary status of the 1996 Plan for the years ended December 31, 2000, 1999, and 1998 and changes during the years then ended is presented below:
2000 1999 1998 ------------------------------ -------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE FIXED OPTIONS OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ------------- ------------ -------------- ------------ ------------ ------------ ----------- Outstanding at beginning of year 1,019,933 $3.67 1,101,690 $6.54 1,086,989 $6.55 Granted 324,000 1.10 579,000 .85 61,000 6.62 Exercised -- -- -- -- (8,061) 6.00 Forfeited (181,422) 6.16 (660,757) 5.98 (38,238) 6.97 ------------ ----------- ----------- Outstanding at end of year 1,162,511 2.57 1,019,933 3.67 1,101,690 6.54 ============ =========== =========== Options exercisable end of year 639,178 665,601 1,017,146 ============ =========== ===========
39 40 The following table summarizes information about fixed stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------- --------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - -------------------- -------------- ------------------ ------------ -------------- ---------------- $0.69 - $0.69 676,667 8.84 $0.69 343,337 $0.69 $0.91 - $1.13 364,000 9.22 $1.08 74,000 $1.00 $1.25 - $6.00 337,209 6.48 $5.51 323,876 $5.63 $6.25 - $11.56 346,600 5.99 $8.15 341,601 $8.16 $11.88 - $16.50 86,500 5.06 $13.90 86,500 $13.90 $16.88 - $16.88 800 4.75 $16.88 800 $16.88
The Company accounts for employee stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations (APB 25). As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On December 31, 1995, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternately, SFAS 123 allows entities to continue to apply the provisions of APB 25 and provide certain disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosures required by SFAS 123. The per share weighted average fair value of stock options granted during 2000, 1999, and 1998 was $.92, $.61, and $4.47 on the date of grant. The fair values were calculated by using the "Black Scholes" option-pricing model with the following average assumptions: 2000 - expected dividend yield of 0%, risk-free interest rate of 4.7%, expected volatility factor of 117% and an expected life of five years, 1999 - expected dividend yield of 0%, risk-free interest rate of 6.5%, expected volatility factor of 100% and an expected life of five years, 1998 - expected dividend yield of 0%, risk-free interest rate of 5.5%, expected volatility factor of 80% and an expected life of five years. Since the Company applies APB 25 in accounting for its plans, no compensation cost has been recognized for its stock options in the financial statements. Had the Company recorded compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net loss and loss per common share would have been increased by the proforma amounts indicated below (in thousands except for per share data): 2000 1999 1998 --------- --------- --------- Increase in net loss $ 277 $ 517 $ 1,767 Increase in basic loss per common share $ 0.02 $ 0.04 $ 0.15 Increase in diluted loss per common share $ 0.02 $ 0.04 $ 0.15 Pro forma net loss reflect only options granted subsequent to 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net loss amounts presented above because compensation costs are reflected over the options' vesting period of five years for the 2000, 1999, and 1998 options. NOTE J -- BENEFIT PLAN The Company established a 401(k) Profit Sharing Plan (the "Plan") which allows qualifying employees electing participation to defer a portion of their income on a pretax basis through contributions to the Plan. For each dollar of employee contributions, the Company makes a discretionary percentage matching contribution to the Plan. In addition, eligible employees share in any additional discretionary contributions which are based upon the profitability of the Company. All contributions made by the Company are determined by the Company's Board of Directors. For the Plan year ended December 31, 2000, the 40 41 approved matching percentage is 35% up to a maximum of $1,750 per employee. Expense recognized for the Company's contributions to the plan amounted to $121,000, $177,000, and $130,000 in 2000, 1999, and 1998 respectively. The Company has suspended matching contributions in 2001. NOTE K - PROFESSIONAL AND LIABILITY INSURANCE 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, 2001, 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. As of December 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 L - 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 and pharmacy management services for certain medical oncology practices through IMPACT Center pharmacies. 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 the individual segments. The Company evaluates performance based on profit or loss from operations before income taxes and unallocated amounts. (In thousands)
PHYSICIAN PRACTICE CANCER RESEARCH IMPACT SERVICES MANAGEMENT SERVICES TOTAL --------------- ------------- --------------- ------------ For the year ended December 31, 2000: Net revenue $ 52,615 $ 77,671 $ 547 $ 130,833 Total operating expenses 52,404 68,500 634 121,538 Impairment of management services agreements and associated assets -- 15,951 -- 15,951 --------- --------- --------- --------- Segment contribution (deficit) 211 (6,780) (87) (6,656) Depreciation and amortization 408 3,972 -- 4,380 --------- --------- --------- --------- Segment loss ($ 197) ($ 10,752) ($ 87) ($ 11,036) ========= ========= ========= ========= Segment assets $ 12,463 $ 68,146 $ 769 $ 81,378 ========= ========= ========= ========= Capital expenditures $ 168 $ 354 -- $ 522 ========= ========= ========= =========
