<PAGE>
UNITED STATES
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 JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-26190
AMERICAN ONCOLOGY RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1213501
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16825 NORTHCHASE DRIVE, SUITE 1300
HOUSTON, TEXAS
77060
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(713) 873-2674
(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
----- -----
AS OF AUGUST 14, 1996, 28,342,082 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE ISSUED AND OUTSTANDING.
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
FORM 10-Q
JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET 3
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS 4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 5
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 3,849 $ 14,816
Short-term investments 13,633 44,967
Accounts receivable 44,698 31,152
Due from affiliated medical groups 766 1,271
Prepaids and other current assets 4,799 3,575
Income taxes receivable and
deferred tax asset 3,989 11
-------- --------
Total current assets 71,734 95,792
Property and equipment, net 13,571 11,157
Management service agreements, net 205,945 164,522
Other assets 2,185 888
-------- --------
$293,435 $272,359
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable $ 12,608
Current maturities of long-term
indebtedness $ 3,874 3,157
Accounts payable 14,116 10,249
Due to affiliated medical groups 1,065 1,153
Income taxes payable 4,253
Other accrued liabilities 6,058 4,648
-------- --------
Total current liabilities 25,113 36,068
Deferred income taxes 2,004 921
Long-term indebtedness 51,744 44,190
-------- --------
Total liabilities 78,861 81,179
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value,
1,000,000 shares authorized,
none issued and outstanding.......
Common Stock, $.01 par value,
60,000,000 and 40,000,000 shares
authorized, 28,342,082 and
27,476,450 shares issued and
outstanding........................ 283 275
Additional paid-in capital............. 141,492 133,242
Common Stock to be issued, 15,804,775
and 15,261,972 shares................. 52,647 46,018
Retained earnings...................... 20,152 11,645
-------- --------
Total stockholders' equity........... 214,574 191,180
-------- --------
$293,435 $272,359
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
3
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $47,374 $24,644 $88,124 $39,244
------- ------- ------- -------
Operating expenses:
Pharmaceuticals and supplies 18,806 9,164 33,997 14,236
Practice compensation and benefits 9,700 4,437 18,064 7,483
Other practice costs 5,668 2,806 10,463 4,527
General and administrative 3,711 2,261 6,580 4,153
Depreciation and amortization 2,192 1,142 4,094 1,883
------- ------- ------- -------
40,077 19,810 73,198 32,282
------- ------- ------- -------
Income from operations 7,297 4,834 14,926 6,962
Other income (expense):
Interest income 202 171 751 244
Interest expense (950) (1,556) (1,956) (2,173)
------- ------- ------- -------
Income before income taxes 6,549 3,449 13,721 5,033
Income taxes 2,489 1,381 5,214 1,983
------- ------- ------- -------
Net income $ 4,060 $ 2,068 $ 8,507 $ 3,050
======= ======= ======= =======
Net income per share $0.09 $0.06 $0.18 $0.09
======= ======= ======= =======
Shares used in per share calculations 47,555 36,226 47,447 34,002
======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
4
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TO RETAINED
SHARES PAR VALUE CAPITAL BE ISSUED EARNINGS TOTAL
------ --------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,1995 27,476 $275 $133,242 $46,018 $11,645 $191,180
Medical practice transactions-value of
542,803 shares to be issued 6,629 6,629
Compensation value of non-employee
options to purchase Common Stock 633 633
Exercise of options to purchase
Common Stock 866 8 1,047 1,055
Tax benefit from exercise of
non-qualified stock options 6,570 6,570
Net Income 8,507 8,507
______ ______ ________ ________ ________ ________
Balance at June 30, 1996 28,342 $283 $141,492 $52,647 $20,152 $214,574
====== ==== ======== ======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
5
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED JUNE 30,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,507 $ 3,050
Noncash adjustments:
Depreciation and amortization 4,094 1,883
Deferred income taxes 1,073 414
Imputed interest on medical practice
transactions 113
Cash provided, net of effects of medical
practice transactions, by changes in:
Accounts receivable (9,094) (6,637)
Prepaids and other current assets (1,151) (472)
Income taxes receivable 644
Other assets (769) (1,362)
Accounts payable 2,485 1,720
Due to/from affiliated medical
practices 724 1,398
Income taxes payable (2,298)
Other accrued liabilities 1,082 2,957
-------- --------
Net cash provided by operating
activities 5,410 2,951
-------- --------
