e10vq

10-Q 1 g76942e10vq.htm RESPONSE ONCOLOGY,INC. e10vq

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, 2002 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 of Incorporation or Organization)		(I. R. S. Employer 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 [ ] No [X]

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, 12,178,701 shares as of June 17, 2002.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
	CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
SECOND AMENDED JOINT PLAN
ORDER CONFIRMING PLAN

INDEX


		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Balance Sheets, March 31, 2002 and December 31, 2001		3

	Consolidated Statements of Operations for the Three Months Ended
	March 31, 2002 and March 31, 2001		5

	Consolidated Statements of Cash Flows for the Three Months Ended
	March 31, 2002 and March 31, 2001		6

	Notes to Consolidated Financial Statements		7

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3	Quantitative and Qualitative Disclosures About Market Risk		23

PART II	OTHER INFORMATION

Item 1	Legal Proceedings		24

Item 2	Changes in Securities and Use of Proceeds		24

Item 3	Defaults Upon Senior Securities		24

Item 4	Submission of Matters to a Vote of Security Holders		24

Item 5	Other Information		24

Item 6	Exhibits and Reports on Form 8-K		25

Signatures			26

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PART I — FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES

(DEBTORS-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)


			March 31, 2002		December 31, 2001
			(Unaudited)		(Note 2)

ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	9,008	$	7,914
	Accounts receivable, less allowance for doubtful accounts of $1,524 and $2,342			3,455		5,915
	Pharmaceuticals and supplies			2,496		3,193
	Prepaid expenses and other current assets			2,504		2,472
	Due from affiliated physician groups			8,353		8,661

		TOTAL CURRENT ASSETS		25,816		28,155

Property and equipment, net				260		614
Other assets				98		133

		TOTAL ASSETS	$	26,174	$	28,902

Continued:

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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES

(DEBTORS-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

Continued:


					March 31, 2002			December 31, 2001
					(Unaudited)			(Note 2)

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
	Accounts payable				$	456		$	276
	Accrued expenses and other liabilities					1,478			2,035

			TOTAL CURRENT LIABILITIES			1,934			2,311
NON-CURRENT LIABILITIES
	Minority interest					433			447

			TOTAL NON-CURRENT LIABILITIES			433			447
LIABILITIES SUBJECT TO SETTLEMENT UNDER
		REORGANIZATION PROCEEDINGS
	Accounts payable					15,654			15,654
	Accrued expenses and other liabilities					1,895			1,955
	Secured notes payable					25,042			26,404
	Subordinated notes payable					50			50
	Capital lease obligations					85			85

				TOTAL LIABILITIES SUBJECT TO SETTLEMENT
				UNDER REORGANIZATION PROCEEDINGS		42,726			44,148
STOCKHOLDERS’ DEFICIT
	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					17			17
	Common stock, $.01 par value, authorized 30,000,000 shares; issued and outstanding 12,279,555 shares					123			123
	Paid-in capital					102,011			102,011
	Accumulated deficit					(121,070	)		(120,155	)

TOTAL STOCKHOLDERS’ DEFICIT						(18,919	)		(18,004	)

			TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	26,174		$	28,902

See accompanying notes to consolidated financial statements.

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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES

(DEBTORS-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollar amounts in thousands except for share data)


				Three Months Ended

				March 31,			March 31,
				2002			2001

NET REVENUE				$	22,790		$	31,552
COSTS AND EXPENSES
		Salaries and benefits			2,620			4,684
		Pharmaceuticals and supplies			18,222			22,852
		Other operating costs			570			1,787
		General and administrative			1,223			1,838
		Depreciation and amortization			127			986
		Interest			323			990
		Provision for (recovery of) doubtful accounts			(92	)		232

					22,993			33,368
REORGANIZATION COSTS					727			—

LOSS BEFORE INCOME TAXES AND MINORITY INTEREST					(930	)		(1,817	)
		Minority owners’ share of net earnings			(15	)		4

	LOSS BEFORE INCOME TAXES				(915	)		(1,821	)
		Income tax benefit			—			(601	)

NET LOSS					($915	)		($1,220	)

LOSS PER COMMON SHARE:
			Basic		($0.07	)		($0.10	)

			Diluted		($0.07	)		($0.10	)

Weighted average number of common shares:
			Basic		12,279,555			12,290,764

			Diluted		12,279,555			12,290,764

See accompanying notes to consolidated financial statements.

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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES

(DEBTORS-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands)


				Three Months Ended

				March 31,			March 31,
				2002			2001

OPERATING ACTIVITIES
Net loss					($915	)		($1,220	)
Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization			127			986
		Provision for (recovery of) doubtful accounts			(92	)		232
		(Gain)/loss on sale of property and equipment			208			(10	)
		Minority owners’ share of net earnings			(15	)		4
		Changes in operating assets and liabilities:
			Accounts receivable		2,551			(1,585	)
			Supplies and pharmaceuticals, prepaid expenses and other current assets		665			198
			Other assets		35			77
			Due from affiliated physician groups		308			4,456
			Accounts payable and accrued expenses		14			560

NET CASH PROVIDED BY OPERATING ACTIVITIES
	BEFORE REORGANIZATION ITEMS				2,886			3,698
OPERATING CASH FLOW USED IN REORGANIZATION ITEMS
		Bankruptcy related professional fees paid			(449	)		—

NET CASH PROVIDED BY OPERATING ACTIVITIES					2,437			3,698
INVESTING ACTIVITIES
		Proceeds from sale of property and equipment			32			22
		Purchase of equipment			(13	)		(42	)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES					19			(20	)
FINANCING ACTIVITIES
		Distributions to joint venture partners			—			(793	)
		Principal payments on notes payable			(1,362	)		(4,554	)
		Principal payments on capital lease obligations			—			(68	)

NET CASH USED IN FINANCING ACTIVITIES					(1,362	)		(5,415	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS					1,094			(1,737	)
		Cash and cash equivalents at beginning of period			7,914			7,327

CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	9,008		$	5,590

See accompanying notes to consolidated financial statements.