41 42
PHYSICIAN IMPACT PRACTICE CANCER RESEARCH SERVICES MANAGEMENT SERVICES TOTAL ----------- ------------- ---------------- ------------- For the year ended December 31, 1999: Net revenue $ 65,709 $ 68,413 $ 1,445 $135,567 Total operating expenses 59,120 59,280 1,438 119,838 Impairment of management service agreements and associated assets -- 1,921 -- 1,921 -------- -------- -------- -------- Segment contribution 6,589 7,212 7 13,808 Depreciation and amortization 536 3,777 -- 4,313 -------- -------- -------- -------- Segment profit $ 6,053 $ 3,435 $ 7 $ 9,495 ======== ======== ======== ======== Segment assets $ 18,448 $ 87,483 $ 1,669 $107,600 ======== ======== ======== ======== Capital expenditures $ 112 $ 741 $ -- $ 853 ======== ======== ======== ========
PHYSICIAN IMPACT PRACTICE CANCER RESEARCH SERVICES MANAGEMENT SERVICES TOTAL ------------- -------------- ---------------- ------------ For the year ended December 31, 1998: Net revenue $ 64,806 $ 59,527 $ 3,913 $ 128,246 Total operating expenses 53,806 53,570 2,059 109,435 Impairment of management service agreements and associated assets -- 35,489 -- 35,489 --------- --------- --------- --------- Segment contribution (deficit) 11,000 (29,532) 1,854 (16,678) Depreciation and amortization 921 4,208 -- 5,129 --------- --------- --------- --------- Segment profit (loss) $ 10,079 ($ 33,740) $ 1,854 ($ 21,807) ========= ========= ========= ========= Segment assets $ 26,448 $ 91,291 $ 2,279 $ 120,018 ========= ========= ========= ========= Capital expenditures $ 340 $ 2,711 $ 18 $ 3,069 ========= ========= ========= =========
YEARS ENDED ----------------------------------------------- 2000 1999 1998 --------- --------- --------- Reconciliation of profit (loss): Segment profit (loss) ($ 11,036) $ 9,495 ($ 21,807) Unallocated amounts: Corporate general and administrative 6,754 7,755 7,980 Corporate depreciation and amortization 230 195 450 Corporate interest expense 3,692 3,074 2,946 --------- --------- --------- Loss before income taxes ($ 21,712) ($ 1,529) ($ 33,183) ========= ========= =========
YEARS ENDED ----------------------------------------------- 2000 1999 1998 --------- --------- --------- Reconciliation of consolidated assets: Segment assets $ 81,378 $ 107,600 $ 120,018 Unallocated amounts: Cash and cash equivalents 7,327 7,195 1,083 Prepaid expenses and other assets 2,940 3,966 4,782 Property and equipment, net 768 884 870 --------- --------- --------- Consolidated assets $ 92,413 $ 119,645 $ 126,753 ========= ========= =========
42 43 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES (Dollar amounts in thousands)
COL A COL B COL C - ADDITIONS COL D COL E CHARGED TO BALANCE AT CHARGED TO OTHER DEDUCTIONS - BALANCE AT BEGINNING OF COSTS AND ACCOUNTS - DESCRIBE (1) END OF CLASSIFICATION PERIOD EXPENSES DESCRIBE PERIOD Year ended December 31, 2000 Deducted from asset accounts: Allowance for doubtful accounts - accounts receivable $2,632 $1,309 $452 $3,489 ================ =============== =============== ============= Year ended December 31, 1999 Deducted from asset accounts: Allowance for doubtful accounts - accounts receivable $2,772 $2,625 $2,765 $2,632 ================ =============== =============== ============= Year ended December 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts - accounts receivable $3,130 $2,947 $3,305 $2,772 ================ =============== =============== =============
(1) Accounts written off, net of recoveries 43 EX-10.W 2 g68543ex10-w.txt FOREBEARANCE AGREEMENT 1 EXHIBIT 10(W) FORBEARANCE AGREEMENT THIS FORBEARANCE AGREEMENT dated as of December 29, 2000 ("this Forbearance Agreement") is executed 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 ("Ft. Lauderdale"; Response, Management, Tamarac and Ft. 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, and BANK OF AMERICA, N.A., a national banking association and formerly known as NationsBank, N.A. (collectively, the "Lenders"), and AMSOUTH BANK, in its capacity as Agent for Lenders ("Agent") BACKGROUND A. The Borrowers, the Lenders and the Agent have entered into a Credit Agreement dated as of June 10, 1999, as amended by a First Amendment thereto dated as of September 30, 1999 and a Second Amendment thereto dated as of March 30, 2000 (such Credit Agreement, as so subsequently amended, modified or supplemented through the date hereof, the "Credit Agreement"). Capitalized terms not otherwise defined in this Forbearance Agreement have the same meanings as specified in the Credit Agreement. B. The Borrowers have informed the Lenders that they are not in compliance with the provisions of Section 7.7 of the Credit Agreement (each an "Event" and collectively, the "Events"). The Events constitute Events of Default. C. In order to provide the Borrowers with a period of time within which to develop a plan to address the Borrowers' current financial difficulties, the Borrowers have requested that the Lenders forbear from exercising their rights and remedies under the Credit Documents. Subject to the terms and conditions of this Forbearance Agreement, the Lenders have agreed to this