-----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, BFuQRkxP05w7J477CLIIYNrH7mi64gP85Nw+B4NMkVeEI3DlGlJBYA01bazxO2FA O20CpERHhlNlz2kvr93Cmw== 0000950144-01-502731.txt : 20010522 0000950144-01-502731.hdr.sgml : 20010522 ACCESSION NUMBER: 0000950144-01-502731 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010521 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-Q SEC ACT: SEC FILE NUMBER: 001-09922 FILM NUMBER: 1644952 BUSINESS ADDRESS: STREET 1: 1775 MORIAH WOODS BLVD CITY: MEMPHIS STATE: TN ZIP: 38117 BUSINESS PHONE: 9017617000 MAIL ADDRESS: STREET 1: 1775 MORIAH WOODS BLVD CITY: MEMPHIS STATE: TN ZIP: 38117 FORMER COMPANY: FORMER CONFORMED NAME: RESPONSE TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BIOTHERAPEUTICS INC DATE OF NAME CHANGE: 19891221 10-Q 1 g69640e10-q.txt RESPONSE ONCOLOGY INC 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------------ Commission file number 0-15416 ------------------------- RESPONSE ONCOLOGY, INC. ----------------------- (Exact name of registrant as specified in its charter) Tennessee 62-1212264 --------------------------------- ------------------ (State or Other Jurisdiction (I. R. S. Employer of Incorporation or Organization) Identification No.) 1805 Moriah Woods Blvd., Memphis, TN 38117 --------------------------------------- --------- (Address of principal executive offices) (Zip Code) (901) 761-7000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value, 12,290,764 shares as of May 15, 2001. 2 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page Consolidated Balance Sheets, March 31, 2001 and December 31, 2000 ................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and March 31, 2000 ...................... 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and March 31, 2000 ...................... 5 Notes to Consolidated Financial Statements ................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings ...................................... 19 Item 2. Changes in Securities and Use of Proceeds .............. 19 Item 3. Defaults Upon Senior Securities ........................ 19 Item 4. Submission of Matters to a Vote of Security Holders .... 19 Item 5. Other Information ...................................... 19 Item 6. Exhibits and Reports on Form 8-K ....................... 19 Signatures ........................................................ 20
-2- 3 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
March 31, 2001 December 31, 2000 ASSETS (Unaudited) (Note 1) -------------- ----------------- CURRENT ASSETS Cash and cash equivalents $ 5,590 $ 7,327 Accounts receivable, less allowance for doubtful accounts of $3,591 and $3,489 11,082 9,469 Supplies and pharmaceuticals 3,189 3,702 Prepaid expenses and other current assets 3,844 3,529 Due from affiliated physician groups 14,665 19,121 Deferred income taxes 1,168 1,168 --------- --------- TOTAL CURRENT ASSETS 39,538 44,316 Property and equipment, net 2,867 3,212 Deferred charges, less accumulated amortization of $398 and $320 78 156 Management service agreements, less accumulated amortization of $8,220 and $7,685 43,697 44,231 Other assets 298 498 --------- --------- TOTAL ASSETS $ 86,478 $ 92,413 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 16,369 $ 14,665 Accrued expenses and other liabilities 3,573 4,581 Current portion of notes payable 29,955 34,509 Current portion of capital lease obligations 284 277 --------- --------- TOTAL CURRENT LIABILITIES 50,181 54,032 Capital lease obligations, less current portion 228 303 Deferred income taxes 3,525 3,525 Minority interest 375 1,164 STOCKHOLDERS' EQUITY Series A convertible preferred stock, $1.00 par value (aggregate involuntary liquidation preference $183), authorized 3,000,000 shares; issued and outstanding 16,631 shares at each period end 17 17 Common stock, $.01 par value, authorized 30,000,000 shares; issued and outstanding 12,290,764 shares at each period end 123 123 Paid-in capital 102,011 102,011 Accumulated deficit (69,982) (68,762) --------- --------- 32,169 33,389 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,478 $ 92,413 ========= =========
See accompanying notes to consolidated financial statements. -3- 4 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollar amounts in thousands except for share data)