Cash flows from investing activities:
Net sales of short-term investments 31,334 858
Acquisition of property and equipment (3,255) (1,528)
Net payments in medical practice
transactions (29,976) (35,809)
-------- --------
Net cash used by investing activities (1,897) (36,479)
-------- --------
Cash flows from financing activities:
Proceeds from bank indebtedness 35,000
Repayment of bank indebtedness (35,000)
Repayment of other indebtedness (15,535) (8,506)
Debt financing costs (411)
Collection of stockholder notes 100
Net proceeds from issuance of common
stock 1,055 111,029
-------- --------
Net cash (used) provided by financing
activities (14,480) 102,212
-------- --------
Increase (decrease) in cash and
equivalents (10,967) 68,684
Cash and equivalents:
Beginning of period 14,816 3,349
-------- --------
End of period $ 3,849 $ 72,033
======== ========
Interest paid $ 1,398 $ 1,200
Taxes paid $ 5,791 $ 5
Noncash transactions:
Tax benefit from exercise
of non-qualified stock options $ 6,570
Value of Common Stock to be issued
in medical practice transactions $ 6,629 $ 21,896
Debt issued in medical practice
transactions $ 11,078 $ 10,135
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT
6
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Form 10-Q and Rule 10.01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited condensed
consolidated financial statements contained in this report reflect only normal
recurring adjustments considered necessary for a fair presentation of the
financial position and the results of operations for the interim periods
presented. To conform to the presentation for the three months ended June 30,
1996, certain expenses were reclassified in the condensed consolidated statement
of operations for the six months ended June 30, 1996. This reclassification had
no effect on net income for any period. The preparation of the Company's
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as disclosures on
contingent assets and liabilities. Because of inherent uncertainties in this
process, actual future results could differ from those expected at the reporting
date. These unaudited condensed consolidated financial statements, footnote
disclosures and other information should be read in conjunction with the
financial statements and the notes thereto included in the Company's Form 10K
filed with the Securities and Exchange Commission on March 25, 1996.
NOTE 2 - MEDICAL SERVICE REVENUE
Medical service revenue for services to patients by the medical groups
affiliated with the Company is recorded when services are rendered based on
established or negotiated charges reduced by contractual adjustments and
allowances for doubtful accounts. Differences between estimated contractual
adjustments and final settlements are reported in the period when final
settlements are determined. Medical service revenue of the affiliated medical
groups is reduced by the contractual amounts retained by the medical groups to
arrive at the Company's revenue.
The following presents the amounts included in the determination of the
Company's revenue (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
Medical service revenue................ $62,391 $32,594 $115,902 $51,484
Amounts retained by medical practices.. 15,017 7,950 27,778 12,240
------- ------- -------- -------
Revenue................................ $47,374 $24,644 $ 88,124 $39,244
======= ======= ======== =======
Management service agreements
at end of period................... 28 12 28 12
</TABLE>
7
<PAGE>
Item 2. AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3 - MEDICAL PRACTICE TRANSACTIONS
During the first six months of 1995 and 1996, the Company, through wholly-owned
subsidiaries, acquired certain non-medical assets of, and entered into long-term
management service agreements with, five and six medical oncology practices,
respectively. The transactions have been accounted for as asset purchases. The
following presents the aggregate consideration required to complete those
transactions (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash and transaction costs....... $10,625 $ 7,405 $29,976 $35,809
Liabilities assumed.............. 832 818 1,799 5,308
Issuance of short-term and
subordinated notes.............. 4,263 1,910 11,078 10,135
Issuance of Common Stock
to be issued.................... 2,480 8,072 6,629 21,896
------- ------- ------- -------
$18,200 $18,205 $49,482 $73,148
======= ======= ======= =======
</TABLE>
In conjunction with the medical practice transactions occurring in the first six
months of 1996, the Company is contingently obligated to pay up to an additional
$2,570,000 in future years, depending on the achievement of certain financial
objectives. Such liability, if any, will be recorded in the period
in which the outcome of the contingency becomes known. Any payment made will be
allocated to the long-term management services agreements entered into and will
not immediately be charged to expense.