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RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES

(DEBTORS-IN-POSSESSION)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002

NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS/BANKRUPTCY PROCEEDINGS

Response Oncology, Inc. and its wholly-owned and majority-owned subsidiaries (the “Company”) was, prior to the events discussed below, a comprehensive cancer management company. As of June 17, 2002, the Company has liquidated substantially all of its operating assets and anticipates that the remaining assets will be liquidated and all wind-down activities completed by the end of 2002. Prior to the sale of its assets, the Company provided: advanced cancer treatment services through outpatient facilities known as IMPACT® Centers under the direction of practicing oncologists; owned the assets of and managed the nonmedical aspects of oncology practices; compounded and dispensed pharmaceuticals to certain oncologists for a fixed or cost plus fee; and conducted outcomes research on behalf of pharmaceutical manufacturers.

On March 29, 2001, the Company (excluding entities that are majority-owned by Response Oncology, Inc.) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Code”) in the United States Bankruptcy Court for the Western District of Tennessee, Western Division (the “Court”). The case is jointly administered under case number 01-24607-DSK. As of March 31, 2002, the Company was operating as a debtor-in-possession under the Code, which protects it from its creditors pending reorganization or liquidation under the jurisdiction of the Court. As debtor-in-possession, the Company is authorized to operate its business but may not engage in transactions outside the ordinary course of business without approval of the Court. A statutory creditors committee may be appointed in the Chapter 11 case, but as of March 31, 2002, such a committee had not been formed. As part of the Chapter 11 process, the Company has attempted to notify all known or potential creditors of the Chapter 11 filing for the purpose of identifying all prepetition claims against the Company.

The Court approved a disclosure statement (the “Disclosure Statement”) filed in connection with the First Joint Plan filed by the Company and AmSouth Bank, as agent for itself, Bank of America, N.A. and Union Planters Bank, N.A. (the “Lenders”) on Friday, May 3, 2002. Under the Plan, originally filed April 12, 2002, and amended April 19, 2002 and June 14, 2002 (collectively the “Plan”), the Company’s outstanding common stock, preferred stock, options and warrants will be cancelled and current shareholders and warrantholders will not receive any consideration. The Plan is a liquidating plan and does not contemplate the financial rehabilitation of the Company or the continuation of its business. Most of the Company’s assets have been sold or are in the process of being liquidated, with such funds being paid to creditors as set forth in the Plan.

Under the Plan, the Lenders, whose outstanding secured claim was allowed in the amount of $29,545,087.31 by Court order dated October 26, 2001, will be paid all proceeds from the liquidation, except for amounts to be paid on account of allowed administrative and priority claims (estimated to be approximately $3,500,000), and $250,000, which will be distributed to general unsecured creditors. The liquidation of the Company’s assets will not return to the Lenders or general unsecured creditors the full amount of their claims.

The Court confirmed the Plan on June 14, 2002. Upon completion of the liquidation of all the Company’s assets and distribution of those proceeds in accordance with the Plan, the Company will be dissolved.

Generally, substantially all of the Company’s liabilities as of the filing date (“prepetition liabilities”) are subject to settlement under a plan of reorganization. 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 as debtor-in-possession. Absent approval from the Court, the Company is prohibited from paying prepetition obligations. The Court has approved payment of certain prepetition obligations such as employee wages and benefits. Additionally, the Court has approved the retention of various legal, financial and other professionals. Schedules were filed by the Company with the Court setting forth its assets and liabilities as of the filing date as reflected in the Company’s accounting records.

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Differences between amounts reflected in such schedules and claims filed by creditors will be investigated and either amicably resolved or subsequently adjudicated before the Court. As previously discussed, a Plan has been confirmed by the Court and proceeds will be distributed pursuant to the Plan during the third quarter of 2002.

Under the Code, the Company may elect to assume or reject real property leases, employment contracts, personal property leases, service contracts and other executory prepetition contracts, subject to Bankruptcy Court review. Parties affected by such rejections may file prepetition claims with the Bankruptcy Court in accordance with bankruptcy procedures. At this time, because of material uncertainties, prepetition claims are generally carried at face value in the accompanying financial statements. The Company cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting leases or from filing of claims for any rejected contracts, and no provisions have been made for the majority of these items. Additionally, the net expense resulting from the Chapter 11 filing by the Company has been segregated and reported as reorganization costs in the consolidated statements of operations for the three months ended March 31, 2002.

The Company’s consolidated financial statements have been prepared in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 90-7 (SOP 90-7), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” In addition, the consolidated financial statements have been prepared using accounting principles applicable to a going concern, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. As a result of the Chapter 11 filing, such realization of assets and liquidation of liabilities is subject to uncertainty. Based on the liquidation values of the Company’s assets sold in April and May of 2002, the carrying value of these assets was adjusted to the net realizable value as of December 31, 2001. The financial statements include reclassifications made to reflect the liabilities that have been deferred under the Chapter 11 proceedings as “Liabilities Subject to Settlement under Reorganization Proceedings.” The Company will adopt “Fresh-Start Reporting” pursuant to SOP 90-7 on the effective date of the Plan, which will be June 25, 2002 unless confirmation of the Plan is appealed or otherwise stayed. Certain accounting and business practices have been adopted that are applicable to companies that are operating under Chapter 11.

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, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.

Net Revenue: The Company’s net patient service revenue includes charges to patients, insurers, government programs and other third-party payers for medical services provided. Such amounts are recorded net of contractual adjustments and other uncollectible amounts. Contractual adjustments result from the differences between the amounts charged for services performed and the amounts allowed by government programs and other public and private insurers.