Three Months Ended ------------------------------------- March 31, March 31, 2001 2000 ------------ ------------ NET REVENUE $ 31,552 $ 35,586 COSTS AND EXPENSES Salaries and benefits 4,684 5,513 Pharmaceuticals and supplies 22,852 24,165 Other operating costs 1,787 2,480 General and administrative 1,838 1,474 Depreciation and amortization 986 1,135 Interest 890 827 Provision for doubtful accounts 232 210 ------------ ------------ 33,269 35,804 ------------ ------------ LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (1,717) (218) Minority owners' share of net earnings 4 255 ------------ ------------ LOSS BEFORE INCOME TAXES (1,721) (473) Income tax benefit (568) (180) ------------ ------------ LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,153) (293) Cumulative effect of change in accounting principle, net of tax (see Note 3) (67) -- ------------ ------------ NET LOSS $ (1,220) $ (293) ============ ============ LOSS PER COMMON SHARE: Basic: Before cumulative effect of change in accounting principle $ (0.09) $ (0.02) Cumulative effect of accounting change, net $ (0.01) -- ------------ ------------ Net loss $ (0.10) $ (0.02) ============ ============ Diluted: Before cumulative effect of change in accounting principle $ (0.09) $ (0.02) Cumulative effect of accounting change, net $ (0.01) -- ------------ ------------ Net loss $ (0.10) $ (0.02) ============ ============ Weighted average number of common shares: Basic 12,290,764 12,282,139 ============ ============ Diluted 12,290,764 12,282,139 ============ ============
See accompanying notes to consolidated financial statements. -4- 5 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollar amounts in thousands)
Three Months Ended -------------------------- March 31, March 31, 2001 2000 --------- -------- OPERATING ACTIVITIES Net loss $(1,220) $ (293) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 986 1,135 Provision for doubtful accounts 232 210 Gain on sale of property and equipment (10) (28) Minority owners' share of net earnings 4 255 Changes in operating assets and liabilities: Accounts receivable (1,585) (1,610) Supplies and pharmaceuticals, prepaid expenses and other current assets 198 33 Deferred charges and other assets 77 (30) Due from affiliated physician groups 4,456 (1,227) Accounts payable and accrued expenses 560 1,023 ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,698 (532) INVESTING ACTIVITIES Proceeds from sale of property and equipment 22 33 Purchase of equipment (42) (199) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (20) (166) FINANCING ACTIVITIES Distributions to joint venture partners (793) -- Proceeds from exercise of stock options -- 32 Principal payments on notes payable (4,554) (501) Principal payments on capital lease obligations (68) (67) ------- ------- NET CASH USED IN FINANCING ACTIVITIES (5,415) (536) DECREASE IN CASH AND CASH EQUIVALENTS (1,737) (1,234) Cash and cash equivalents at beginning of period 7,327 7,195 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,590 $ 5,961 ======= =======
See accompanying notes to consolidated financial statements. -5- 6 RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 NOTE 1 -- ORGANIZATION AND DESCRIPTION OF BUSINESS/BANKRUPTCY PROCEEDINGS 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. 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 may 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 were 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. 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. NOTE 2 -- BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in Response Oncology, Inc. and Subsidiaries' (the "Company's") annual report on Form 10-K for the year ended December 31, 2000. Net Revenue: The Company's net patient service revenue includes charges to patients, insurers, government programs and other third-party payers for medical services provided. Such amounts are recorded net of contractual adjustments and other uncollectible amounts. Contractual adjustments result from the differences between the amounts charged for services performed and the amounts allowed by government programs and other public and private insurers. The Company's revenue from practice management affiliations includes a fee equal to practice operating expenses incurred by the Company (which excludes expenses that are the obligation of the physicians, such as physician salaries and benefits) and a management fee either fixed in amount or equal to a percentage of each affiliated oncology group's adjusted net revenue or net operating income. In certain affiliations, the Company may also be entitled to a performance fee if certain financial criteria are satisfied. Pharmaceutical sales to physicians are recorded based upon the Company's contracts with physician groups to manage the pharmacy component of the groups' practice. Revenue recorded for these contracts represents the cost of pharmaceuticals plus a fixed or percentage fee. -6- 7 Clinical research revenue is recorded based on the Company's contracts with various pharmaceutical manufacturers to manage clinical trials and is generally measured on a per patient basis for the monitoring and collection of data. The following table is a summary of net revenue by source for the respective three month periods ended March 31, 2001 and 2000.