The Company has committed to issue shares of Common Stock pursuant to completed
acquisition transactions as follows: 112,428 in 1996; 2,570,074 in 1997;
2,933,712 in 1998; 4,994,450 in 1999; 4,688,004 in 2000 and 506,107 in 2001
through 2003. Although such shares are not issued or outstanding for legal
purposes, such shares are considered as outstanding for per share calculations.
The accompanying unaudited condensed consolidated financial statements include
the results of operations derived from the management service agreements from
their respective effective dates. The following unaudited pro forma information
presents the results of operations assuming all 1995 and 1996 transactions were
consummated on January 1, 1995. Such pro forma information is based on the
historical financial information of the medical practices and does not include
operational or other changes which might have been effected pursuant to the
Company's management of the nonmedical aspects of such practices.
The pro forma information presented below is for illustrative information only
and is not necessarily indicative of results which would have been achieved or
results which may be achieved in the future (in thousands except share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
----------- ------------
<S> <C> <C>
Revenue................. $93,825 $77,863
Net income.............. 8,305 4,630
Net income per share.... 0.18 0.10
</TABLE>
NOTE 4 - CAPITALIZATION
As part of entering into long-term management agreements with medical practices
described in Note 3, the Company has nonforfeitable commitments to issue shares
of Common Stock at specified future dates for no further consideration. Common
Stock to be issued is shown as a separate component in stockholders' equity and
the amounts, upon issuance of the shares, will be reclassified to par value and
additional paid-in capital.
During the first six months of 1996, options to purchase 338,400 shares of
Common Stock at $20.68 to $24.18 per share were granted under the Company's
various stock option plans, of which 150,000 were granted to
8
<PAGE>
Item 2. AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
executive officers and directors. During the first six months of 1996, options
to purchase 865,632 shares of Common Stock at $1.34 to $6.13 per share were
exercised, of which 848,132 were exercised by executive officers and directors.
At June 30, 1996, there were options to purchase 5,160,918 shares of Common
Stock outstanding under the Company's various stock option plans at exercise
prices of $1.34 to $24.18 per share.
Effective May 9, 1996, the Company's stockholders approved an increase in the
number of shares of Common Stock authorized to be issued to 60,000,000 shares.
On May 16, 1996, the Board of Directors of the Company declared a two-for-one
stock split of the Company's Common Stock which was paid on June 10, 1996 to
stockholders of record on May 31, 1996. All references herein to the number of
shares and per share amounts have been adjusted to reflect the effect of the
split.
On August 13, 1996, the Board of Directors of the Company authorized the
repurchase of 3,000,000 shares of Common Stock from time to time in public or
private transactions.
NOTE 5 - INDEBTEDNESS
Indebtedness consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
-------------- ------------------
<S> <C> <C>
Promissory notes to physicians.. $53,004 $44,443
Other........................... 2,614 2,904
------- -------
55,618 47,347
Less current maturities......... (3,874) (3,157)
------- -------
$51,744 $44,190
======= =======
</TABLE>
The Company has a loan agreement and revolving credit/term facility (Credit
Facility) with First Union National Bank of North Carolina (First Union) under
which the Company can borrow up to $35,000,000 to finance medical group
transactions. At June 30, 1996, the Company had no outstanding balance under
the Credit Facility. Effective August 9, 1996, the Company obtained a
commitment from First Union to increase the Company's Credit Facility from $35
million to $150 million.
The Company has a $5,000,000 Master Lease Agreement to provide equipment
financing for use in operations. At June 30, 1996, the Company has no
outstanding balance under the Agreement.
NOTE 6 - EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average number of
Common Stock and Common Stock equivalent shares outstanding during the periods
in accordance with the requirements of the Securities and Exchange Commission
(SEC). All options to purchase Common Stock, shares issued and commitments to
issue Common Stock at specified future dates, which were issued or granted
within one year prior to the initial SEC filing at prices less than the initial
public offering price, are assumed to have been outstanding Common Stock
equivalents under the treasury stock method for each of the periods presented up
to the effective date of the initial public offering. Fully diluted earnings
per share has not been presented because it does not differ materially from the
primary per share computations.
