<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 MARCH 31, 1997 JUNE 30, 1997
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 INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NO.)
16825 NORTHCHASE DRIVE, SUITE 1300
HOUSTON, TEXAS
77060
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(281) 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 7, 1997, 28,805,252 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
FORM 10-Q
JUNE 30, 1997
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 12
PART II. OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
</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,
1997 1996
--------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents.................. $ 7,383 $ 3,429
Accounts receivable................... 75,069 61,183
Prepaids and other current assets..... 5,191 5,775
Due from affiliated physician groups.. 2,867 5,356
-------- --------
Total current assets................. 90,510 75,743
Property and equipment, net............. 24,777 18,943
Management service agreements, net...... 281,363 240,034
Other assets............................ 4,477 4,680
-------- --------
$401,127 $339,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of indebtedness.... $ 5,010 $ 9,783
Accounts payable...................... 23,072 15,148
Due to affiliated physician groups.... 6,701 616
Accrued compensation costs............ 2,367 1,806
Accrued interest payable.............. 2,701 2,325
Income taxes payable.................. 173 641
Other accrued liabilities............. 3,109 2,452
-------- --------
Total current liabilities............ 43,133 32,771
Deferred income taxes................... 5,634 3,068
Long-term indebtedness.................. 117,859 81,707
-------- --------
Total liabilities.................... 166,626 117,546
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value,
500,000 shares authorized,
none issued and outstanding...........
Series A Preferred Stock, $.01 par
value, 500,000 shares authorized and
reserved, none issued and outstanding.
Common stock, $.01 par value,
80,000,000 shares authorized,
28,649,630 and 28,369,482 shares
issued and 28,649,630 and 27,371,422
shares outstanding.................... 286 284
Additional paid-in capital............. 132,496 139,804
Common stock to be issued, 16,942,518
and 17,462,782 shares................ 63,237 61,225
Treasury stock, 998,060 shares......... (8,530)
Retained earnings...................... 38,482 29,071
-------- --------
Total stockholders' equity........... 234,501 221,854
-------- --------
$401,127 $339,400
======== ========
</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,
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenue................................ $79,525 $47,374 $149,921 $88,124
Operating expenses:
Pharmaceuticals and supplies......... 36,002 18,806 68,140 33,997
Practice compensation and benefits... 14,588 9,700 28,059 18,064
Other practice costs................. 8,634 5,668 16,324 10,463
General and administrative........... 5,647 3,711 9,818 6,580
Depreciation and amortization........ 3,311 2,192 6,348 4,094
------- ------- -------- -------
68,182 40,077 128,689 73,198
------- ------- -------- -------
Income from operations................. 11,343 7,297 21,232 14,926
Other income (expense):
Interest income...................... 74 202 176 751
Interest expense..................... (2,117) (950) (3,862) (1,956)
------- ------- -------- -------
Income before income taxes............. 9,300 6,549 17,546 13,721
Income taxes........................... 3,581 2,489 6,755 5,214
------- ------- -------- -------
Net income............................. $ 5,719 $ 4,060 $ 10,791 $ 8,507
======= ======= ======== =======
Net income per share................... $0.12 $0.09 $0.23 $0.18
======= ======= ======== =======
48,431 47,555 47,912 47,447
Shares used in per share calculations.. ======= ======= ======== =======
</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 TREASURY
COMMON STOCK PAID-IN STOCK TO STOCK RETAINED
SHARES PAR VALUE CAPITAL BE ISSUED COST EARNINGS TOTAL
------- --------- ----------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............ 28,369 $284 $139,804 $ 61,225 $ (8,530) $29,071 $221,854
Medical practice transactions-value of
1,364,544 shares to be issued.......... 7,979 7,979
Purchase of 657,000 shares of Treasury
stock.................................. (6,418) (6,418)
Delivery of 1,650,064 shares of Common
Stock issued from treasury............. (7,975) (5,545) 14,900 (1,380)
Delivery of 234,744 shares from
issuance of Common Stock............... 235 2 420 (422)
Exercise of options to purchase
Common Stock........................... 45 96 48 144
Tax benefit from exercise of
non-qualified stock options............ 151 151
Net Income.............................. 10,791 10,791
------ ---- -------- -------- ---------- ------- --------