(In thousands) Three Months Ended March 31, --------------------- 2001 2000 ------- ------- Net patient services revenue $ 2,189 $ 4,633 Practice management service fees 18,049 19,993 Pharmaceutical sales to physicians 11,196 10,781 Clinical research revenue 118 179 ------- ------- $31,552 $35,586 ======= =======
Revenue is recognized when earned. Sales and related cost of revenues are generally recognized upon delivery of goods or performance of services. Net Loss Per Common Share: A reconciliation of the basic loss per share and the diluted loss per share computation is presented below for the three month periods ended March 31, 2001 and 2000. (Dollar amounts in thousands except per share data)
Three Months Ended March 31, ------------------------------- 2001 2000 ----------- ----------- Weighted average shares outstanding 12,290,764 12,282,139 Net effect of dilutive stock options and warrants based on the treasury stock method -- (A) -- (A) ----------- ------------ Weighted average shares and common stock equivalents 12,290,764 12,282,139 =========== ============ Net loss before cumulative effect of accounting change $ (1,153) $ (293) =========== ============ Diluted per share amount $ (0.09) $ (0.02) =========== ============
(A) Stock options and warrants are excluded from the weighted average number of common shares due to their anti-dilutive effect. NOTE 3 -- NOTES PAYABLE 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 March 31, 2001, $29.2 million aggregate principal was outstanding under the Credit Facility with an interest rate of approximately 10%. 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. -7- 8 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 minimum 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. 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 provided that a financial advisor be retained by the Company to assist in the development of a restructuring plan and perform certain valuation analyses. 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. Consistent with all of the above described factors, the Company has classified all amounts due under the Company's Credit Facility as current. 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 SFAS No. 133 in the first quarter of 2001 of approximately $100,000 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. -8- 9 NOTE 4 -- INCOME TAXES Upon the consummation of the physician practice management affiliations, the Company recognized deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of purchased assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. NOTE 5 -- COMMITMENTS AND CONTINGENCIES With respect to professional and general liability risks, the Company currently maintains an insurance policy that provides coverage during the policy period ending August 1, 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 and as of March 31, 2001 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 6 -- DUE FROM AFFILIATED PHYSICIANS Due from affiliated physicians consists of management fees earned and due pursuant to the management service agreements ("Service Agreements"). In addition, the Company funds certain working capital needs of the affiliated physicians from time to time. NOTE 7 -- SEGMENT INFORMATION The Company's reportable segments are strategic business units that offer different services. The Company has three reportable segments: IMPACT Services, Physician Practice Management and Cancer Research Services. The IMPACT Services segment provides stem cell supported high dose chemotherapy and other advanced cancer treatment services under the direction of practicing oncologists as well as compounding and dispensing pharmaceuticals to certain medical oncology practices. The Physician Practice Management segment owns the assets of and manages oncology practices. The Cancer Research Services segment conducts clinical cancer research on behalf of pharmaceutical manufacturers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that the Company does not allocate interest expense, taxes or corporate overhead to the individual segments. The Company evaluates segment performance based on profit or loss from operations before income taxes and unallocated amounts. (In thousands)
Physician IMPACT Practice Cancer Research Services Management Services Total -------- ---------- ---------------- -------- For the three months ended March 31, 2001: Net revenue $ 13,385 $18,049 $118 $31,552 Total operating expenses 13,485 16,329 87 29,901 -------- ------- ---- ------- Segment contribution (deficit) (100) 1,720 31 1,651 Depreciation and amortization 99 822 -- 921 -------- ------- ---- ------- Segment profit (loss) $ (199) $ 898 $ 31 $ 730 ======== ======= ==== ======= Segment assets $ 14,129 $62,080 $809 $77,018 ======== ======= ==== ======= Capital expenditures -- $ 36 -- $ 36 ======== ======= ==== =======
-9- 10
Physician IMPACT Practice Cancer Research Services Management Services Total -------- ---------- ---------------- -------- For the three months ended March 31, 2000: Net revenue $15,414 $19,993 $ 179 $ 35,586 Total operating expenses 14,639 17,514 181 32,334 ------- ------- ------- -------- Segment contribution (deficit) 775 2,479 (2) 3,252 Depreciation and amortization 93 987 -- 1,080 ------- ------- ------- -------- Segment profit (loss) $ 682 $ 1,492 $ (2) $ 2,172 ======= ======= ======= ======== Segment assets $19,494 $87,796 $ 1,241 $108,531 ======= ======= ======= ======== Capital expenditures $ 10 $ 172 -- $ 182 ======= ======= ======= ========
Reconciliation of profit:
Three Months Ended March 31, --------------------------- 2001 2000 ------- ------- Segment profit $ 730 $ 2,172 Unallocated amounts: Corporate salaries, general and administrative 1,485 1,771 Corporate depreciation and amortization 65 55 Corporate interest expense 901 819 ------- ------- Loss before income taxes $(1,721) $ (473) ======= =======