The Company’s revenue from practice management affiliations includes a fee equal to practice operating expenses incurred by the Company (which excludes expenses that are the obligation of the physicians, such as physician salaries and benefits) and a management fee either fixed in amount or equal to a percentage of each affiliated oncology group’s adjusted net revenue or net operating income. In certain affiliations, the Company may also be entitled to a performance fee if certain financial criteria are satisfied.

Pharmaceutical sales to physicians are recorded based upon the Company’s contracts with physician groups to manage the pharmacy component of the groups’ practice. Revenue recorded for these contracts represents the cost of pharmaceuticals plus a fixed or percentage fee.

Clinical research revenue is recorded based on 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.

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The following table is a summary of net revenue by source for the respective three-month periods ended March 31, 2002 and 2001.


	Three Months Ended
	March 31,

	2002		2001

	(In thousands)
Net patient services revenue	$	194	$	2,189
Practice management service fees		14,178		18,049
Pharmaceutical sales to physicians		8,418		11,196
Clinical research revenue		—		118

	$	22,790	$	31,552

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, 2002 and 2001.


	Three Months Ended
	March 31,

	2002			2001

	(Dollar amounts in thousands
	except per share data)
Weighted average shares outstanding		12,279,555			12,290,764
Net effect of dilutive stock options and warrants based on the treasury stock method		—	(A)		—	(A)

Weighted average shares and common stock equivalents		12,279,555			12,290,764

Net loss		($915	)		($1,220	)

Diluted per share amount		($0.07	)		($0.10	)

(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 originally bore 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. The Company was 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,

-9-

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, resulting in an event of default under the Credit Facility. 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) included 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 to perform certain valuation analyses.

Pursuant to the Plan, the Lenders’ claims under the Credit Facility have been liquidated and no future revisions to the Credit Facility will occur. The terms of the permanent cash collateral order provide for the payment of interest to the Lenders at the non-default rate as set forth in the original credit agreement (currently LIBOR plus 2.5%). 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 a liability subject to settlement under reorganization proceedings in the accompanying consolidated balance sheets as of March 31, 2002 and December 31, 2001. At March 31, 2002, $25.0 million aggregate principal was outstanding under the Credit Facility with an interest rate of approximately 5.2%.

Absent the impact of the Company’s bankruptcy filing, amounts under the Credit Facility are contractually due entirely in the Company’s fiscal 2002.

The Company entered into a LIBOR-based interest rate swap agreement with the Company’s Lender as required by the terms of the Credit Facility. Effective July 1, 2000, the Company entered into a new Swap Agreement under which amounts hedged accrued interest at the difference between 7.24% and the ninety-day LIBOR rate and were settled quarterly (“Swap Agreement”). The Company has hedged $17.0 million under the terms of the Swap Agreement. The Swap Agreement terminated upon the filing of the Company’s bankruptcy petitions and has not been renewed.

The installment notes payable to affiliated physicians and physician practices were issued as partial consideration for the practice management affiliations. Pursuant to the physician practice management sale transactions that occurred in the first and second quarters of 2002, the related subordinated debt that was forgiven as part of these transactions was adjusted to the net realizable value at December 31, 2001. The unpaid principal amount of a note related to a physician practice management affiliation was $50,000 at March 31, 2002.

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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, 2002, 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 $5,000,000 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, 2002 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 had three reportable segments: IMPACT Services, Physician Practice Management and Cancer Research Services. The IMPACT Services segment provided 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 owned the assets of and managed oncology practices. The Cancer Research Services segment conducted 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.


			Physician Practice		Cancer Research
	IMPACT Services		Management		Services		Total

	(In thousands)
For the three months ended March 31, 2002:
Net revenue	$	8,612	$	14,178		—	$	22,790
Total operating expenses		8,486		12,647		—		21,133

Segment contribution		126		1,531		—		1,657
Depreciation and amortization		19		—		—		19

Segment profit	$	107	$	1,531		—	$	1,638

Segment assets	$	5,589	$	10,461	$	102	$	16,152

Capital expenditures	$	6		—		—	$	6

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				Physician Practice		Cancer Research
	IMPACT 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

Reconciliation of profit:


		Three Months Ended
		March 31,

		2002			2001

Segment profit		$	1,638		$	730
Unallocated amounts:
	Corporate salaries, general and administrative		2,122			1,485
	Corporate depreciation and amortization		108			65
	Corporate interest expense		323			1,001

Loss before income taxes			($915	)		($1,821	)

Reconciliation of consolidated assets:


		As of March 31,

		2002		2001

Segment assets		$	16,152	$	77,018
Unallocated amounts:
	Cash and cash equivalents		9,008		5,590
	Prepaid expenses and other assets		919		3,152
	Property and equipment, net		95		718

Consolidated assets		$	26,174	$	86,478

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Management has included in this report certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are, by their nature, subject to known and unknown risks and uncertainties. Forward-looking statements include statements about the Plan (as defined below) and the timing of completion of the liquidation of the Company (as described below). These statements are based on current expectations and the current status of the Company’s financial condition and filings with the Court (as defined below). They involve a number of risks and uncertainties that are difficult to predict, including, but not limited to the ability of the Company to liquidate its assets under the terms of the Plan as confirmed by the Court. Actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are detailed from time to time in other filings by the Company with the SEC. The Company assumes no obligation to publicly release any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

Response Oncology, Inc. and its wholly-owned and majority-owned subsidiaries (the “Company”) was, prior to the events described below, a comprehensive cancer management company. As of June 17, 2002, the Company has liquidated substantially all of its operating assets and anticipates that the remaining assets will be liquidated and all wind-down activities completed by the end of 2002. Prior to the sale of its assets, the Company provided: advanced cancer treatment services through outpatient facilities known as IMPACT® Centers under the direction of practicing oncologists; owned the assets of and managed the nonmedical aspects of oncology practices; compounded and dispensed pharmaceuticals to certain oncologists for a fixed or cost plus fee; and conducted outcomes research on behalf of pharmaceutical manufacturers.