request. AGREEMENT NOW, THEREFORE, incorporating the section in this Forbearance Agreement captioned "Background" above, and for other good and valuable consideration, the Agent, the Lenders and the Borrowers agree as of the date hereof (the "Forbearance Agreement Effective Date") as follows: 2 ARTICLE 1 ACKNOWLEDGMENTS AND AGREEMENTS 1.1 Acknowledgment of Existing Events; Existing Credit Documents. The Borrowers acknowledge and agree that: (a) each Event is material in nature and constitutes an Event of Default; (b) the Credit Documents are valid and enforceable against the Borrowers in every respect and all of the terms and conditions thereof are binding upon the Borrowers; and (c) the Subordinated Debt is subordinated and subject in right of payment to the prior payment in full of the obligations described in the Credit Agreement. The Borrowers further acknowledge and agree that, as a result of the Events, the Lenders are entitled immediately without further notice or declaration to the Borrowers or any other Person, to accelerate the Obligations pursuant to the Credit Documents and to exercise all rights and remedies under the Credit Documents, applicable law or otherwise. With respect to the Events, to the extent that any of the Credit Documents require notification by the Lenders or the Borrowers of the existence of a default or an opportunity for the Borrowers to cure such a default, or both, such notice and period for cure have been properly given by the Lenders or hereby are waived by the Borrowers. 1.2 Acknowledgment of Current Outstanding Obligations. As of December 26, 2000, the Borrowers are indebted to the Lenders in an aggregate amount equal to the principal sum (including the face amount of outstanding letters of credit) of $33,748,715 apportioned as follows: Term Loan Facility $28,749,000.00 Revolving Credit Facility $ 4,999,715.00 Letters of Credit $ 0
plus accrued but unpaid interest, plus, to the extent provided in the Credit Documents, the costs and expenses associated with the Loans incurred by any Lender and/or the Lenders, including, without limitation, reasonable attorneys' fees incurred by the Agent in the negotiation and preparation of the Credit Documents, this Forbearance Agreement and the documents related hereto (the foregoing amounts are hereafter collectively referred to as the "Current Outstanding Obligations") and/or in connection with the Events, all without offset, counterclaims or defenses of any kind. Nothing contained herein shall alter, amend, modify or extinguish the obligation of the Borrowers to repay the Current Outstanding Obligations, and neither this Forbearance Agreement nor any of the other documents related hereto constitutes a novation or modification of any of the Credit Documents. 1.3 Acknowledgment of Liens and Priority. Pursuant to the Credit Documents and except as specifically set forth therein or herein, the Agent, for the benefit of the Lenders, holds first priority, perfected security interests in and liens upon all of the Borrowers' assets, wherever located, including assets now owned or hereafter acquired, and as more specifically described in -2- 3 the Credit Documents. The Borrowers will promptly take all actions and execute all documents requested by the Agent in regard to such security interests and liens including any actions requested by the Agent as a result of revisions to the Uniform Commercial Code in the jurisdictions in which any Collateral is located. Such security interests and liens secure all of the Obligations now or hereafter incurred, including, without limitation, the Current Outstanding Obligations and all other amounts now or hereafter owed by the Borrowers to the Lenders under the Credit Documents. For purposes of this Forbearance Agreement, the word "Obligations" shall mean any and all obligations and liabilities of the Borrowers to the Lenders, of every kind and description, direct and indirect, absolute and contingent, sole, joint, several, or joint and several, primary or secondary, due or to become due, now existing or hereafter arising, regardless of how they arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, and includes obligations to perform acts and refrain from taking actions as well as obligations to pay money, and also includes the Current Outstanding Obligations. 1.4 Reaffirmation of Security Interests. All of the assets of the Borrowers pledged, assigned, conveyed, mortgaged, hypothecated or transferred to the Agent for the benefit of the Lenders pursuant to the Credit Documents including, without limitation, the Collateral constitute collateral security for all of the Obligations. The Borrowers hereby reaffirm their prior conveyance to the Agent for the benefit of the Lenders of a continuing security interest in and lien on the Collateral as well as a security interest in and lien upon any and all funds and/or monies of the Borrowers. ARTICLE 2 FORBEARANCE 2.1 Forbearance Period. Subject to the terms and conditions of this Forbearance Agreement, and without waiving the Events or other Defaults or Events of Default that may exist, the Lenders agree to forbear from enforcing their rights or remedies pursuant to the Credit Documents and applicable law as a result of the occurrence of the Events until the earliest to occur of the following (as the case may be, the "Forbearance Termination Date"): (i) February 28, 2001, (ii) the occurrence of an Event of Default under this Forbearance Agreement, any other Credit Document or any other loan or credit agreement or other document evidencing a debt obligation of the Borrowers, including without limitation the documents evidencing Subordinated Debt, except for the Events, and (iii) the exercise of any rights by any party to any loan or credit agreement or other document evidencing a debt obligation, including, without limitation, the documents evidencing Subordinated Debt, which the Required Lenders and the Agent consider to be adverse to the interests of the Lenders. 