Reconciliation of consolidated assets:
As of March 31, --------------------------- 2001 2000 ------- -------- Segment assets $77,018 $108,531 Unallocated amounts: Cash and cash equivalents 5,590 5,961 Prepaid expenses and other assets 3,152 4,763 Property and equipment, net 718 845 ------- -------- Consolidated assets $86,478 $120,100 ======= ========
-10- 11 ITEM 2. 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. As of March 31, 2001, approximately 260 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 under the federal bankruptcy laws by filing a voluntary petition for relief on March 29, 2001, under Chapter 11 of the United 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. 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 March 31, 2001, 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. Subsequent to March 31, 2001, the Company decided to close 11 additional Centers and is currently evaluating the long-term viability of the remaining Centers. 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 44% decrease in high dose procedures in the first quarter of 2001 as compared to the same period in 2000. High dose procedures in the Company's wholly-owned IMPACT Centers decreased 56% in the first quarter of 2001 as compared to the same period in 2000, while procedures in the Company's managed and joint venture Centers decreased 23% and 26%, respectively. The Company closed 16 IMPACT Centers since the first quarter of 2000 due to decreased patient volumes and is currently in the process of closing 11 additional centers. 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 -11- 12 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 pharmaceutical 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. These services have been marketed to select physicians and third-party payers in existing locations within the IMPACT Center network. The Company treated its first patient utilizing such specialty drugs in the second quarter of 2001. 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. 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. -12- 13 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 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 disputes, 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. 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. -13- 14 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. These matters are currently subject to the automatic stay provided for under Chapter 11 of the United States Bankruptcy Code and will likely be resolved in the context of the bankruptcy proceedings. 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 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 Net revenue decreased 11% to $31.6 million for the quarter ended March 31, 2001, compared to $35.6 million for the quarter ended March 31, 2000. Practice management service fees were $18.0 million for the first quarter of 2001 compared to $20.0 million for the same period in 2000 for a 10% decrease. This decrease is primarily due to the termination and sale of related assets of a certain Service Agreement effective February 1, 2001. Net revenue on a same-practice basis increased $.7 million, or 5%, due to growth in patient volumes for both ancillary and non-ancillary services and pharmaceutical utilization. Pharmaceutical sales to physicians increased $.4 million, or 4%, from $10.8 million for the first three months of 2000 to $11.2 million in 2001. This increase is due to increased drug utilization by the physicians serviced under these agreements and the addition of one pharmacy management contract effective February 1, 2001, but was tempered by the termination of pharmaceutical sales agreements with two physician practices effective July 1, 2000. Additionally, net patient service revenues from IMPACT services decreased $2.4 million, or 52%, from $4.6 million in the first quarter of 2000 to $2.2 million in the first quarter of 2001. This decrease in high dose chemotherapy revenues continues to reflect the confusion and related pullback in breast cancer related admissions resulting from the high dose chemotherapy/breast cancer study results presented at ASCO in May 1999. In addition, the Company experienced a decline in insurance approvals on high dose referrals obtained. Since the release of the study results, the Company's high dose business has slowed significantly, as evidenced by a 44% decrease in high dose procedures in the first quarter of 2001 as compared to the first quarter of 2000. -14- 15 Salaries and benefits costs decreased $.8 million, or 15%, from $5.5 million for the first quarter of 2000 to $4.7 million in 2001. The decrease is primarily due to the termination of certain Service Agreements, the closing of various IMPACT Centers and a reduction in corporate staffing. Salaries and benefits expense as a percentage of net revenue was 15% and 16% for the quarters ended March 31, 2001 and 2000, respectively. Supplies and pharmaceuticals expense decreased $1.3 million, or 5%, from the first quarter of 2000 to the first quarter of 2001. The decrease is primarily related to the net effect of increased volume in pharmaceutical sales to physicians and greater utilization of new chemotherapy agents with higher costs in the practice management division, tempered by the termination of two pharmaceutical sales agreements effective July 1, 2000 and a decrease in patient volumes in the IMPACT Centers. Supplies and pharmaceuticals expense as a percentage of net revenue was 72% and 68% for the quarters ended March 31, 2001 and 2000, respectively. The increase as a percentage of net revenue is due to the lower margin associated with the increased pharmaceutical sales to physicians as well as general price increases in pharmaceuticals used in the practice management division. General