9
<PAGE>
ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table summarizes the determination of shares used in per share calculations
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
------ ------- ------ -------
<S> <C> <C> <C> <C>
Outstanding at end of period:
Common Stock............................ 28,342 27,464 28,342 27,464
Common Stock to be issued............... 15,805 13,888 15,805 13,888
------ ------ ------ ------
44,147 41,352 44,147 41,352
Effect of weighting and assumed share
equivalents for grants and issuances
at less than the weighted average
price................................. 3,408 (6,348) 3,330 (8,384)
Effect of weighting and assumed share
equivalents for grants and issuances
at less than the initial public
offering price........................ - 1,222 - 1,034
------ ------- ------- ------
Shares used in per share calculations.. 47,555 36,226 47,447 34,002
====== ====== ====== ======
</TABLE>
10
<PAGE>
ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
American Oncology Resources, Inc. (the "Company") enters into management
agreements with, and purchases the nonmedical assets of, oncology medical
practices. Under the terms of the management agreements, the Company provides
comprehensive management services to its affiliated oncology practices,
including operational and administrative services, and furnishes personnel,
facilities, supplies and equipment. These practices provide a broad range of
medical services to cancer patients, integrating the specialties of medical
oncology, hematology and radiation oncology. The Company's revenue consists of
management fees and includes the reimbursement of all medical practice operating
costs.
In recent years, there has been a trend among oncologists to form larger group
practices that provide a broad range of services to cancer patients in
outpatient settings, rather than in hospitals or other inpatient settings. The
Company believes that the coordinated delivery of comprehensive cancer care in
an outpatient setting offers high quality care that is more cost-effective than
traditional approaches and is increasingly preferred by patients, payors and
physicians. The Company believes that many of these larger oncology practices
recognize the need for outside managerial, financial and business expertise to
more efficiently manage the increasingly complex, burdensome and time-consuming
nonmedical aspects of their practices and that such practices will increasingly
elect to enter into management relationships with entities such as the Company.
The Company's objective is to be the leading national physician practice
management company providing comprehensive services to an integrated network of
affiliated oncology practices. The Company intends to achieve this objective by
(i) focusing exclusively on oncology, (ii) affiliating with leading oncology
practices throughout the United States, (iii) expanding each affiliated oncology
group's presence in its market, (iv) assisting affiliated oncology practices in
offering coordinated, comprehensive cancer care and (v) negotiating and
expanding managed care relationships. Based on the Company's success in
expanding its business to date, the Company believes that it has effective
strategies for achieving its objective of becoming the leading national oncology
practice management company.
RESULTS OF OPERATIONS
Since the Company's incorporation in October 1992, it has grown rapidly from
managing six affiliated physicians in one state to 195 affiliated physicians and
28 oncology practices in fifteen states as of June 30, 1996. For the first six
months of 1995, four of the Company's affiliated physician groups each
contributed more than 10% of the Company's revenue. For the first six months of
1996, only one of the Company's affiliated physician groups contributed more
than 10% of the Company's revenue which was 12% of total revenue. For the first
six months of 1995, the payor mix of the affiliated physician groups' medical
practice revenue, expressed as a percentage, was 27% for Medicare and Medicaid,
50% for managed care and 23% for private insurance and other payors. For the
first six months of 1996, the payor mix of the affiliated physician groups'
medical practice revenue, expressed as a percentage, was 33% for Medicare and
Medicaid, 45% for managed care and 22% for private insurance and other payors.
As a result of the Company's rapid growth, the Company's limited period of
affiliation with the physician practices and the different payor and patient
mixes of the practices, the Company does not believe that the period-to-period
comparisons and percentage relationships within periods are fully meaningful at
this time.
11
<PAGE>
The following table sets forth the percentages of revenue represented by certain
items reflected in the Company's Statement of Operations. The information that
follows should be read in conjunction with the Company's unaudited condensed
consolidated financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue.............................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:..................
Pharmaceuticals and supplies........ 39.7 37.2 38.6 36.3
Practice compensation and benefits.. 20.5 18.0 20.5 19.1
Other practice costs................ 12.0 11.4 11.9 11.5
General and administrative.......... 7.8 9.2 7.5 10.6
Depreciation and amortization....... 4.6 4.6 4.6 4.8
Net interest........................ 1.6 5.6 1.3 4.9
----- ----- ----- -----
Income (loss) before income taxes.... 13.8 14.0 15.6 12.8
Income taxes......................... 5.2 5.6 5.9 5.0
----- ----- ----- -----
Net income (loss).................... 8.6% 8.4% 9.7% 7.8%
===== ===== ===== =====
</TABLE>
COMPARISON OF THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996 AND THE
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1995
The Company entered into management agreements with five oncology practices in
the first six months of 1995 and six oncology practices in the first six months
of 1996, the results of which are included in the Company's operating results
from the dates of affiliation. Changes in results of operations from the second
quarter and first six months of 1995 to the second quarter and first six months
of 1996 were caused primarily by affiliations with these oncology practices.