Balance at June 30, 1997................ 28,649 $286 $132,496 $ 63,237 $ - $38,482 $234,501
====== ==== ======== ======== ========== ======= ========
</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,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income........................... $ 10,791 $ 8,507
Noncash adjustments:
Depreciation and amortization.... 6,348 4,094
Deferred income taxes............ 2,566 1,073
Imputed interest on medical
practice transactions........... 113
Cash provided (used), net of effects
of medical practice transactions,
by changes in:
Accounts receivable.............. (11,109) (9,094)
Prepaids and other current assets 582 (1,151)
Income taxes receivable.......... 644
Other assets..................... 175 (769)
Accounts payable................. 7,272 2,485
Due from/to affiliated physician
groups.......................... 8,897 724
Income taxes payable............. (317) (2,298)
Other accrued liabilities........ (1,150) 1,082
-------- --------
Net cash provided by operating
activities.................... 24,055 5,410
Cash flows from investing activities: -------- --------
Net sales of short-term investments.. 31,334
Acquisition of property and equipment (7,092) (3,255)
Net payments in medical practice
transactions........................ (24,004) (29,976)
Net cash used in investing -------- --------
activities.................... (31,096) (1,897)
-------- --------
Cash flows from financing activities:
Proceeds from credit facility........ 45,000
Repayment of credit facility......... (21,000)
Repayment of other indebtedness...... (6,728) (15,535)
Purchase of Treasury Stock........... (6,418)
Net proceeds from issuance of Common
Stock............................... 141 1,055
-------- --------
Net cash provided (used) by
financing activities.......... 10,995 (14,480)
-------- --------
Increase (decrease) in cash and
equivalents............................ 3,954 (10,967)
Cash and equivalents:
Beginning of period.................. 3,429 14,816
-------- --------
End of period........................ $ 7,383 $ 3,849
======== ========
Interest paid........................... $ 3,484 $ 1,398
Taxes paid.............................. 4,538 5,791
Noncash transactions:
Tax benefit from exercise of
non-qualified stock options......... 151 6,570
Value of Common Stock to be issued
in medical practice transactions.... 7,979 6,629
Delivery of Common Stock to be
issued in medical practice
transactions........................ 5,967
Debt issued in medical practice
transactions........................ 14,393 11,078
</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 all
adjustments, which are normal and recurring in nature, considered necessary for
a fair presentation of the financial position and the results of operations for
the interim periods presented. 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 10-K
filed with the Securities and Exchange Commission on March 25, 1997.
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,
1997 1996 1997 1996
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Medical service revenue................ $105,602 $62,391 $197,739 $115,902
Amounts retained by medical practices.. 26,077 15,017 47,818 27,778
-------- ------- -------- --------
Revenue................................ $ 79,525 $47,374 $149,921 $ 88,124
======== ======= ======== ========
Management service agreements
at end of period................... 35 28 35 28
</TABLE>
-7-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - MEDICAL PRACTICE TRANSACTIONS
During the first six months of 1997, the Company, through wholly-owned
subsidiaries, acquired certain non-medical assets of, and amended long-term
management agreements to affiliate with, seven medical oncology practices and
two radiation oncology practices. During the first six months of 1996, the
Company acquired certain non-medical assets of, and entered into long-term
management service agreements with, six medical oncology practices. 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,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and transaction costs.............. $10,134 $10,625 $24,004 $29,976
Liabilities assumed..................... 592 832 2,804 1,799
Issuance of short-term and subordinated
notes................................ 5,438 4,263 14,393 11,078
Common Stock to be issued............... 3,586 2,480 7,979 6,629
------- ------- ------- -------
$19,750 $18,200 $49,180 $49,482
======= ======= ======= =======
</TABLE>
In conjunction with the medical practice transactions occurring since inception,
the Company is contingently obligated to pay up to an additional $3.4 million in
future years depending on the achievement of certain financial objectives, of
which $.6 million related to medical practice transactions occurring in the
first six months of 1997. 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 and will not
immediately be charged to expense.