and administrative expenses increased $.3 million, or 20%, from $1.5 million in the first quarter of 2000 to $1.8 million in the first quarter of 2001. The increase was primarily due to the net effect of increased expenses for professional services, principally legal and consulting fees related to the Company's restructuring efforts and bankruptcy filings, and decreased administrative expenses due to the closure of various IMPACT Centers and the termination of certain Service Agreements. Other operating expenses decreased $.7 million, or 28%, from $2.5 million in 2000 to $1.8 million in 2001. Other operating expenses consist primarily of medical director fees, purchased services related to global case rate contracts, rent expense, and other operational costs. The decrease is primarily due to the closure of various IMPACT Centers and lower purchased services and physician fees as a result of lower IMPACT and cancer research volumes as compared to the first quarter of 2000. For the three months ended March 31, 2001, all operating and general expenses other than those related to pharmaceuticals and supplies were reduced by $1.2 million, or 12%, as compared with those for the three months ended March 31, 2000. These reductions reflect cost reduction and containment steps put in place in the first quarter of 2000, the closure of IMPACT Centers, lower patient volumes and the termination of certain Service Agreements, tempered by increases for professional services, principally legal and accounting fees, related to the Company's restructuring efforts and bankruptcy filing. Depreciation and amortization decreased $.1 million from $1.1 million for the first quarter of 2000 to $1.0 million for the first quarter of 2001. This decrease is primarily due to the termination of certain Service Agreements. EBITDA (earnings before interest, taxes, depreciation and amortization) decreased $1.3 million, or 87%, to $.2 million for the quarter ended March 31, 2001 in comparison to $1.5 million for the quarter ended March 31, 2000. EBITDA from the IMPACT services segment decreased $.9 million, or 113%, for the quarter ended March 31, 2001 as compared to the quarter ended March 31, 2000. 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 division decreased $.8 million, or 31%, primarily due to increases in pharmaceutical and supply costs, increases in contractual adjustments, and the termination and modification of certain Service Agreements. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had a working capital deficit of ($10.7) million with current assets of $39.5 million and current liabilities of $50.2 million. Cash and cash equivalents represented $5.6 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 $3.7 million in the first quarter of 2001 compared to cash used by operating activities of $.5 million for the same period in 2000. This increase is largely attributable to a reduction in amounts due from affiliated physician groups resulting from the sale proceeds and recovery of working capital associated with the asset sale and concurrent termination of a Service Agreement in the first quarter of 2001. -15- 16 Cash used in investing activities was $20,000 and $.2 million for the quarters ended March 31, 2001 and 2000, respectively. The decrease is primarily attributable to a reduction in capital expenditures in the first quarter of 2001 as compared to the first quarter of 2000. Cash used in financing activities was $5.4 million for the first quarter of 2001 and $.5 million for the same period in 2000. The increase in cash used in financing activities is primarily attributable to additional payments on notes payable and distributions to joint venture partners in the first quarter of 2001 as compared to the first quarter of 2000. 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 March 31, 2001, $29.2 million aggregate principal was outstanding under the Credit Facility with a current interest rate of approximately 10%. 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 minimum 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. 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. 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. Consistent with all of the above described factors, the Company has -16- 17 classified all amounts due under the Company's Credit Facility as current. The Company is currently operating under an interim cash collateral order which expires June 29, 2001. Under the terms of this order, the Company is allowed operate in the normal course of business within the parameters of an approved cash budget. A hearing on the permanent cash collateral order is set for June 29, 2001. 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 SFAS No. 133 in the first quarter of 2001 of approximately $100,000 in recognition of the reported fair value of the Swap Agreement. 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 March 31, 2001. The Company is committed to future minimum lease payments under operating leases of approximately $14.5 million for administrative and operational facilities. Such commitments may be reduced as a result of the rejection of certain real property leases in the context of the bankruptcy proceeding. 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. The transactions and code sets standards and privacy standards were finalized effective October 2000 and April 2001, respectively. The Company will be required to comply with the new standards 24 months after their respective effective dates of adoption. The Company is currently assessing preliminary HIPAA issues, with detailed compliance and integration measures taking place in 2002 and 2003. 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. 