Revenue. Revenue for the second quarter ended June 30, 1996 increased $22.7
million or 92% over the comparable prior year period. Revenue for the six
months ended June 30, 1996 increased $48.9 million or 125% over the comparable
prior year period. Of these increases for the second quarter and six months
ended June 30, 1996, $18.8 million and $32.4 million, respectively, was
attributable to the addition of sixteen affiliated oncology practices after June
30, 1995. The remaining increase in revenue of $3.9 million for the second
quarter and $16.5 million for the first six months period was attributable to
increases in medical practice revenue of the physician practices affiliated with
the Company prior to June 30, 1995. Same practice revenue for physician
practices affiliated with the Company prior to June 30, 1995 increased 16% and
19% for the second quarter and six months ended June 30, 1996, respectively,
over the like prior year period of operations. This growth in practice revenue
resulted from the expansion of services, increases in patient volume and, to a
lesser extent, price adjustments for certain physician services.
Pharmaceuticals and Supplies. Pharmaceuticals and supplies, which include
drugs, medications and other supplies used by the affiliated physician
practices, for the second quarter ended June 30, 1996 increased $9.6 million or
105% over the comparable prior year period. Pharmaceuticals and supplies for
the six months ended June 30, 1996 increased $19.8 million or 139% over the
comparable prior year period. Of these increases for the second quarter and six
months ended June 30, 1996, $7.4 million and $12.5 million, respectively, was
attributable to the addition of sixteen affiliated oncology practices after June
30, 1995. The remaining increase is principally the result of the expansion of
services and increase in patient volume of practices affiliated with the Company
prior to June 30, 1995. As a percentage of revenue, pharmaceuticals and
supplies increased from 36.3% in the first six months of 1995 to 38.6% in the
first six months of 1996. Decreases in the cost of pharmaceuticals and supplies
as a percentage of drug revenue due to volume purchasing efficiencies and
improved vendor contracts were offset by lower reimbursement rates caused by a
shift in payor mix, higher discounts to payors and practice integration issues
including delays in implementation of financial policies and procedures as well
as discipline in payor contract administration due to the Company's rapid
growth. Management expects third-party payors to continue to negotiate medical
services, pharmaceuticals (including chemotherapy drugs) and other supplies,
with the goal of lowering reimbursement and utilization rates.
12
<PAGE>
Practice Compensation and Benefits. Practice compensation and benefits, which
include the salaries, wages and benefits of the affiliated physician practices'
employees (excluding affiliated oncologists) and the Company's employees located
at the affiliated physician practice sites, for the second quarter ended June
30, 1996 increased $5.2 million or 119% over the comparable prior year period.
Practice compensation and benefits for the six months ended June 30, 1996
increased $10.6 million or 141% over the comparable prior year period. Of these
increases for the second quarter and six months ended June 30, 1996, $4.2
million and $7.1 million, respectively, was attributable to the addition of
sixteen affiliated oncology practices after June 30, 1995. As a percentage of
revenue, practice compensation and benefits increased from 19.1% in the first
six months of 1995 to 20.5% in the first six months of 1996. Decreases in
practice compensation and benefit costs relative to patient volumes from
economies of scale were offset by lower reimbursement rates caused by a shift in
payor mix, higher discounts to payors and practice integration issues due to the
Company's rapid growth.
Other Practice Costs. Other practice costs, which consist of rent, utilities,
repairs and maintenance, insurance and other direct practice costs, for the
second quarter ended June 30, 1996 increased $2.9 million or 102% over the
comparable prior year period. Other practice costs for the six months ended
June 30, 1996 increased $5.9 million or 131% over the comparable prior year
period. Of these increases for the second quarter and six months ended June 30,
1996, $2.3 million and $3.8 million, respectively, was attributable to the
addition of sixteen affiliated oncology practices after June 30, 1995. As a
percentage of revenue, other practice costs increased from 11.5% in the first
six months of 1995 to 11.9% in the first six months of 1996.