2.2 Payments to Affiliates; Subordinated Payments. Until the occurrence of the Forbearance Termination Date, neither the Borrowers, nor any Subsidiary, will (i) pay, redeem, purchase, defease or otherwise partially or fully satisfy in any manner, whether in respect of -3- 4 interest, principal, premiums, fees, expenses or otherwise, any of the Subordinated Debt except for the payment of interest to Medical Oncology Hematology Consultants, PLLC in the amount of $3,605, which payment is due on January 1, 2001; provided, however, Response represents to the Agent and the Lenders that it is negotiating an amendment to the Management Services Agreement with Oncology-Hematology Group of South Florida ("OHG") that would allow Response not to pay the Subordinated Debt payment due OHG on December 31, 2000. If the negotiations between Response and OHG fail to result in nonpayment of the scheduled Subordinated Debt payment to OHG, the Agent and the Lenders will consider, as promptly as practicable, approving such payment by Response to OHG. In no event shall the Agent and the Lenders be deemed to permit such payment without written approval signed by the Agent and the Lenders; or (ii) make any other payment, whether as a dividend, compensation, management fee, bonus or otherwise to any Affiliate of the Borrowers or any of their Subsidiaries. 2.3 Financial Advisor. (a) The Borrowers are utilizing the services of PricewaterhouseCoopers, which is acceptable to the Lenders, to develop a business plan and otherwise advise the Borrowers with respect to the Borrowers' current financial difficulties. The business plan developed with the assistance of the outside professionals and the restructuring proposal formulated by the Borrowers will be delivered to the Agent and the Lenders by no later than February 1, 2001. (b) The Borrowers agree promptly to provide to the Agent copies of any existing or subsequently created valuations of the Borrowers' businesses and/or the Collateral. The Borrowers confirm that they will require PricewaterhouseCoopers to perform a valuation of the Borrowers' businesses under various scenarios and assumptions as soon as practicable. 2.4 Interest and No Advances. From the Forbearance Agreement Effective Date until the occurrence of the Forbearance Termination Date, (i) interest on the Obligations shall be charged at the Prime Rate plus two percentage points (200 basis points), (ii) the Borrowers shall otherwise make all payments required to be made in accordance with the terms of the Credit Documents and (iii) the Lenders shall not be obligated to advance any additional Loans and the Issuing Bank shall not be obligated to issue Letters of Credit. 2.5 Forbearance Fee. In consideration for the Lenders' agreement to forbear as set forth herein, the Borrowers hereby agree to pay to the Agent for distribution to the Lenders Pro Rata, on the date of the Borrowers' execution of this Forbearance Agreement a forbearance fee in an amount equal to Sixty-Seven Thousand Four Hundred Ninety-Seven and 43/100 Dollars ($67,497.43), which shall be fully earned and not refundable by the Lenders. 2.6 Financial Information. In addition to all the information required to be provided to the Agent under the Credit Agreement, including without limitation the information required to be provided under Section 5.3 of the Credit Agreement, the Borrowers shall deliver to the Agent each week commencing January 1, 2001, cash flow forecasts for each of the next four weeks on both a consolidated and consolidating basis in such form and content as are mutually acceptable -4- 5 to the Agent and to the Borrowers. The cash flow forecasts shall be on a rolling basis, shall reflect actual receipts and disbursements, shall compare actual cash flow for the past week to the previously projected amounts for such past week and shall reflect the actual cash on hand as of the date of the forecasts. ARTICLE 3 CONDITIONS TO CLOSING The obligations of the Agent and the Lenders under this Forbearance Agreement and the effectiveness of this Forbearance Agreement are subject to the receipt by the Agent of the following: (a) this Forbearance Agreement duly executed by the Borrowers, the Lenders and the Agent; and (b) all reasonable fees, costs, expenses and disbursements owing to the Lenders, including without limitation, the fees and disbursements of Maynard, Cooper & Gale, P.C. shall have been paid. ARTICLE 4 REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Forbearance Agreement and as partial consideration for the terms and conditions contained herein, the Borrowers, jointly and severally, make the following representations and warranties to the Lenders, each and all of which shall survive the execution and delivery of this Forbearance Agreement and all of the other documents executed in connection herewith: 