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 -17- 18 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is to changes in interest rates obtainable on its Credit Facility. The Company's interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower its overall borrowing costs by selecting favorable interest periods for traunches of the Credit Facility based on the current market interest rates. The Company has the option of fixing current interest rates for interest periods of 1, 2, 3 or 6 months. The Company is also a party to a LIBOR based interest rate swap agreement ("Swap Agreement") with an affiliate of one of the Company's lenders as required by the terms of the Credit Facility. Amounts hedged under the Swap Agreement accrue interest at the difference between 7.24% and the ninety-day LIBOR rate and are settled quarterly. As of March 31, 2001, approximately 58% 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 March 31, 2001, $29.2 million aggregate principal was outstanding under the Credit Facility with an interest rate of approximately 10%. The Company does not have any other material market-sensitive financial instruments. -18- 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10(y) Termination Agreement and Release between Registrant and Patrick J. McDonough dated January 15, 2001 (B) REPORTS ON FORM 8-K A report on Form 8-K disclosing the Company's bankruptcy filing under Item 3 was filed on April 9, 2001. -19- 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Response Oncology, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RESPONSE ONCOLOGY, INC. By: /s/ Anthony M. LaMacchia ------------------------------ Anthony M. LaMacchia President and Chief Executive Officer Date: May 21, 2001 By: /s/ Peter A. Stark ------------------------------ Peter A. Stark Executive Vice President and Chief Financial Officer Date: May 21, 2001 -20- EX-10.Y 2 g69640ex10-y.txt TERMINATION AGREEMENT AND RELEASE 1 EXHIBIT 10(Y) TERMINATION AGREEMENT AND RELEASE THIS AGREEMENT (the "Agreement") is made and entered into as of the 15th day of January, 2001 by and between Response Oncology, Inc. ("ROI") and Patrick McDonough ("Executive"). RECITALS WHEREAS, ROI and Executive have previously entered into an Employment Agreement for Chief Operating Officer, dated January 3, 2000 (the "Employment Agreement"), pursuant to which ROI employed Executive as the Chief Operating Officer of ROI, for a term to expire on January 3, 2002, a copy of which is attached hereto as Exhibit A; and, WHEREAS, ROI and Executive have concluded that it is in their mutual best interests that the Employment Agreement be terminated and Executive remain employed as an at-will employee until no later than December 31, 2001 as set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing, and the mutual promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Recitals. The foregoing recitals are restated and incorporated by reference and made a part of this Agreement. 2. Termination of Employment Agreement. Executive's Employment Agreement with ROI shall terminate effective as of January 15, 2001 (the "Termination Date"), except as set forth below. All of ROI's and Executive's rights and obligations under the Employment Agreement, including without limitation, the payment of any compensation to Executive pursuant to Article 3 of the Employment Agreement, shall terminate and be of no further force or effect as of the Termination Date, except for the following (which both parties acknowledge and agree shall remain in full force and effect as and to the extent set forth below): A. Section 3.4 of the Employment Agreement ("Business Expenses") shall survive the termination of the Employment Agreement to the extent that Executive has incurred reasonable travel and other expenses in connection with the performance of his duties and obligations prior to the Termination 1 2 Date and has submitted proper documentation in accordance with ROI's policies for expense reimbursement. B. Article 5 of the Employment Agreement ("Confidentiality; Corporate Opportunities") and the related provisions of Section 10.11 of that Agreement shall survive the termination of the Employment Agreement and remain in full force and effect according to its terms. C. The loan by ROI to Executive will remain in effect as modified by Section 5 below. D. Executive's covenant not to compete set out in Article 8 of the Employment Agreement and the related provisions of Section 10.11 of that Agreement are hereby reformed and narrowed to apply only to U.S. Oncology and Salick Health Care, Inc. 3. Compensation and Benefits. ROI shall pay to Executive a one-time lump sum in the amount of one hundred twenty-five thousand dollars ($125,000), subject to applicable withholdings. Executive is not entitled to any other compensation or salary or any other increase in compensation pursuant to the Employment Agreement. During the time Executive continues to be employed by ROI he will be paid at the same rate at which he has previously been paid. During that time Executive shall also be entitled to continue to participate in all employee benefit plans, including any plans for executives in which he is currently a participant, and to receive all benefits to which any salaried employee is eligible under any existing plans established for salaried employees, each to the extent permissible under the terms and conditions of such plans. 4. Relinquishment of Stock Options. Pursuant to Section 3.7 of the Employment Agreement, Executive was granted one hundred fifty thousand (150,000) shares of ROI's common stock, of which one-third would vest each year. Executive agrees to forfeit all such options and all rights to exercise, and all vested but unexercised stock options are hereby cancelled. 