For transactions completed through June 30, 1997, the scheduled issuance of the
shares of Common Stock that the Company is committed to deliver over the passage
of the time are: 707,084 in 1997, 2,940,617 in 1998, 5,244,319 in 1999,
5,225,148 in 2000, 1,431,623 in 2001 and 1,393,727 thereafter. Although such
shares are not yet issued or outstanding, 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 1997 and 1996 transactions were
consummated on January 1, 1996. 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,
1997 1996
------------ -----------
<S> <C> <C>
Revenue............... $153,394 $110,836
Net income............ 11,143 9,634
Net income per share.. $ 0.23 $ 0.19
</TABLE>
-8-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 1997, options to purchase 736,500 shares of
Common Stock at $8.13 TO $10.56 per share were granted under the Company's
various stock option plans, of which 458,500 were granted to executive officers
and directors. During the first six months of 1997, options to purchase 50,400
shares of Common Stock at $1.34 to $6.13 per share were exercised, of which
30,000 were exercised by executive officers and directors. During the first six
months of 1997, options to purchase 82,824 shares of Common Stock were canceled.
At June 30, 1997, there were options to purchase 5,421,844 shares of Common
Stock outstanding under the Company's various stock option plans at exercise
prices of $1.34 to $24.18 per share.
On May 16, 1997, the Board of Directors of the Company adopted a shareholder
rights plan and, in connection therewith, declared a dividend of one Series A
Preferred Share Purchase Right for each outstanding share of Common Stock. For
a more detailed description of the shareholder rights plan, refer to the
Company's Form 8-A filed with the Securities and Exchange Commission on June 2,
1997.
Effective May 8, 1997, the Company's stockholders approved an increase in the
number of shares of Common Stock authorized to be issued to 80,000,000 shares.
In addition, the Company's Key Employee Stock Option Plan ("Plan") was amended
to increase the number of shares available for grants under the Plan to 7% from
5% of the Company's outstanding Common Stock (including shares to be issued at
future specified dates).
On August 13, 1996, the Board of Directors of the Company authorized the
repurchase of up to 3,000,000 shares of the Company's Common Stock in public or
private transactions. From November 1996 through January 1997, the Company
repurchased 1,767,500 shares of Common Stock at an average price of $8.96 to be
held as treasury stock. During the first six months of 1997, the Company issued
1,650,064 shares from treasury stock to affiliated physicians in connection with
a 1994 medical practice transaction and two 1995 medical practice transactions.
The remaining 4,996 shares of treasury stock were issued in conjunction with the
exercise of stock options during the first six months of 1997.
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.
NOTE 5- INDEBTEDNESS
Indebtedness consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- -------------
<S> <C> <C>
Short-term notes payable............. $ 4,219
Subordinated notes................... $ 73,442 62,113
Credit facility...................... 47,000 23,000
Capital lease obligations and other.. 2,427 2,158
-------- -------
122,869 91,490
Less current maturities.............. (5,010) (9,783)
-------- -------
$117,859 $81,707
======== =======
</TABLE>
-9-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has a loan agreement and revolving credit facility ("Credit
Facility") with First Union National Bank of North Carolina ("First Union")
individually and as Agent for seven additional lenders ("Lenders"), which was
amended as of October 30, 1996 to increase the amount available for borrowing
thereunder to $150 million through October 31, 2001. Proceeds of loans may be
used to finance medical group transactions, to provide working capital or for
other general corporate uses. At June 30, 1997, the Company had an outstanding
balance of $47 million under the Credit Facility which consisted of multiple
draws with maturities up to 30 days. The Company has classified this facility
as long term due to its ability and intent to renew the obligations through
1998.