4.1 Organization. (a) The Borrowers are corporations duly incorporated and validly existing and in good standing under the laws of their respective states of incorporation, and are duly authorized to do business and are duly qualified as foreign corporations in all jurisdictions wherein the nature of their businesses or properties make such qualification necessary, and have the corporate power to own their respective properties and to carry on their respective businesses as now conducted; and (b) The Borrowers have the requisite corporate power and authority to deliver and perform this Forbearance Agreement and all of the documents executed by them in connection herewith. -5- 6 4.2 Authorization; Valid and Binding Agreement. All corporate action required to be taken by the Borrowers and their respective officers, directors and stockholders and all actions required to be taken by the principals of the Borrowers for the authorization, execution, delivery and performance of this Forbearance Agreement and other documents contemplated hereby have been taken. Each person executing this Forbearance Agreement on behalf of the Borrowers is an authorized officer of the Borrowers. This Forbearance Agreement is, and each of the documents executed pursuant hereto will be, legal, valid, and binding obligations of the party or parties thereto, enforceable against each such party in accordance with their respective terms, subject only to bankruptcy, insolvency, reorganization, moratorium and other laws or equitable principles affecting creditors' rights generally. 4.3 Third Party Consents. The execution, delivery and performance by the Borrowers of this Forbearance Agreement and the documents related hereto will not: (a) require any consent or approval of any person or entity which has not been obtained prior to, and which is not in full force and effect as of, the date of this Forbearance Agreement; (b) result in the breach of, default under, or cause the acceleration of any obligation owed under any loan, credit agreement, note, security agreement, lease indenture, mortgage, loan document or other agreement by which any of them are bound or affected; or (c) result in, or require the creation or imposition of, any lien or encumbrance on any of their respective properties other than those liens or security interests in favor of the Lenders or the liens or security interests disclosed to the Lenders in the Credit Documents. 4.4 Other Representations and Warranties. The Borrowers hereby reaffirm all of their representations and warranties to the Lenders contained in the Credit Documents, and warrant that such representations and warranties, not otherwise rendered untrue by the Events as disclosed by the Borrowers herein, are true and correct as of the date of this Forbearance Agreement (it being understood that any representation or warranty made as of a specific date shall be true and correct in all material respects as of such specified date). ARTICLE 5 DEFAULTS AND REMEDIES It shall constitute an immediate Event of Default under this Forbearance Agreement if the Borrowers (i) fail to perform or observe any covenants, term, agreement or condition of this Forbearance Agreement, or (ii) are in violation of or non-compliance with any provision of this Forbearance Agreement or any of the Credit Documents (other than the Events) after the expiry of any cure period related thereto, if applicable. The Borrowers specifically agree that, upon and at any time after the Forbearance Termination Date, the Lenders, upon written notice to the Borrowers, may, in their sole discretion, exercise or enforce any or all of their rights and -6- 7 remedies under this Forbearance Agreement, the Credit Documents, and/or applicable law, against any one or more of the Borrowers. ARTICLE 6 MISCELLANEOUS 6.1 Submission to Jurisdiction; Selection of Forum. Each of the parties hereto agree that the provisions of Sections 10.6 and 10.24 of the Credit Agreement shall be incorporated herein by reference and shall apply to any action with respect to this Forbearance Agreement as if fully set forth herein. 6.2 Cooperation; Other Documents. At all times following the execution of this Forbearance Agreement, the Borrowers shall execute and deliver to the Lenders and the Agent, or shall cause to be executed and delivered to the Lenders and the Agent, and shall do or cause to be done all such other acts and things as the Lenders and the Agent may reasonably deem to be necessary or desirable to assure the Lenders of the benefit of this Forbearance Agreement and the documents comprising or relating to this Forbearance Agreement. 6.3 Remedies Cumulative; No Waiver. The respective rights, powers and remedies of the Lenders in this Forbearance Agreement and in the other Credit Documents are cumulative and not exclusive of any right, power or remedy provided in the Credit Documents, by law or equity and no failure or delay on the part of the Lenders in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Nothing contained in this Forbearance Agreement or in any prior communications between or among the Borrowers and the Lenders shall constitute a waiver or modification of any rights or remedies that the Lenders may have under the Credit Documents and applicable law. The Lenders expressly reserve and preserve all of their rights and remedies. 