5. Loan. Pursuant to Section 3.6 of the Employment Agreement, ROI made a loan to Executive in the amount of fifty thousand dollars ($50,000) for the purchase of a home. Commencing on the date one month after the Termination Date, Executive agrees to pay installments of interest monthly on or before the first day of each month or, so long as employed by ROI, to continue to make interest payments through regular payroll deductions. Executive will pay ROI the principal amount in a lump sum, with accrued and unpaid interest on or before January 15, 2002 (the "Repayment Date"). All unpaid principal and interest will be due and payable on the Repayment Date. Notwithstanding 2 3 the foregoing, all unpaid principal and interest will be due and payable within five (5) business days of any sale prior to the Repayment Date of the home Executive purchased (in part) with the proceeds of the ROI loan to him. 6. Termination of Employment Relationship. As of December 31, 2001 or at any earlier date on which his employment is terminated at the discretion of either ROI or Executive, Executive agrees that he shall no longer be an employee of ROI and will not thereafter hold himself out to be an employee, agent or independent contractor of ROI. 7. Release by Executive. Except with respect to Executive's rights pursuant to this Agreement and his rights to any vested benefit in any qualified retirement plans and in or to any other benefit plans, all of which are hereby expressly reserved, Executive for himself and his representatives, agents, heirs, successors, and assigns, and their heirs, successors and assigns, and each of them (hereinafter "Releasors") waives, releases, relinquishes, and discharges ROI, its directors, officers, employees, representatives, and agents and its and their heirs, successors, and assigns, and each of them (hereinafter "Releasees") from any and all claims, liabilities, suits, damages, actions, or manner of actions, whether in contract, tort, or otherwise, which the Releasors or any of them ever had, now have, or hereafter may have against the Releasees, or any of them, whether the same be in administrative proceedings, in arbitration, at law, in equity, or mixed, arising from or relating to any act or omission prior to the Termination Date relating to Executive's employment by ROI or the termination of the Employment Agreement. Notwithstanding the foregoing, in the event that any claim(s) is asserted against Releasors, or any of them, by a person or entity which is not a party to this Agreement, Releasors, and each of them, hereby specifically reserve and retain any and all rights, claims, and defenses which they, or any of them, now have, have had, or would otherwise have against Releasees, or any of them, arising out of the act(s) or omission(s) which is the subject matter of each claim(s) against Releasors, or any of them. It is further understood and agreed that this general release applies to any and all claims, liabilities, suits, damages, actions or manner of actions relating to Executive's employment with ROI pursuant to the Employment Agreement and the termination of that agreement which may arise pursuant to any federal, state or local employment law, regulation or other requirement including, but not limited to, Title VII of the 1964 Civil Rights Act, the Americans With Disabilities Act, the Age Discrimination in Employment Act (all as amended), and any claim in tort or contract. Executive agrees, warrants and represents that he will not hereafter file any claim or action against Releasees or any of them before any state, federal or local agency or in any federal or state court concerning any matter based upon, arising from or relating to his employment pursuant to the Employment Agreement or the termination of the Employment Agreement. 3 4 8. Release by ROI. Except with respect to ROI's rights pursuant to this Agreement, all which are hereby expressly reserved, ROI for itself and its directors, officers, employees, representatives, and its agents and its and their heirs, successors, and assigns, and each of them (hereinafter "ROI Releasors") waives, releases, relinquishes, and discharges Executive and his heirs, successors, and assigns, and each of them (hereinafter "Executive Releasees") from any and all claims, liabilities, suits, damages, actions, or manner of actions, whether in contract, tort, or otherwise which the ROI Releasors or any of them ever had, now have, or hereafter may have against the Executive Releasees, or any of them, whether the same be in administrative proceedings, in arbitration, at law, in equity, or mixed, arising from or relating to any act or omission prior to the Termination Date relating to Executive's employment by ROI or termination of the Employment Agreement. Notwithstanding the foregoing, in the event that any claim(s) is asserted against the ROI Releasors, or any of them, by a person or entity which is not a party to this Agreement, the ROI Releasors, and each of them, hereby specifically reserve and retain any and all rights, claims, and defenses, which they, or any of them, now have, have had, or would otherwise have against Executive Releasees, or any of them, arising out of the act(s) or omission(s) which is the subject matter of each claim(s) against the Executive Releasors or any of them. 9. Superceded Agreement. As of the Termination Date, this Agreement supercedes and replaces all existing and previous agreements between the parties including the Employment Agreement except as specified herein. Notwithstanding the foregoing, the parties shall fulfill any and all obligations and covenants under previous agreements as required by such agreements until the Termination Date, and shall remain liable with respect to such obligations. 