General and Administrative. General corporate expenses for the second quarter
ended June 30, 1996 increased $1.4 million or 64% over the comparable prior year
period. General corporate expenses for the six months ended June 30, 1996
increased $$2.4 million or 58% over the comparable prior year period. This
increase was primarily attributable to the addition of personnel and greater
support costs associated with the Company's rapid growth since June 30, 1995. As
a percentage of revenue, general and administrative expenses decreased from
10.6% in the first six months of 1995 to 7.5% in the first six months of 1996,
primarily as a result of economies of scale.
Depreciation and Amortization. Depreciation and amortization expenses for the
second quarter ended June 30, 1996 increased $1.0 million or 92% over the
comparable prior year period. Depreciation and amortization for the six months
ended June 30, 1996 increased $2.2 million or 117% over the comparable prior
year period. The second quarter and six months ended June 30, 1996 increase was
primarily the result of the Company's entering into management agreements with,
and acquiring the nonmedical assets of, sixteen affiliated oncology practices
after June 30, 1995.
Interest. Net interest expense for the second quarter ended June 30, 1996
decreased $637,000 or 46% over the comparable prior year period. Net interest
expense for the six months ended June 30, 1996 increased $724,000 or 37.5% over
the comparable prior year period. The decrease was primarily attributable to
interest earnings in the first six months of 1996 on higher cash and short-term
investment balances than during the first six months of 1995 and the absence of
draws on the Credit Facility in 1996. As a percentage of revenue, net interest
expense decreased from 4.9% in the first six months of 1995 to 1.3% in the first
six months of 1996. At June 30, 1996 the Company had no outstanding balance
under the Credit Facility.
Income Taxes. For the six months ended June 30, 1995 and 1996, the Company
recognized a tax provision of $2.0 million and $5.2 million, respectively, at
estimated annual effective rates of 39.4% and 38%, respectively. The Company's
composition of revenue by state has significantly changed as the Company has
affiliated with sixteen oncology practices in seven new states since June 30,
1995. The effective annual tax rates represent management's best estimate of
the tax provision based on the existing state revenue mix.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to obtain management agreements with,
and to purchase the nonmedical assets of, oncology medical practices. From its
incorporation through June 30, 1996, the Company has entered into management
agreements with 28 oncology practices. To fund this rapid growth and
development, the Company has satisfied its transaction and working capital needs
through a recapitalization, private debt and equity financings and borrowings
under the Credit Facility with First Union National Bank of North Carolina. To
fund its operations, the Company relies primarily on management fees received
from its affiliated physician practices. Cash derived from operations was $5.4
million for the first six months of 1996, an increase of $2.4 million over the
comparable period of 1995. The increase is due primarily to the operations of
the sixteen oncology practices affiliated with the Company since June 30, 1995.
On January 31, 1996, the Company's $35 million revolving credit facility with
First Union National Bank of North Carolina (Credit Facility) was amended to
reduce the fees and interest payable under the agreement and to amend certain of
the financial and other covenants in the agreement to make them more favorable
to the Company. Borrowings under the Credit Facility bear interest at a rate
equal to a rate based on prime rate or the London Interbank Offer Rate, based on
a defined formula. The Credit Facility contains affirmative and negative
covenants, including the maintenance of certain ratios, restrictions on sales,
leases or other dispositions of properties, restrictions on other indebtedness
and prohibitions on the payment of dividends. The Company's Management Service
Agreements and its equity ownership in its subsidiaries are pledged as security
under the Credit Facility. There were no borrowings in the first six months of
1996 and as of June 30, 1996, the entire $35 million was available under the
Credit Facility. Effective August 9, 1996, the Company obtained a commitment
from First Union to increase the Company's Credit Facility to $150,000,000.
At June 30, 1996, the Company had working capital of $46.6 million and cash
equivalents and short-term investments of $17.5 million. The Company also had
$25.1 million of current liabilities, including approximately $3.9 million of
long-term indebtedness maturing before June 30, 1997. The Company currently
expects that its principal use of funds in the near future will be in connection
with anticipated transactions with affiliated physician groups and the purchase
of furniture and equipment. The Company expects that the existing cash and
investment balances, cash generated from operations, amounts available under the
Credit Facility will be adequate to satisfy the Company's cash requirements for
the next 12 months.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) May 9, 1996 annual meeting of stockholders.