Filings Under Chapter 11 of the Bankruptcy Code

On March 29, 2001, the Company (excluding entities that are majority-owned by Response Oncology, Inc.) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Code”) in the United States Bankruptcy Court for the Western District of Tennessee, Western Division (the “Court”). The case is jointly administered under case number 01-24607-DSK. As of March 31, 2002, the Company was operating as a debtor-in-possession under the Code, which protects it from its creditors pending reorganization or liquidation under the jurisdiction of the Court. As debtor-in-possession, the Company is authorized to operate its business but may not engage in transactions outside the ordinary course of business without approval of the Court. A statutory creditors committee may be appointed in the Chapter 11 case, but at this point such a committee has not been formed. As part of the Chapter 11 process, the Company has attempted to notify all known or potential creditors of the Chapter 11 filing for the purpose of identifying all prepetition claims against the Company.

The Court approved a disclosure statement (the “Disclosure Statement”) filed in connection with the First Joint Plan by the Company and AmSouth Bank, as agent for itself, Bank of America, N.A. and Union Planters Bank, N.A. (the “Lenders”) on Friday, May 3, 2002. Under the Plan, originally filed April 12, 2002, and amended April 19, 2002, and June 14, 2002 (collectively the “Plan”), the Company’s outstanding common stock, preferred stock, options and warrants will be cancelled and current shareholders and warrantholders will not receive any consideration. The Plan is a liquidating plan and does not contemplate the financial rehabilitation of the Company or the continuation of its business. Most of the Company’s assets have been sold or are in the process of being liquidated, with such funds being paid to creditors as set forth in the Plan.

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Generally, the Company has exited its IMPACT Services business that provided high dose chemotherapy with stem cell support to cancer patients on an outpatient basis. Through its IMPACT Centers, the Company had 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 supported the Company’s clinical trials program, which involved 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 allowed the Company to develop a rational means of improving future treatment regimens by predicting which patients are most likely to benefit from different treatments. The Company’s clincial trials assets and related infrastructure were sold in April 2002.

Each IMPACT Center was staffed by, and made 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 included preparation and collection of stem cells, administration of high dose

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chemotherapy, reinfusion of stem cells and delivery of broad-based supportive care. IMPACT Center personnel extended the support mechanism into the patient’s home, further reducing the dependence on hospitalization. The advantages of this system to the physician and patient included: (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 were placed on a treatment protocol developed from the cumulative analysis of the Company’s approximately 4,000 high dose cases. Cases conducted at the IMPACT Center began with a drug regimen which allowed 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 were harvested over a two to three day period. The harvested stem cells were then frozen and stored at the IMPACT Center, and following confirmation of response to treatment and a satisfactory stem cell harvest, patients received high dose chemotherapy followed by reinfusion of stem cells. Most patients were then admitted to an affiliated hospital for approximately 8-12 days. After discharge, the patient was monitored in the oncologist’s office. The Company believed that the proprietary databases and the information gathering techniques developed from the foregoing programs enabled practicing oncologists to cost effectively manage cancer cases while ensuring quality. Clinical research conducted by the Company focused 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. After the release of these data, the Company’s high dose business slowed extensively. The Company closed 4 IMPACT Centers in the first quarter of 2002, 16 IMPACT Centers in 2001, 19 IMPACT Centers in 2000, and 12 IMPACT Centers in 1999 due to decreased patient volumes. All remaining IMPACT Centers are currently being sold or closed by the Company. The decline in the IMPACT Center business was a significant factor that led to the Company’s bankruptcy filing.

While additional data presented at the 2000 ASCO annual meeting appeared to clarify somewhat the role of high dose therapies for breast cancer and indicated favorable preliminary results, the Company did not experience an increase in referrals for breast cancer patients, nor did the Company expect this trend to reverse in the foreseeable future. The continuing declines in high dose therapy volumes and the inability to develop new referral lines or treatment options for the network related to non-breast cancer volumes adversely affected the financial results of this line of business. Such adverse results have required the Company to close or sell the remaining 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 intended 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 would have included the distribution of new drugs with special handling requirements, and was expected to involve the use of the Company’s regional network of specialized pharmaceutical centers. In addition, the Company intended 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 had 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 had operating responsibilities over the existing business segments and for the development of the specialty pharmaceutical business. The Company also engaged in discussions with potential strategic partners, including certain pharmaceutical manufacturers, partner hospitals, and affiliated physicians. Various clinical and marketing materials were also developed. These services were marketed to select physicians and third-party payers in existing locations within the IMPACT Center network. The Company treated very few patients utilizing such specialty drugs. Given the Company’s liquidation of all of its assets, the Company is no longer pursuing this strategy.

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The Company provided pharmacy management services to certain medical oncology practices through its IMPACT Center pharmacies. These services included compounding and dispensing pharmaceuticals for a fixed or cost plus fee. The Company has sold or is in the process of selling all of its pharmacy management assets.

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 provided management services that extended to all nonmedical aspects of the operations of the affiliated practices. As described below, the Company recognized deterioration in the value of its Service Agreements through financial charges and termination and modification negotiations. As of May 10, 2002, the Company had terminated all of its Service Agreements and sold all of its assets related to oncology practice management services.

The Service Agreements named 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 was 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) prepared annual capital and operating budgets; (ii) prepared financial statements; (iii) ordered and purchased medical and office inventory and supplies; (iv) billed patients and third party payers as agent for the affiliated practices; (v) maintained accounting, billing, medical, and collection records; (vi) negotiated and administered managed care contracts as agent for affiliated physicians; (vii) arranged for legal and accounting services related to practice operations; (viii) recruited, hired and appointed an executive director to manage and administer all of the day-to-day business functions of each practice; and (ix) managed all non-physician professional support, administrative, clerical, secretarial, bookkeeping and billing personnel. The Company sought 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 received 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 agreed not to compete with the Company and the practice. Each Service Agreement had an initial term of 40 years and, after the initial term, would have been automatically extended for additional five year terms unless either party delivered written notice to the other party 180 days prior to the expiration of the preceding term. The Service Agreement only provided for termination “for cause.” If the Company terminated the Service Agreement for cause, the practice was typically obligated to purchase assets (which typically include intangible assets) and pay liquidated damages, which obligations were wholly or partially guaranteed by individual physician owners of the practice for a period of time. Each Service Agreement provided for the creation of an oversight committee, a majority of the members of which were designated by the practice. The oversight committee was 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. 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 terminated the Service Agreement with the third physician group effective December 31, 2001.