6.4 Notices. Each of the parties hereto agree that the provisions of Section 10.1 of the Credit Agreement shall be incorporated herein by reference and shall apply to any action with respect to this Forbearance Agreement as if fully set forth herein, except that copies of notice to Borrowers shall be sent to: Akin, Gump, Strauss, Hauer & Feld, LLP Attn: James A. Barker, Esq. 1333 New Hampshire Avenue, N.W. Washington, D.C. 20036 Telecopier: 202-887-4288 -7- 8 6.5 Indemnification. If, after receipt of any payment of all or any part of the Obligations, the Lenders are compelled to surrender such payment to any person or entity for any reason (including, without limitation, a determination that such payment is void and voidable as a preference or fraudulent conveyance, an impermissible setoff, or a diversion of trust funds), then the Borrowers shall be jointly and severally liable for, and shall indemnify, defend and hold harmless the Lenders with respect to the full amount so surrendered including any fees and costs incurred by the Lenders in connection therewith. The provisions of this section shall survive the termination of this Forbearance Agreement and the other Credit Documents and shall be and remain effective notwithstanding the payment of the Obligations, the cancellation of the Notes, the release of any lien, security interest or other encumbrance securing the Obligations or any other action which the Lenders may have taken in reliance upon their receipt of such payment. Any cancellation of the Notes, release of any such encumbrance or other such action shall be deemed to have been conditioned upon any payment of the Obligations having become final and irrevocable. 6.6 RELEASE. TO INDUCE THE AGENT AND THE LENDERS TO ENTER INTO THIS FORBEARANCE AGREEMENT, 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 OF ACTION 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. 6.7 Restructuring Negotiations. The Borrowers have informed the Lenders of their desire to restructure the Obligations owing to the Lenders. In connection with any such restructuring, the Borrowers acknowledge that (i) discussions among the Borrowers, the Agent and the Lenders do not evidence an agreement on the Lenders' part to modify or restructure the Obligations; (ii) any discussions, questions or comments posed or made by the Lenders' staff, consultants or advisors during any discussions or meetings should not be considered by the Borrowers to be a binding commitment by the Lenders to accede to any requests or proposals made by the Borrowers during any such discussions or meetings; (iii) even if any understanding in principle is reached on the terms of a restructuring of any of the Obligations at any time, neither the Borrowers nor the Lenders shall be legally bound until the appropriate approval authority in the Lenders has approved the proposed restructuring, and until all parties have signed definitive documents evidencing such restructuring; and (iv) any discussions concerning the terms of a proposed restructuring shall in no way invalidate, nullify or waive the Lenders' rights and remedies under the Credit Documents or signify the Lenders' agreement to postpone the exercise of any of their respective remedies under the Credit Documents. The parties contemplate that these discussions may be lengthy and complex and that while the parties may reach agreement on one or more preliminary matters that are part of the disputes and issues that they are trying to -8- 9 resolve, the parties agree that none of them shall be bound by any agreement until said agreement has been reduced to a written agreement and signed by each of the parties. Thus, no party can rely upon (i) any understanding or agreement which is not reduced to a written agreement and signed; or (ii) the existence of the negotiations. The terms and conditions set forth in this Forbearance Agreement are the product of joint draftsmanship by ALL parties, each being represented by counsel, and any ambiguities in this Forbearance Agreement or any documentation prepared pursuant to or in connection with this Forbearance Agreement shall not be construed against any of the parties because of draftsmanship. 6.8 Survival of Representations and Warranties. All representations and warranties of the Borrowers contained in this Forbearance Agreement and in all other documents and instruments executed in connection herewith or otherwise relating to this Forbearance Agreement shall survive the execution of this Forbearance Agreement and are material and have been or will be relied upon by the Agent and the Lenders, notwithstanding any investigation made by any person, entity or organization on the Agent and the Lenders' behalf. No implied representations or warranties are created or arise as a result of this Forbearance Agreement or the documents comprising or relating to this Forbearance Agreement. 6.9 Governing Law. This Forbearance Agreement and all documents and instruments executed in connection herewith or otherwise relating to this Forbearance Agreement shall be construed in accordance with and governed by the internal laws of the State of Tennessee without reference to conflict of laws principles. 6.10 Amendment and Waiver. No amendment of this Forbearance Agreement, and no waiver, discharge or termination of any one or more of the provisions thereof, shall be effective unless set forth in writing and signed by all of the parties hereto. 