Borrowings under the Credit Facility are secured by capital stock of the
Company's subsidiaries and all material contracts, including management service
agreements. At the Company's option, funds may be borrowed at the Base interest
rate or the London Interbank Offer Rate plus a range from .5% to 1.5%
(determined under a specific formula). Interest on amounts outstanding under
Base rate loans is due quarterly while interest on London Interbank Offer Rate
related loans is due upon maturity. The weighted average interest rate
outstanding on draws under the Credit Facility at June 30, 1997 was 6.9%.
The Company is subject to restrictive covenants under the facility, including
the maintenance of certain financial ratios. The agreement limits certain
activities such as additional indebtedness, sales of assets, investments,
capital expenditures, mergers and consolidations and the payment of dividends.
Under certain circumstances, additional medical practice transactions may
require First Union and the Lenders' consent.
The subordinated notes are issued in substantially the same form in different
series and are payable to the physicians with whom the Company entered into
management agreements. Substantially all of the notes outstanding at June 30,
1997 and 1996 bear interest at 7%, are due in installments through 2003 and are
subordinated to senior bank and certain other debt. If the Company fails to
make payment under any of the notes, the respective physician group can
terminate the related management service agreement for cause.
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 are assumed to have been
outstanding Common Stock equivalents under the treasury stock method for each of
the periods presented. Fully diluted earnings per share has not been presented
because it does not differ materially from the primary per share computations.
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,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Outstanding at end of period:
Common Stock.......................... 28,650 28,342 28,650 28,342
Common Stock to be issued............. 16,942 15,805 16,942 15,805
------ ------ ------ ------
45,592 44,147 45,592 44,147
Effect of weighting and assumed share
equivalents for grants and issuances
at less than the weighted average
price.................................. 2,839 3,408 2,320 3,330
------ ------ ------ ------
Shares used in per share calculations... 48,431 47,555 47,912 47,447
====== ====== ====== ======
</TABLE>
-10-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - RECENT PRONOUNCEMENTS
In 1997, Financial Accounting Standards No. 128 ("FAS 128") Earnings Per Share
was issued. FAS 128 is effective for earnings per share calculations for
periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods.
-11-
<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, medical and radiation
oncology 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 all medical practice operating costs for which the
Company is contractually responsible.
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.
FORWARD LOOKING STATEMENTS
The statements contained in this report, in addition to historical information,
are forward looking statements based on the Company's current expectations, and
actual results may vary materially. The Company's business and financial
results are subject to various risks and uncertainties, including the Company's
continued ability to enter into affiliations with new physician practices and to
successfully integrate such practices, the results of operations of groups
currently affiliated with the Company, competition, reductions in third party
reimbursement for services rendered by physician groups affiliated with the
Company, health care regulation and other risks generally affecting the health
care industry. Please refer to the Company's 1996 Annual Report on Form 10-K
for a more detailed discussion of such risks and uncertainties. These forward
looking statements are provided as a framework for the Company's results of
operations. The Company does not intend to provide updated information other
than as otherwise required by applicable law.
RESULTS OF OPERATIONS
Since the Company's incorporation in October 1992, it has grown rapidly from
managing six affiliated physicians in one state to 261 affiliated physicians and
35 oncology practices in sixteen states as of June 30, 1997. For the first six
months of 1997 and 1996, only one of the Company's affiliated physician groups
contributed more than 10% of the Company's revenue which was 10% and 12%,
respectively, of total revenue. For the first six months of 1997, the payor
mix of the affiliated physician groups' medical practice revenue, expressed as a
percentage, was 32% for Medicare and Medicaid, 47% for managed care and 21% 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.