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 sought recovery of liquidated damages and other amounts owed. This dispute was settled pending execution of definitive documents in May 2002 for $275,000. No recovery has been recorded in the consolidated financial statements as of and for the year ended December 31, 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 2000.

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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. (“OHGSF”) 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. The pharmacy management agreement with OHGSF expired on February 1, 2002.

During the first and second quarters of 2002, the Company terminated all of the remaining Service Agreements and sold the associated assets to the physician groups that were parties to the agreements. At December 31, 2001, the Company adjusted the Service Agreements and associated assets to their net realizable values as measured by the termination and sale agreements. This resulted in an impairment charge of $42.1 million related to the Service Agreements and $5.0 million related to adjustments to associated assets that was recorded in the year ended December 31, 2001. The aggregate proceeds generated from the termination of the remaining six Service Agreements as sale of related assets were approximately $11.3 million.

The filings of the voluntary bankruptcy petitions by the Company were technical defaults under the terms of the Service Agreements. However, such provisions are not enforceable under the Bankruptcy Code and the affiliated practices were stayed from terminating their agreements for cause because of the bankruptcy filings. As discussed above, all of the remaining Service Agreements and associated assets were terminated and sold back to the affiliated physicians in the first and second quarters of 2002.

During the second quarter of 2000, the Centers for Medicare and Medicaid Services (“CMS” — fka the Health Care Financing Administration), which oversees the Medicare program, announced its intent to adjust certain pharmaceutical reimbursement mechanisms. CMS 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 CMS’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. CMS’s investigation into inflated AWPs is ongoing. If the Service Agreements had not been terminated, the management fees earned by the Company pursuant to the Service Agreements would have been exposed to reduction resulting from decreases in reimbursement rates.

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 30 consecutive trading days as required under the maintenance standards of the Nasdaq National Market. On March 15, 2001, the Company’s common stock was delisted from the Nasdaq Stock Market. Following the delisting, quotations for the Company’s common stock were available on the OTC Bulletin Board.

Results of Operations

Net revenue decreased 28% to $22.8 million for the quarter ended March 31, 2002, compared to $31.6 million for the quarter ended March 31, 2001. Practice management service fees were $14.2 million for the first quarter of 2002 compared to $18.0 million for the same period in 2001 for a 21% decrease. This decrease is primarily due to the termination and sale of related assets of two Service Agreements effective February 1, 2001 and December 31, 2001, respectively. This decrease was partially offset by a 2% increase in practice management fees on the remaining practice groups. Pharmaceutical sales to physicians decreased $2.8 million, or 25%, from $11.2 million for the first three months of 2001 to $8.4 million in 2002. This decrease is primarily due to the terminations of two pharmaceutical sales agreements with physician practices effective April 1, 2001 and February 1, 2002, but was partially offset by the addition of one pharmacy management contract effective January 1, 2002. Additionally, net patient service revenues from IMPACT services decreased $2.0 million, or 91%, from $2.2 million in the first quarter of 2001 to $.2 million in the first quarter of 2002. This decrease in high dose chemotherapy revenues was due to overall decreases in referrals to the IMPACT Centers, with some continued 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. These decreases in referrals and approvals led to the

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closure of numerous IMPACT Centers each year since 1999. As stated above, the Company has closed or is in the process of selling all remaining IMPACT Centers.

Salaries and benefits costs decreased $2.1 million, or 45%, from $4.7 million for the first quarter of 2001 to $2.6 million in 2002. The decrease is primarily due to the termination of certain Service Agreements, the closing of various IMPACT Centers and a significant reduction in corporate staffing. Salaries and benefits expense as a percentage of net revenue was 11% and 15% for the quarters ended March 31, 2002 and 2001, respectively.

Supplies and pharmaceuticals expense decreased $4.6 million, or 20%, from the first quarter of 2001 to the first quarter of 2002. The decrease is primarily related to the termination of a pharmacy management contract with two physician practices effective April 1, 2001 and February 1, 2002, as well as the termination and sale of two Service Agreements effective February 1, 2001 and December 31, 2001. A decrease in patient volumes in the IMPACT Centers also contributed to the decrease. Supplies and pharmaceuticals expense as a percentage of net revenue was 80% and 72% for the quarters ended March 31, 2002 and 2001, respectively. The increase as a percentage of net revenue is primarily due to general price increases in pharmaceuticals used in the pharmaceutical sales and practice management divisions.

General and administrative expenses decreased $.6 million, or 33%, from $1.8 million in the first quarter of 2001 to $1.2 million in the first quarter of 2002. The decrease was primarily due to the net effect of decreased administrative expenses due to the closure of various IMPACT Centers and the termination of certain Service Agreements, offset by increased expenses for professional services, principally legal and consulting fees, related to the Company’s restructuring efforts prior to the bankruptcy filing.

Other operating expenses decreased $1.2 million, or 67%, from $1.8 million in 2001 to $.6 million in 2002. 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 2001.

For the three months ended March 31, 2002, all operating and general expenses other than those related to pharmaceuticals and supplies were reduced by $3.9 million, or 47%, as compared with those for the three months ended March 31, 2001. These reductions reflect cost reduction and containment steps put in place in the first quarter of 2000, the closure of 17 IMPACT Centers since the first quarter of 2001, lower patient volumes, lower corporate overhead expenses and the termination of Service Agreements in February and December 2001, partially offset by increased expenses for professional services, principally legal and consulting fees, related to the Company’s restructuring efforts prior to the bankruptcy filing.