6.11 Successors and Assigns. This Forbearance Agreement and the other Credit Documents, (i) shall be binding upon the Lenders, the Agent, the Borrowers and their respective heirs, nominees, successors and assigns, and (ii) shall inure to the benefit of the Lenders, the Agent, the Borrowers and their respective heirs, nominees, successors and assigns; provided, however, that none of the Borrowers may assign any rights hereunder or any interest herein without obtaining the prior written consent of the Lenders, any such assignment or attempted assignment shall be void and of no effect with respect to the Lenders. 6.12 Severability of Provisions. Any provision of this Forbearance Agreement that is held to be inoperative, unenforceable, void or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of that provision in any other jurisdiction, and to this end the provisions of this Forbearance Agreement are declared to be severable. -9- 10 6.13 Counterparts; Effectiveness. This Forbearance Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Forbearance Agreement. This Forbearance Agreement may be executed by facsimile signatures, and shall be effective when Agent has received telecopy transmissions of the signature pages executed by all parties hereto; provided, however, that all parties shall deliver original executed documents to Agent promptly following the execution hereof. 6.14 Credit Documents to Remain in Effect. Except as specifically modified by this Forbearance Agreement, the Credit Agreement and the other Credit Documents shall remain in full force and effect in accordance with their respective terms. This Forbearance Agreement shall be one of the Credit Documents wherever that term is used. [Remainder of page left intentionally blank] -10- 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunder duly authorized as of the date first written above. RESPONSE ONCOLOGY, INC. By: /s/ A. LaMacchia -------------------------------------------------- Title: /s/ President & CEO ------------------------------------------ RESPONSE ONCOLOGY MANAGEMENT OF SOUTH FLORIDA, INC. By: /s/ A. LaMacchia -------------------------------------------------- Title: /s/ President & CEO ------------------------------------------ RESPONSE ONCOLOGY OF TAMARAC, INC. By: /s/ A. LaMacchia -------------------------------------------------- Title: /s/ President & CEO ------------------------------------------ RESPONSE ONCOLOGY OF FORT LAUDERDALE, INC. By: /s/ A. LaMacchia -------------------------------------------------- Title: /s/ President & CEO ------------------------------------------ -11- 12 AMSOUTH BANK, as Lender By: /s/ Cathy M. Wind -------------------------------------------------- Title: Vice President ------------------------------------------ -12- 13 UNION PLANTERS NATIONAL BANK, as a Lender By: /s/ Elizabeth Rouse -------------------------------------------------- Title: Senior Vice President ------------------------------------------ -13- 14 BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), as a Lender By: /s/ David Colmie -------------------------------------------------- Title: Senior Vice President ------------------------------------------ -14- 15 AMSOUTH BANK, as Agent By: /s/ Cathy M. Wind -------------------------------------------------- Title: Vice President ------------------------------------------ -15- EX-10.X 3 g68543ex10-x.txt FIRST AMENDMENT TO FOREBEARANCE AGREEMENT 1 EXHIBIT 10(X) FIRST AMENDMENT TO FORBEARANCE AGREEMENT THIS FIRST AMENDMENT TO FORBEARANCE AGREEMENT, dated as of February 28, 2001, ("this Amendment") is executed 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 ("Ft. Lauderdale"; Response, Management, Tamarac and Ft. 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, and BANK OF AMERICA, N.A., a national banking association and formerly known as NationsBank, N.A. (collectively, the "Lenders"), and AMSOUTH BANK, in its capacity as Agent for Lenders ("Agent"). RECITALS A. The Borrowers, the Lenders and the Agent entered into a Credit Agreement dated as of June 10, 1999, as amended by a First Amendment thereto dated as of September 30, 1999 and a Second Amendment thereto dated as of March 30, 2000. B. In order to provide the Borrowers with a period of time within which to develop a plan to address the Borrowers' financial difficulties, the Borrowers, the Lenders and the Agent entered into a Forbearance Agreement dated as of December 29, 2000 (the "Agreement"). Capitalized terms not otherwise defined in this Amendment have the same meanings as specified in the Agreement. C. The Borrowers and the Lenders now desire to extend the Forbearance Termination Date as set forth in this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the recitals and the mutual obligations and covenants contained herein, the Borrowers and the Lenders 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. Section 2.1(i) of the Agreement is hereby amended to read as follows: 2 "(i) March 30, 2001." 3. Section 2.7 is hereby added to the Agreement, and shall read, in its entirety, as follows: 2.7 Extension Fee. In consideration for the Lenders' agreement to extend the Forbearance Period as set forth herein, the Borrowers hereby agree to pay to the Agent for distribution to the Lenders Pro Rata, on the date of the Borrowers' execution of the First Amendment to Forbearance Agreement an extension fee in an amount equal to Twenty-Nine Thousand Nine Hundred Ten and 72/100 Dollars ($29,910.72), which shall be fully earned and not refundable by the Lenders. 