-12-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue.............................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Pharmaceuticals and supplies........ 45.3 39.7 45.5 38.6
Practice compensation and benefits.. 18.3 20.5 18.7 20.5
Other practice costs................ 10.8 12.0 10.9 11.9
General and administrative.......... 7.1 7.8 6.5 7.5
Depreciation and amortization....... 4.2 4.6 4.2 4.6
Net interest expense................ 2.6 1.6 2.5 1.3
----- ----- ----- -----
Income before income taxes........... 11.7 13.8 11.7 15.6
Income taxes......................... 4.5 5.2 4.5 5.9
----- ----- ----- -----
Net income (loss).................... 7.2% 8.6% 7.2% 9.7%
===== ===== ===== =====
</TABLE>
1997 COMPARED TO 1996
The Company amended management agreements to affiliate with nine oncology
practices in the first six months of 1997 and entered into new management
agreements with six oncology practices in the first six months of 1996. The
results of the new affiliated oncology practices are included in the Company's
operating results from the dates of affiliation. Changes in results of
operations from the first six months of 1996 to the first six months of 1997
were caused, in part, by affiliations with these oncology practices.
Revenue. Revenue for the second quarter of 1997 increased $32.2 million or
68% over the comparable period of the prior year. Revenue for the first six
months of 1997 increased by $61.8 million or 70% over the comparable prior year
period. Of the increases in revenue for the second quarter and six month period
ended June 30, 1996, $9.5 million and $18.2 million, respectively, were
attributable to the addition of eight new oncology practices with whom the
Company entered into new management agreements after June 30, 1996. The
remaining increases in revenue of $22.7 million and $43.6 million for the second
quarter and first six months of 1997, respectively, were attributable to the
increase in medical practice revenue for affiliated physician practices with
whom the Company either entered into management agreements prior to June 30,
1996 or through new affiliations created by amendments to existing management
agreements. Revenue for the second quarter and first six months of 1997 for
markets under management since June 30, 1996 increased 52% and 48%,
respectively, over the same periods from the prior year. The growth in practice
revenue resulted from the recruitment of new physicians, expansion of services,
affiliation with new physician groups, increases in patient volume and, to a
lesser extent, price adjustments for certain physician services. The Company
changed the methodolgy of calculating the growth in practice revenue to more
accurately reflect the revenue growth for a market from period to period as well
as the changing structure of new physician transactions in 1997. Under the new
method, revenue growth for all practices within a metropolitan service area in
which the Company has operations in both periods is treated as same market
growth, whereas the old methodology excluded new affiliations with physicians in
existing markets. Excluding the transactions with new physicians in those
existing markets during the second quarter and first six months of 1997 and the
comparable period of 1996, revenue increased 32% and 31%, respectively.
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, 1997 increased $17.2
-13-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
million or 91% over the comparable prior year period. Pharmaceuticals and
supplies increased $34.1 million or 100% for the first six months of 1997 over
the comparable period of the prior year. Of these increases for the second
quarter and six months ended June 30, 1997, $4.6 million and $9.0 million,
respectively, were attributable to the addition of eight new oncology practices
with whom the Company entered into new management agreements after June 30,
1996. The remaining increases are principally the result of the expansion of
services and increase in patient volume of practices with whom the Company
entered into management agreements prior to June 30, 1996 as well as the
affiliation of new physician groups through amended management agreements. As a
percentage of revenue, pharmaceuticals and supplies increased to 45.3% and 45.5%
in the second quarter and first six months of 1997, respectively, from 39.7% and
38.6% in the comparable periods of 1996. This increase was primarily due to a
shift in the revenue mix to a higher percentage of drug revenue (resulting from
the introduction of a number of new chemotherapy agents and regimens) and, to a
lesser extent, lower reimbursement from payors. The Company has adopted a number
of strategies to address this matter, including initiating preferred
pharmaceutical relationships, which have resulted in a decrease in
pharmaceuticals and supplies as a percentage of revenue when comparing the first
quarter of 1997 to the second quarter of 1997. Management expects that third-
party payors will continue to negotiate medical services, pharmaceuticals
(including chemotherapy drugs) and other supplies, with the goal of lowering
reimbursement and utilization rates, and that such lower reimbursement and
utilization rates as well as shifts in revenue mix may continue to reduce the
Company's margins with respect to such items.