Depreciation and amortization decreased $.9 million from $1.0 million for the first quarter of 2001 to $.1 million for the first quarter of 2002. This decrease is primarily due to the write-off of the Company’s Service Agreements in 2001, resulting in lower amortization in 2002.

Reorganization costs of $.7 million for the quarter ended March 31, 2002, consist of expenses for professional services, principally legal and consulting fees, that were incurred by the Company in 2002 as a result of the bankruptcy filing.

EBITDA (earnings (loss) before interest, taxes, depreciation and amortization) decreased $.6 million to ($.4) million for the quarter ended March 31, 2002 in comparison to $.2 million for the quarter ended March 31, 2001. EBITDA from the IMPACT services segment increased $.2 million for the quarter ended March 31, 2002 as compared to the quarter ended March 31, 2001. The increase is primarily due to certain bad debt recoveries in the first quarter of 2002. EBITDA from the physician practice management division decreased $.2 million primarily due to increases in pharmaceutical and supply costs, increases in contractual adjustments, and the termination and modification of certain Service Agreements. Corporate general and administrative expenses, principally reorganization costs, increased $.6 million in the first quarter of 2002 as compared to the first quarter of 2001, thereby accounting for the overall net decrease in EBITDA. EBITDA is presented because it is a widely accepted financial indicator of a company’s ability to service indebtedness. However, EBITDA should not be considered as an alternative to income (loss) from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. EBITDA should also not be construed as an indication of the Company’s operating performance or as a measure of liquidity. In

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addition, because EBITDA is not calculated identically by all companies, the presentation herein may not be comparable to other similarly titled measures of other companies.

Liquidity and Capital Resources

At March 31, 2002, the Company’s working capital totaled $23.9 million, with current assets of $25.8 million and current liabilities of $1.9 million (excluding liabilities subject to settlement under reorganization proceedings of $42.7 million). Cash and cash equivalents represented $9.0 million of the Company’s current assets. Approximately $1.1 of the Company’s cash and cash equivalents as of March 31, 2002 is escrowed pursuant to the Company’s employee retention plan that was approved by the Bankruptcy Court in the third quarter of 2001. Positive working capital is primarily attributable to the change in balance sheet classification of liabilities subject to settlement under reorganization proceedings, as further described below.

Cash provided by operating activities was $2.4 million in the first quarter of 2002 compared to cash provided by operating activities of $3.7 million for the same period in 2001. This decrease is largely attributable to a reduction in amounts due from affiliated physician groups in the first quarter of 2001 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 and the payment of bankruptcy related professional fees. In addition, this decrease was partially offset by an increase in cash generated from accounts receivable due to the termination of certain pharmacy management agreements and the closure of various IMPACT Centers.

Cash provided by investing activities was $19,000 for the quarter ended March 31, 2002. Cash used in investing activities was $20,000 for the quarter ended March 31, 2001. The increase is primarily attributable to a reduction in capital expenditures in the first quarter of 2002 as compared to the first quarter of 2001.

Cash used in financing activities was $1.4 million for the first quarter of 2002 and $5.4 million for the same period in 2001. The decrease in cash used in financing activities is primarily attributable to additional payments on notes payable due to the remittances of the sale proceeds discussed above and distributions to joint venture partners in the first quarter of 2001 as compared to the first quarter of 2002.

Under the terms of the Company’s Bankruptcy case, liabilities in the approximate amount of $42.7 million are subject to settlement. 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 its business operations as debtor-in-possession. The ultimate amount and settlement terms for such liabilities are subject to the Plan which provides a mechanism for the allowance of claims and distribution on account of such claims. The precise treatment of such claims is not presently determinable.

Since the filing of the bankruptcy petitions, the Company has been operating under various interim cash collateral orders whereby the Company is authorized to utilize cash according to cash budgets approved by the Court. On October 26, 2001, a permanent cash collateral order was approved by the Court. Pursuant to the terms of the permanent cash collateral order, the Company was authorized to utilize cash according to approved cash budgets until the earlier of the occurrence of a specific defined event or March 31, 2002. Such defined events included, but were not limited to, the filing of a reorganization plan, the sale of all of the assets of the Company, conversion of the cases to Chapter 7 of the Code, or the occurrence of an uncured default. Furthermore, a lump sum principal payment to the Lenders of $2.6 million was made on October 31, 2001. The terms of the permanent cash collateral order also provide for the payment of interest to the Lenders at the non-default rate as set forth in the original credit agreement (currently LIBOR plus 2.5%). On April 12, 2002, an order extending and modifying the order entered on October 26, 2001 was approved by the Court. Pursuant to the terms of this amendment, the termination date for the use of cash collateral was extended until July 15, 2002. Furthermore, additional default provisions were added to the order. Such additional defaults include, but are not limited to, failure of the Company to support through confirmation the Plan, the disposition or settlement of any assets without full consultation of the Lenders, payment of any additional professional fees above the amount set forth in the budget, and the accrual of additional professional fees in excess of $250,000 for services performed for the period from April 1, 2002, through the effective date of the Plan. The Company’s historical cash flow since the filing of the petitions and current cash budgets indicate sufficient liquidity to fund its operations during the aforementioned periods.