4. 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. 5. 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 Loan Documents not specifically mentioned herein, and the consents granted herein are effective only in the specific instance and for the purposes for which given. 6. This Amendment shall be governed by the laws of the State of Tennessee. [Remainder of page intentionally left blank] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunder duly authorized as of the date first written above. RESPONSE ONCOLOGY, INC. By: /s/ A. LaMacchia ----------------------------------------- Title: /s/ President --------------------------------- RESPONSE ONCOLOGY MANAGEMENT OF SOUTH FLORIDA, INC. By: /s/ A. LaMacchia ----------------------------------------- Title: /s/ President --------------------------------- RESPONSE ONCOLOGY OF TAMARAC, INC. By: /s/ A. LaMacchia ----------------------------------------- Title: /s/ President --------------------------------- RESPONSE ONCOLOGY OF FORT LAUDERDALE, INC. By: /s/ A. LaMacchia ----------------------------------------- Title: /s/ President --------------------------------- 4 AMSOUTH BANK, as a Lender By: /s/ Cathy Wind ----------------------------------------- Title: Vice President --------------------------------- 5 UNION PLANTERS NATIONAL BANK, as a Lender By: /s/ Elizabeth Rouse ----------------------------------------- Title: Senior Vice President --------------------------------- 6 BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), as a Lender By: /s/ David Colmie ----------------------------------------- Title: Senior Vice President --------------------------------- 7 AMSOUTH BANK, as Agent By: /s/ Cathy Wind ----------------------------------------- Title: Vice President --------------------------------- EX-11 4 g68543ex11.txt COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF DILUTED COMMON EARNINGS (LOSS) PER SHARE (In thousands)
Years Ended December 31, ----------------------------------------------------------------------- 2000 1999 1998 --------------------- -------------------- ---------------------- Weighted average number of shares 12,288 12,014 12,039 Net effect of dilutive stock options and warrants based on the treasury stock method (1) -- -- -- --------------------- -------------------- ---------------------- Weighted average number of common shares and common stock equivalents 12,288 12,014 12,039 --------------------- -------------------- ---------------------- Net loss ($14,419) ($1,693) ($17,448) Common stock dividend to preferred shareholders (2) -- -- (1) --------------------- -------------------- ---------------------- Net loss to common stockholders ($14,419) ($1,693) ($17,449) ===================== ==================== ====================== Diluted loss per share amount (3) ($1.17) ($0.14) ($1.45) ===================== ==================== ======================
(1) Stock options and warrants are excluded from the weighted average number of common shares due to their anti-dilutive effect. (2) In December 2000, 1999, and, 1998, the Board of Directors approved a Common Stock dividend of 183, 183, and 293 shares to the stockholders of record of Series A Convertible Preferred Stock as of December 15, 2000, 1999, and 1998 that was paid January 2001, 2000, and 1999 respectively. The market value of the common stock distributed was approximately $34, $297 and $1,000 at December 15, 2000, 1999 and 1998, respectively. (3) The assumed conversion of the preferred stock would have an immaterial effect (less than 1/10 of $.01) in all periods, and therefore that calculation has been omitted. EX-21 5 g68543ex21.txt LIST OF SUBSIDIARIES 1 EXHIBIT 21 LIST OF SUBSIDIARIES COMPANY STATE OF ORGANIZATION - ------- --------------------- IMPACT Center of Albany, LLC Tennessee IMPACT Center of Bayonne, LLC New Jersey IMPACT Center of Billings, LLC Montana IMPACT Center of Fort Smith, LLC Tennessee IMPACT Center of Glendale, LLC Tennessee IMPACT Center of Mobile, LLC Tennessee IMPACT Center of Mt. Diablo, LLC Tennessee IMPACT Center of Northridge, LLC Tennessee IMPACT Center of St. Johns, LLC Tennessee IMPACT Center of Tri-City Medical Center, LLC Tennessee IMPACT Center of Washington, D.C., LLC Tennessee Response Oncology of Fort Lauderdale, Inc. Florida Response Oncology of Tamarac, Inc. Florida Response Oncology Management of South Florida, Inc. Tennessee EX-23 6 g68543ex23.txt CONSENT OF KPMG LLP 1 EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Response Oncology, Inc.: We consent to incorporation by reference in the Registration Statements (No. 33-45616, No. 33-21333, and No. 333-14371) on Form S-8 of Response Oncology, Inc. of our report dated March 30, 2001, relating to the consolidated balance sheets of Response Oncology, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000, and the related financial statement schedule, which report appears in the December 31, 2000 annual report on Form 10-K of Response Oncology, Inc. Our report dated March 30, 2001 contains an explanatory paragraph that states that on March, 29, 2001, the Company filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court. The filing and related matters raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP Memphis, Tennessee March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----