Practice Compensation and Benefits. Practice compensation and benefits, which
include the salaries, wages and benefits of the employees of the affiliated
physician practices (excluding affiliated oncologists) and the employees of the
Company who are located at the affiliated physician practice sites, for the
second quarter and first six months of 1997 increased $4.9 million or 50% and
$10.0 million or 55%, respectively, over the comparable prior year periods. Of
these increases for the second quarter and the first six months of 1997, $1.6
million and $3.3 million, respectively, were attributable to the addition of
eight affiliated oncology practices with whom the Company entered into new
management agreements after June 30, 1996. As a percentage of revenue, practice
compensation and benefits decreased to 18.3% and 18.7% in the second quarter and
first six months of 1997, respectively, from 20.5% in both comparable periods of
1996. Decreases in practice compensation and benefit costs as a percentage of
revenue resulted from economies of scale.
Other Practice Costs. Other practice costs, which consist of rent, utilities,
repairs and maintenance, insurance and other direct practice costs, for the
second quarter of 1997 increased $3.0 million or 52% over the comparable prior
year period. For the six months ended June 30, 1997, practice costs have
increased $5.9 million or 56%. Of these increases for the second quarter and
first six months of 1997, $0.8 million and $1.5 million, respectively, were
attributable to the addition of eight affiliated oncology practices with whom
the Company entered into new management agreements after June 30, 1996. As a
percentage of revenue, other practice costs decreased to 10.8% and 10.9% in the
second quarter and first six months of 1997, respectively, as compared to 12.0%
and 11.9% in the comparable periods of 1996. Decreases in other practice costs
as a percentage of revenue resulted from economies of scale.
General and Administrative. General corporate expenses for the second quarter
ended June 30, 1997 increased $1.9 million or 52% over the comparable prior year
period. General corporate expenses for the six month period increased $3.2
million or 49% over the same period in the prior year. These increases were
primarily attributable to the addition of personnel and greater support costs
associated with the Company's rapid growth since June 30, 1996. As a percentage
of revenue, general and administrative expenses decreased to 7.1% and 6.5% in
the second quarter and first six months of 1997, respectively, from 7.8% and
7.5% in the comparable periods of 1996, primarily as a result of economies of
scale.
Depreciation and Amortization. Depreciation and amortization expenses for the
second quarter ended June 30, 1997 increased $1.1 million or 51% over the
comparable prior year period, while for the six month period ended June 30, 1997
depreciation and amortization expenses increased $2.3 million or 55%. This
increase was primarily the result of amortization of intangible assets
associated with the Company's entering into new and amending existing management
agreements with physician groups.
-14-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest. Net interest expense increased to $2.0 million and $3.7 million
during the second quarter and first six months of 1997 from $0.7 million and
$1.2 million in the same periods of 1996. The increase was primarily
attributable to interest expense on borrowings used to fund cash consideration
and physician debt issued for seventeen medical practice transactions, including
both new and amendments to existing management agreements, since June 30, 1996.
In the future, management expects that net interest expense as a percentage of
revenue will increase slightly due to anticipated debt related to medical
practice transactions and the development of integrated cancer centers.
Income Taxes. For the first six months of 1997 and 1996, the Company
recognized a tax provision of $6.8 million and $5.2 million, respectively, at
estimated annual effective rates of 38.5% and 38.0%, respectively. The effective
annual tax rates represent management's best estimate of the tax provision based
on the existing revenue mix by state.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to enter into new or amended management
agreements with, and to purchase the nonmedical assets of, oncology medical and
radiation practices. During the first six months of 1997, the Company paid
total consideration of $49 million for the affiliation of nine oncology
practices through amending existing management agreements including cash and
transaction costs of $24 million. During the comparable period of the prior
year, the Company paid $49 million for management agreements with physician
groups including cash and transaction costs of $30 million.
To fund this rapid growth and development, the Company has satisfied its
transaction and working capital needs through funds raised in the equity
offering and borrowings under a $150 million syndicated revolving Credit
Facility with First Union. The Company has relied primarily on management fees
received from its affiliated physician practices to fund operations. Cash
derived from operations was $24.1 million for the first six months of 1997 and
$5.4 in the comparable period of 1996. The increase is due primarily to the
operations of the oncology practices with whom the Company has affiliated since
June 30, 1996.