(b) The following individuals, constituting the entire Board of Directors,
were elected as directors at the meeting:
Russell L. Carson, Lloyd K. Everson, M.D., Kyle M. Fink, M.D, Richard B.
Mayor, Magaral S. Murali, M.D., Robert A. Ortenzio, Andrew M. Paul,
Leonard M. Riggs, Jr., M.D., Edward E. Rogoff, M.D., R. Dale Ross
(c)
Election of Directors
<TABLE>
<CAPTION>
Votes Withheld
For Authority
--------- ---------
<S> <C> <C>
Nominee:
--------
Russell L.Carson 9,499,860 29,450
Lloyd K. Everson, M.D. 9,499,860 29,450
Kyle M. Fink, M.D. 9,499,860 29,450
Richard B. Mayor 9,499,860 29,450
Magaral S. Murali, M.D. 9,499,860 29,450
Robert A. Ortenzio 9,499,860 29,450
Andrew M. Paul 9,499,860 29,450
Leonard R. Riggs, Jr., M.D. 9,499,860 29,450
Edward E. Rogoff, M.D. 9,499,860 29,450
R. Dale Ross 9,499,860 29,450
</TABLE>
Other Matters
- -------------
<TABLE>
<CAPTION>
Description of Votes Votes
Matter For Against Abstentions
- ----------------------------- --------- --------- -----------
<S> <C> <C> <C>
Approval of amendment to the Company's Certificate of Incorporation increasing
the amount of Common Stock Authorized to be issued by the Company from
40,000,000 shares to 60,000,000 shares 9,502,715 25,695 900
Approval of amendment to the Company's 1993 Non-Employee Director Stock Option
Plan 8,467,165 1,059,095 3,050
Ratification of appointment of Price Waterhouse LLP as the Company's independent
accountants 9,526,080 2,830 400
</TABLE>
No broker non-votes were recorded.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
AMERICAN ONCOLOGY RESOURCES, INC.
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation, as amended
3.2 By-Laws, as amended
10.1 Amendment to the American Oncology Resources, Inc. 1993 Non-
Employee Director Stock Option Plan
11 Statement Re-Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the quarter ended
June 30, 1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1996 AMERICAN ONCOLOGY RESOURCES, INC.
By: /s/ R. DALE ROSS
-------------------------
R. Dale Ross, Chairman of the Board
and Chief Executive Officer
By: /s/ L. FRED POUNDS
-----------------------
L. Fred Pounds, Vice President of Finance
and Chief Financial Officer
17
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit Number Description of Exhibits
3.1 Articles of Incorporation, as amended (filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein
by reference)
3.2 By-Laws, as amended (filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated herein by reference
10.1 Amendment to the American Oncology Resources, Inc. 1993 Non-Employee
Director Stock Option Plan
11 Statement Re-Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
18
<PAGE>
EXHIBIT 10.1
------------
AMENDMENT TO THE AMERICAN ONCOLOGY RESOURCES, INC.
1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Board of Directors of the Company adopted the American Oncology
Resources, Inc. 1993 Non-Employee Director Stock Option Plan (the "Plan") in
June 1993 and the Company's Stockholders approved the Plan in February 1994.
Subject to the provisions of the Plan, the Board retained the right to amend the
Plan. On March 22, 1996, the Board determined that the Plan be amended as
follows, subject to, and to be effective upon, approval by the Company's
Stockholders. At the annual meeting of Stockholders on May 9, 1996, the
Stockholders of the Company approved the Plan. Capitalized terms not otherwise
defined in this First Amendment to the Plan have the meanings assigned thereto
in the Plan.
The Plan is hereby amended as follows:
A. The definition of "Eligible Director" in Section II(a)(9) of the Plan is
hereby amended to read in its entirety as follows:
(9) "Eligible Director" means a person who as of any applicable date
(i) is a member of the Board, (ii) is not an officer of the
Company or any subsidiary of the Company and (iii) is not a full-
time employee of the Company or any of its subsidiaries.
B. Section III of the Plan is hereby amended to read in its entirety as
follows:
III. GRANTS OF STOCK OPTIONS; OPTION PRICE; VESTING SCHEDULE
(a) Options will be granted only to individuals who are Eligible
Directors of the Company. On the date of each annual meeting of
stockholders of the Company after January 1, 1996, each Eligible
Director elected at such annual meeting shall receive, without the
exercise of the discretion of any person or persons, an option to
purchase 1,000 shares. All Options granted under the Plan shall be at
the Option price set forth in the following subsection (b), shall be
subject to adjustment as provided in Section VII and to the terms and
conditions set forth in Section VIII and shall vest in the manner set
forth in the following subsection (c). All options granted under the
Plan shall be evidenced by a written option agreement.