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On July 31, 2001 (and subsequently amended on or about January 25, 2002), the Court approved the establishment of an Employee Retention Plan (“ERP”) by the Company in order to provide monetary incentives for certain employees to remain with the Company during its restructuring and liquidation efforts. The ERP also provides severance benefits for certain employees in the event of a “without cause” termination. In addition, amendments to certain employment agreements of officers of the Company were approved. Pursuant to these court orders, approximately $1.3 million was placed in escrow for the benefit of various employees and officers related to the stay bonus components of the ERP and employment contracts. At March 31, 2002, approximately $1.1 million in ERP funds is reflected in cash and cash and equivalents. The aggregate contingent liability of the ERP, including certain employment agreements, was approximately $1.7 million as of March 31, 2002. Approximately $1.1 million was paid out to certain employees and officers from April 1, 2002, through May 31, 2002, and such amounts were not accrued in the consolidated financial statements as of and for the quarter ended March 31, 2002 because the triggers for payment of such obligations occurred subsequent to quarter-end.

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 originally bore 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. 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.

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 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, resulting in an event of default under the Credit Facility. 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. 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) included 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.

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Pursuant to the Plan, the Lenders’ claims under the Credit Facility have been liquidated and no future revisions to the Credit Facility will occur. 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 a liability subject to settlement under reorganization proceedings in the accompanying consolidated balance sheets as of March 31, 2002 and December 31, 2001. At March 31, 2002, $25.0 million aggregate principal was outstanding under the Credit Facility with an interest rate of approximately 5.2%.

The Company entered into a LIBOR-based interest rate swap agreement with the Company’s Lender as required by the terms of the Credit Facility. Effective July 1, 2000, the Company entered into a new Swap Agreement Under which amounts hedged accrued interest at the difference between 7.24% and the ninety-day LIBOR rate and were settled quarterly (“Swap Agreement”). The Company has hedged $17.0 million under the terms of the Swap Agreement. The Swap Agreement terminated upon the filing of the Company’s bankruptcy petitions and has not been renewed.

The installment notes payable to affiliated physicians and physician practices were issued as partial consideration for the practice management affiliations. Pursuant to the physician practice management sale transactions that occurred in the first and second quarters of 2002, the related subordinated debt that was forgiven as part of these transactions was adjusted to the net realizable value at December 31, 2001. The unpaid principal amount of a note related to a practice management affiliation was $50,000 at March 31, 2002.

The Company is committed to future minimum lease payments under operating leases of $93,000 for administrative and operational facilities through June 30, 2002. As of June 30, 2002, the Company will cease operations at its headquarters in Memphis, Tennessee.

Health Insurance Portability and Accountability Act of 1996

The federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) mandated the development of regulations to standardize electronic healthcare transactions and to ensure the privacy and protection of individually identifiable health information. On August 17, 2000, the Department of Health and Human Services (“HHS”) published the first final rule of this set, Standards for Electronic Transactions (“Transactions Rule”). Most entities subject to the Transactions Rule must be in compliance by October 16, 2003. On December 28, 2000, HHS published a second final rule, addressing the privacy of individually identifiable health information (“Privacy Rule”). Most entities subject to the Privacy Rule are currently required to be in compliance by April 14, 2003. A third final regulation establishing a unique identifier for employers to use in electronic health care transactions was published on May 31, 2002. Two other HIPAA components — a rule creating a unique identifier for providers to use in such transactions and a rule setting standards for the security of electronic health information – were proposed in 1998, but have not been finalized. Still to be proposed are rules establishing a unique identifier for health plans for electronic transactions, standards for claims attachments, and enforcement standards. Plans for a national individual identifier rule have been placed on hold.

The Company will likely be dissolved prior to implementation of the HIPAA regulations.

New Accounting Standards

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provision of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FAS Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

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The Company is required to adopt the provisions of Statement 141 immediately except with regard to business combinations initiated prior to July 1, 2001, and Statement 142 effective January 1, 2002. Furthermore, goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before Statement 142 is adopted in full will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized and tested for impairment in accordance with the appropriate pre-Statement 142 accounting requirements prior to the adoption of Statement 142.

Statement 141 requires upon adoption of Statement 142 that the Company evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with Statement 142’s transitional goodwill impairment evaluation, the Statement will require the Company to perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s statement of earnings.

Any unamortized negative goodwill (and equity-method goodwill) existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle.

As of the date of adoption, the Company had no unamortized identifiable intangible assets that were subject to the transitional provisions of Statements 141 and 142. Amortization expense related to identifiable intangible assets was $.6 million for the quarter ended March 31, 2001. There was no amortization expense related to identifiable intangible assets for the quarter ended March 31, 2002.

In August 2001, the FASB issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets.

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The Company has adopted Statement 144 for the quarter ended March 31, 2002. Such adoption of Statement 144 for long-lived assets held for use did not have a material impact on the Company’s financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. Furthermore, the Company has no unamortized identifiable intangible assets. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposition activities.

Critical Accounting Policies

Financial Reporting Release No. 60, recently issued by the SEC, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. Notes 1 and 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the Company’s Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies.

The Company’s consolidated financial statements have been prepared in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 90-7 (SOP 90-7), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” In addition, the consolidated financial statements have been prepared using accounting principles applicable to a going concern, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. As a result of the Chapter 11 filing, such realization of assets and liquidation of liabilities is subject to uncertainty. Based on the liquidation values of the Company’s assets sold in April and May of 2002, the carrying value of these assets has been adjusted to their net realizable value as of December 31, 2001. The financial statements include reclassifications made to reflect the liabilities that have been deferred under the Chapter 11 proceedings as “Liabilities Subject to Settlement under Reorganization Proceedings.” The Company will adopt “Fresh- Start Reporting” pursuant to SOP 90-7 on the effective date of the Plan, which will likely be June 25, 2002. Certain accounting and business practices have been adopted that are applicable to companies that are operating under Chapter 11.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure has been to changes in interest rates obtainable on its Credit Facility. The Company’s interest rate risk objective has been to limit the impact of interest rate fluctuations on earnings and cash flows and to lower its overall borrowings by selecting interest periods for traunches of the Credit Facility that are more favorable to the Company based on the current market interest rates. Prior to the Company’s bankruptcy filing, the Company had the option of fixing current interest rates for interest periods of 1, 2, 3 or 6 months. Since the filing of the Company’s bankruptcy petitions and consistent with the cash collateral orders, interest rates have been set exclusively for one-month periods.