During the first six months of 1997, the Company borrowed $45 million under
the Credit Facility to fund medical practice transactions and the purchase of
treasury stock. Of the borrowings, $21 million was repaid during the first six
months of 1997. 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 financial ratios, restrictions
on sales, leases or other dispositions of property, restrictions on other
indebtedness and prohibitions on the payment of dividends. The Company's
management service agreements, its equity ownership in its subsidiaries and all
other securities owned by the Company (other than treasury shares of the
Company) are pledged as security under the Credit Facility. The Company is
currently in compliance with the Credit Facility covenants.
At June 30, 1997, the Company had working capital of $47.4 million and cash
and cash equivalents of $7.4 million. The Company also had $43.1 million of
current liabilities, including approximately $5.0 million of short term notes
payable and long-term indebtedness maturing before June 30, 1998. 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, the
purchase of medical equipment and the acquisition of real estate for the
development of integrated cancer centers. The Company expects that the existing
cash and investment balances, cash generated from operations and amounts
available under the Credit Facility will be adequate to satisfy the Company's
cash requirements for the next 12 months.
-15-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities
On May 16, 1997, the Board of Directors of the Company adopted a shareholder
rights plan and, in connection therewith, declared a dividend of one Series A
Preferred Share Purchase Right for each outstanding share of Common Stock. For
a more detailed description of the shareholder rights plan, refer to the
Company's Form 8-A filed with the Securities and Exchange Commission on June 2,
1997.
In connection with each affiliation transaction between the Company and an
oncology group, the Company purchases the nonmedical assets of, and enters into
a long-term management agreement with, that oncology group. In consideration
for that arrangement, the Company typically pays cash, issues subordinated
promissory notes (in general, payable in equal installments on the third through
seventh anniversaries of the closing date at an annual interest rate of seven
percent) and unconditionally agrees to delivery shares of Common Stock at future
specified dates (in general, on each of the third through fifth anniversaries of
the closing date). The price per share is the lower of the average of the
closing price per share for the five days preceding the date of the letter of
intent or the closing date with respect to such affiliation transaction.
The following table describes all unregistered sales by the Company of the
Company's securities during the first six months of 1997. Each sale was a
private placement made in connection with a physician transaction, described in
general in the preceding paragraph, to affiliated oncologists, the overwhelming
majority of whom are accredited investors. No underwriter was involved in any
such sale, and no commission or similar fee was paid with respect thereto. Each
sale was not registered under the Securities Act of 1933 in reliance on Section
4(2) of such Act and Rule 506 enacted thereunder.
<TABLE>
<CAPTION>
Number of Shares of Aggregate Principal
Date of Transaction Number of Physicians Common Stock (1) Amount of Notes
- --------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
1/97 2 94,452 1,620,000
1/97 2 67,022 858,550
3/97 1 25,134 470,000
3/97 8 514,124 6,006,000
4/97 4 342,632 4,223,100
4/97 4 249,717 -
4/97 1 12,717 149,250
4/97 1 30,088 646,000
6/97 2 28,658 420,000
</TABLE>
(1) In connection with each affiliation transaction, the Company unconditionally
agrees to deliver shares of Common Stock at specified future dates.