10. Notice. Any notice, demand or other communications that must or may be given by either party hereto shall be in writing and shall be made by hand delivery, by overnight delivery commercial carrier (with proof of receipt), or by registered or certified mail, postage prepaid, receipt requested, addressed as follows: To Response Oncology, Inc.: Response Oncology, Inc. 1805 Moriah Woods Boulevard Memphis, TN 38117 Attn: Chair of Compensation Committee 4 5 To Executive: Patrick McDonough 7469 Meadow Rise Cove Memphis, TN 38119 Any notice provided pursuant to this Agreement shall be effective upon the earlier of the date received or three (3) days following mailing by registered or certified mail, return receipt requested. Either party, by written notice to the other, may change the address, persons, or entities to whom notice is to be provided. 11. Severability. If any one or more of the provisions of this Agreement is ruled to be wholly or partly invalid or unenforceable by a court or other government body of competent jurisdiction then: (a) the validity and enforceability of all provisions of this Agreement not ruled to be invalid or unenforceable shall be unaffected; (b) the effect of the ruling shall be limited to the jurisdiction of the court or other government body making the ruling; (c) the provision(s) held wholly or partly invalid or unenforceable shall be deemed amended, and the Court or other government body is authorized to amend and to reform the provision(s) to the minimum extent necessary to render it valid and enforceable in conformity with the parties' intent as manifested in this Agreement and a provision having a similar economic effect shall be substituted; and (d) if the ruling and/or the controlling principle of law or equity leading to the ruling is subsequently overruled, modified, or amended by legislative, judicial, or administrative action, then the provision(s) in question as originally set forth in this Agreement shall be deemed valid and enforceable to the maximum extent permitted by the new controlling principle of law or equity. 12. Assignment. The obligations of Executive under this Agreement are personal in nature and he may not assign this Agreement or his rights or obligations, or any of his rights or obligations, under this Agreement, and any attempt by Executive to assign this Agreement or any of his rights or obligations thereunder shall be null, void, and without effect. ROI may assign this Agreement to any successor in interest, any merged or consolidated entity, any purchaser of assets of ROI, or any parent, affiliate or subsidiary. 13. Waiver of Breach. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed to be a waiver of any subsequent breach of this Agreement. Further, neither party shall be deemed to have waived any provision of or right under this Agreement unless such waiver is set forth in writing signed by the party against whom waiver is asserted. 14. Headings. The captions used throughout this Agreement are for convenience only and the words contained therein shall in no way be held or deemed to define, limit, describe, 5 6 explain, modify, amplify or add to the interpretation, construction or meaning of any provision of or the scope or intent of this Agreement, nor in any way affect this Agreement. 15. Attorney's Fees. In the event that either party commences litigation in order to enforce the terms of this Agreement, the party prevailing in such litigation shall have the right to an award for such of its reasonable attorney's fees and costs incurred herein. 16. Binding Agreement. The covenants, conditions, agreements, terms and provisions herein contained shall be binding upon, and shall inure to the benefit of, the parties hereto and each of their respective successors, heirs, legal representatives and permitted assigns. 17. Entire Agreement. This Agreement, including all exhibits and attachments, contains the final and entire agreement between the parties hereto, and they shall not be bound by any terms, statements, conditions, or representations, oral or written, express or implied, not herein contained unless mutually agreed to and made a part hereof. 18. Applicable Law. This Agreement (and the terms and provisions hereof) shall be construed and enforced in accordance with the laws of the State of Tennessee, without resort or reference to the State of Tennessee's choice or conflict of law provisions or principles. 19. Construction. Executive and ROI agree that each party has had the opportunity to consult, and has consulted with, counsel in connection with negotiation of the terms and conditions of this Agreement. This Agreement shall not be construed more strictly against any party to it merely by virtue of the fact that the Agreement may have been drafted or prepared by such party or its counsel, it being recognized that each party has consulted with counsel and has had the opportunity to contribute substantially and materially to the Agreement's preparation and that this Agreement has been the subject of and is the product of negotiations between the parties. 20. Consideration Period. Executive has twenty-one (21) days in which to review this Agreement and have it reviewed by counsel, it being understood that, at his option, Executive shall have the right to execute this Agreement prior to that date. It is also understood and agreed that Executive shall be bound by this Agreement if not revoked within seven (7) days of execution of the Agreement. ROI will have no obligation to make the foregoing payment or provide any of the foregoing benefits unless and until this Agreement has been fully executed and the consideration period has expired without Executive having revoked his execution of or consent to the Agreement. IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. 6 7 /s/ Patrick McDonough - ------------------------------------ Patrick McDonough Response Oncology, Inc. By: /s/ Anthony M. LaMacchia --------------------------------- Name: Anthony M. LaMacchia ------------------------------- Title: President & CEO ------------------------------ 7 -----END PRIVACY-ENHANCED MESSAGE-----