The Company was also a party to a LIBOR based interest rate swap agreement, effective July 1, 2000, with the Company’s Lender as required by the terms of the Credit Facility. Amounts hedged under the Swap Agreement accrued interest at the difference between 7.24% and the ninety-day LIBOR rate and were settled quarterly (“Swap Agreement”). The Swap Agreement terminated upon the filing of the Company’s bankruptcy petitions and has not been renewed. The Company does not enter into derivative or interest rate transactions for speculative purposes.

At March 31, 2002, $25.0 million aggregate principal was outstanding under the Credit Facility with a current interest rate of approximately 5.2%. The Company does not have any other material market-sensitive financial instruments.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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, Note 1 of the Notes to Consolidated Financial Statements, Part I Item 2, and Part II Item 5 of this Form 10-Q. 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 former affiliated physician group that would have a material adverse effect on the Company’s financial condition or results of operations. The Company expects its former 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 formerly affiliated oncologists.

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

On or about May 15, 2002, the Plan and Disclosure Statement were mailed to all shareholders of the Company. Because the secured claim of the Lenders and unsecured non-priority claims are not being paid in full, shareholders will receive nothing on account of their claims, and their interests in the Company will be cancelled on the effective date of the Plan. Therefore, shareholders were deemed to have rejected the Plan, and the votes of the shareholder class were not solicited.

ITEM 5. OTHER INFORMATION

Bankruptcy or Receivership

As previously reported, on March 29, 2001, the Company (excluding entities that are majority-owned by Response Oncology, Inc.) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Code”) in the United States Bankruptcy Court for the Western District of Tennessee, Western Division (the “Court”). The case is jointly administered under case number 01-24607-DSK. The Company has operated its business as a debtor-in-possession since the filing date.

A hearing on the confirmation of the Company’s Second Amended Joint Plan (the “Plan”) was held on June 14, 2002, and the Plan was confirmed by the Court pursuant to an Order Confirming Plan (the “Confirmation Order”). A copy of the Confirmation Order is attached hereto as Exhibit 99.1 and is incorporated herein by reference. A copy of the Plan is attached hereto as Exhibit 2.1 and is incorporated herein by reference. The Confirmation Order will become a Final Order on June 25, 2002, unless an objection is filed (the “Effective Date”). All capitalized terms not defined herein shall have the meanings as set forth in the Plan.

The Plan constitutes a liquidating plan, whereby all of the Company’s assets have been or will be liquidated, and net proceeds will be distributed to the Company’s creditors. The Plan designates four classes of creditor claims and one class of claims of shareholders. These classes take into account the differing nature and priority under the Code.

Holders of Allowed Claims in Class 1 will be paid in full. Holders of Allowed Claims in Class 2 will receive all amounts collected through the liquidation of the Company’s assets except those amounts paid to other Classes. Holders of Class 3 Allowed Claims, to the extent they exist, will be satisfied at the election of the Lenders by tendering the

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collateral for such secured claim or by paying from the Assets the value of such collateral to any such claimant. In full satisfaction of all Allowed Claims in Class 4, Allowed Claims will receive a pro rata portion of $250,000 from the Creditors Trust. Class 5 claimants will receive nothing under the Plan, and all stock, options, warrants, and ROI Interests shall be deemed cancelled on the Effective Date.

The following table briefly summarizes the classification and treatment of Claims and equity interests under the Plan. The recoveries set forth below are estimates based upon various assumptions. The following summary is qualified in its entirety by reference to the Confirmation Order and the Plan, which are attached as Exhibits 99.1 and 2.1, respectively.


	Type of Claim or		Estimated
Class	Equity Interest	Treatment	Recovery

1	Administrative Claims	Unimpaired; Allowed Claims paid in full, in cash		100	%
2	Secured Claim of Lenders ($29.6 million)	Impaired; will receive all amounts collected through the liquidation except those amounts paid to other Classes.		80	%
3	Claims of Other Secured Creditors (Estimated at $0)	Unimpaired; Allowed Claims satisfied by tendering collateral for such Claims.		100	%
4	Unsecured Non-Priority Claims (Estimated at $6.5 million after allowances and settlements)	Impaired; Allowed Claims to be paid pro rata share of $250,000.		4	%
5	Claims of Shareholders	Impaired; no distribution		0	%

Prior to the Effective Date of the Plan, the Company had 12,279,555 shares of common stock issued and outstanding and 16,631 shares of preferred stock issued and outstanding. As of May 31, 2002, the latest practicable date that such information is available, and before giving effect to the consummation of the Plan, the Company estimated that it had consolidated assets with a book value of approximately $7.2 million and liabilities with a book value of approximately $29.6 million (of which approximately $27.6 million are liabilities subject to settlement under reorganization proceedings). The Company will adopt “Fresh-Start Reporting” pursuant to SOP 90-7 on the Effective Date of the Plan. Furthermore, the Company intends to take the steps necessary to cease being subject to the periodic reporting requirements of the federal securities laws.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS


2.1		Second Amended Joint Plan filed by Registrant and AmSouth Bank, as Agent for the Lenders, filed June 14, 2002.
99.1		Order Confirming Plan entered by Court on June 14, 2002.

(B) REPORTS ON FORM 8-K

The Company filed a Current Report on Form 8-K on February 13, 2002, disclosing the approval of the order establishing bidding procedures providing for the sale of all of the operating assets of the Company.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Response Oncology, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		RESPONSE ONCOLOGY, INC.



		By:		/s/ Charles E. Sweet Charles E. Sweet President and Chief Executive Officer and Director

				Date: June 25, 2002

		By:		/s/ Peter A. Stark Peter A. Stark Executive Vice President and Chief Financial Officer and Director

				Date: June 25, 2002

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