-16-
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to Vote of Security Holders
(a) May 8, 1997 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
-------------- --------------
Nominee:
--------
<S> <C> <C>
Russell L. Carson........................ 22,405,012 61,576
Lloyd K. Everson, M.D.................... 22,405,012 61,576
Kyle M. Fink, M.D........................ 22,405,012 61,576
Richard B. Mayor......................... 22,405,012 61,576
Magaral S. Murali, M.D................... 22,405,012 61,576
Robert A. Ortenzio....................... 22,405,012 61,576
Andrew M. Paul........................... 22,405,012 61,576
Leonard M. Riggs, Jr., M.D............... 22,405,012 61,576
Edward E. Rogoff, M.D.................... 22,405,012 61,576
R. Dale Ross............................. 22,405,012 61,576
Other Matters
-------------
Votes
Description of Votes Against
Matter For Abstained
------------------- -------------- ------------
Approval of amendment to the Company's
Certificate of Incorporation increasing
the amount of Common Stock Authorized
to be issued by the Company from
640,000,000 shares to 860,000,000
shares.................................. 22,237,338 229,250
Approval of amendment to the
Company's 1993 Non-Employee
Director Stock Option Plan.............. 18,797,343 3,669,245
Ratification of appointment of Price
Waterhouse LLP as the Company's
independent accountants................. 22,436,996 29,592
</TABLE>
No broker non-votes were recorded.
-17-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation, as amended (incorporated by reference
from Form 10-Q for the period ended March 31, 1997)
3.2 By-Laws, as amended (incorporated by reference from Form 10-Q for
the period ended March 31, 1997)
4.1 Rights Agreement between the Company and American Stock Transfer &
Trust Company (incorporated by reference from Form 8-A filed June 2,
1997)
11 Statement Re - Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 9, 1997 reporting under
item 2 and item 7, the acquisition, through a wholly-owned subsidiary, of the
nonmedical assets of, and entry into a long-term management agreement with,
Texas Radiation Oncology Group, L.L.P.
-18-
<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 12, 1997 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
-19-
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
EXHIBIT INDEX
Exhibit Number Description of Exhibits
- -------------- -----------------------
3.1 Articles of Incorporation, as amended (incorporated by
reference from Form 10-Q for the period ended March 31,
1997)
3.2 By-Laws, as amended (incorporated by reference from Form
10-Q for the period ended March 31, 1997)
4.1 Rights Agreement between the Company and American Stock
Transfer & Trust Company (incorporated by reference from
Form 8-A filed June 2, 1997)
11 Statement Re - Computation of Per Share Earnings
27 Financial Data Schedule
-20-
<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,
1997 1996 1997 1996
-------- -------- --------- --------
<S> <C> <C> <C> <C>
NET INCOME.............................. $ 5,719 $ 4,060 $10,791 $ 8,507
======= ======= ======= =======
OUTSTANDING AT END OF PERIOD:
Shares of Common Stock................ 28,650 28,342 28,650 28,342
Commitments to issue Common Stock at
specific future dates................ 16,942 15,805 16,942 15,805
Effect of weighting................... (124) (261) (562) (626)
------- ------- ------- -------
45,468 43,886 45,030 43,521
Options to purchase Common Stock........ 5,422 5,161 5,422 5,161
Effect of treasury stock method......... (2,459) (1,492) (2,540) (1,235)
------- ------- ------- -------
Total shares used in per share
calculation............................ 48,431 47,555 47,912 47,447
======= ======= ======= =======
Net income per share.................... $0.12 $ 0.09 $0.23 $ 0.18
======= ======= ======= =======
ASSUMING FULL DILUTION:
Outstanding per above................. 48,431 47,555 47,912 47,447
Additional dilution resulting from
use of period end price per share if
higher than average.................. 377 188
------- ------- ------- -------
Total shares used in per share
calculation............................ 48,808 47,555 48,100 47,447
======= ======= ======= =======
Net income per share.................... $0.12 $ 0.09 $0.22 $ 0.18
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,383
<SECURITIES> 0
<RECEIVABLES> 75,069
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 90,510
<PP&E> 33,799
<DEPRECIATION> 9,022
<TOTAL-ASSETS> 401,127
<CURRENT-LIABILITIES> 43,133
<BONDS> 0
0
0
<COMMON> 286
<OTHER-SE> 234,215
<TOTAL-LIABILITY-AND-EQUITY> 401,127
<SALES> 0
<TOTAL-REVENUES> 79,525
<CGS> 0
<TOTAL-COSTS> 68,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,117
<INCOME-PRETAX> 9,300
<INCOME-TAX> 3,581
<INCOME-CONTINUING> 5,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,719
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