(b) The purchase price of Shares issued under each Option shall be the
Fair Market Value of Shares subject to the Option on the date the
Option is granted.
<PAGE>
(c) Except to the extent otherwise provided herein, each Option
granted under subsection (a) above shall vest and be exercisable as to
all of the Shares covered thereby six months after the effective date
of the grant of such Option.
C. Section VII(b) of the Plan is hereby amended to read in its entirety as
follows:
(b) If the Company shall effect a subdivision or consolidation of
shares or other capital readjustment, the payment of a stock dividend,
or other increase or reduction of the number of shares of Common Stock
outstanding, without receiving compensation therefor in money,
services or property, then (a) the number and per share price of
shares of Common Stock to be granted pursuant to annual grants in
subsection III(a) hereof shall be appropriately adjusted in such a
manner as to entitle a Participant to receive options to purchase the
same total number of shares as he would have received had he or she
been granted such option immediately prior to the event requiring the
adjustment; (b) the number and per share price of shares of Common
Stock subject to outstanding Stock Options hereunder shall be
appropriately adjusted in such a manner as to entitle a Participant to
receive upon exercise of a Stock Option, for the same aggregate cash
consideration, the same total number of shares as he would have
received had he or she exercised his or her Stock Option in full
immediately prior to the event requiring the adjustment; and (c) the
number of shares then reserved for issuance under the Plan shall be
adjusted by substituting for the total number of shares of Common
Stock then reserved that number of shares of Common Stock that would
have been received by the owner of an equal number of outstanding
shares of Common Stock as the result of the event requiring the
adjustment.
<PAGE>
EXHIBIT 11
AMERICAN ONCOLOGY RESOURCES, INC.
STATEMENT RE-COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
NET INCOME $ 4,060 $ 2,068 $ 8,507 $ 3,050
======== ======= ======== ========
OUTSTANDING AT END OF PERIOD:
Shares of Common Stock 28,342 27,464 28,342 27,464
Commitments to issue
Common Stock at specific
future dates 15,805 13,888 15,805 13,888
Effect of weighting ( 261) (8,740) ( 626) (10,754)
-------- ------- -------- --------
43,886 32,612 43,521 30,598
-------- ------- -------- --------
Options to purchase Common Stock 5,161 5,161
Effect of treasury stock method ( 1,492) ( 1,235)
Dilutive effect of options to purchase
Common Stock granted April 1, 1994 and
prior - 1,222 - 1,034
Additional assumed shares for 1994 and
1995 grants and issuances
at less than the initial public
offering price:
Options to purchase Common Stock 3,632 3,632
Effect of treasury stock method - (1,240) - (1,262)
-------- ------- -------- --------
- 2,392 - 2,370
-------- ------- -------- --------
Total shares used in per share calculation 47,555 36,226 47,447 34,002
======== ======= ======== ========
Net income per share $ 0.09 $0.06 $ 0.18 $0.09
======== ======= ======== ========
ASSUMING FULL DILUTION:
Outstanding per above 47,555 36,226 47,447 34,002
Additional dilution resulting from use
of period end price per - 310 - 340
share if higher than average -------- ------- -------- --------
Total shares used in per share calculation 47,555 36,536 47,447 34,342
======== ======= ======== ========
Net income per share $ 0.09 $0.06 $ 0.18 $0.09
======== ======= ======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,849
<SECURITIES> 13,633
<RECEIVABLES> 44,698
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 71,734
<PP&E> 17,605
<DEPRECIATION> 4,034
<TOTAL-ASSETS> 293,435
<CURRENT-LIABILITIES> 25,113
<BONDS> 0
<COMMON> 283
0
0
<OTHER-SE> 214,291
<TOTAL-LIABILITY-AND-EQUITY> 293,435
<SALES> 0
<TOTAL-REVENUES> 47,374
<CGS> 0
<TOTAL-COSTS> 40,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 950
<INCOME-PRETAX> 6,549
<INCOME-TAX> 2,489
<INCOME-CONTINUING> 4,060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,060
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
