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 SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITITES 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 (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
---------------------------- -------------------
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 NOVEMBER 5, 1998, THE REGISTRANT HAD 48,920,835 SHARES OF COMMON
STOCK OUTSTANDING OR TO BE DELIVERED ON FUTURE DATES FOR NO ADDITIONAL
CONSIDERATION. OF THIS AMOUNT, 32,694,724 SHARES WERE OUTSTANDING AND 16,226,111
SHARES WERE TO BE DELIVERED ON FUTURE DATES FOR NO ADDITIONAL CONSIDERATION.
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE NO
-------
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
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and equivalents $ 1,080 $ 5,000
Accounts receivable 122,099 92,038
Prepaids and other current assets 15,595 10,149
Due from affiliated physician groups 4,612 7,904
---------- ---------
Total current assets 143,386 115,091
Property and equipment, net 48,782 38,564
Management service agreements, net of amortization of $23,529 and $15,589 340,916 326,295
Other assets 4,408 3,943
---------- ---------
$ 537,492 $ 483,893
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable $ - $ 14,011
Current maturities of long-term indebtedness 12,553 8,628
Accounts payable 30,262 38,870
Due to affiliated physician groups 7,241 289
Accrued compensation costs 3,924 2,783
Accrued interest payable 3,709 2,804
Income taxes payable 3,798 8
Other accrued liabilities 9,455 3,834
---------- ---------
Total current liabilities 70,942 71,227
Deferred income taxes 14,448 8,956
Long-term indebtedness 165,567 139,716
---------- ---------
Total liabilities 250,957 219,899
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 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, 32,691,922
and 29,721,754 shares issued, 31,670,422 and 29,721,754 shares
outstanding 327 297
Additional paid-in capital 151,195 138,381
Common stock to be issued, 16,326,127 and 17,937,752 shares 72,571 74,757
Treasury stock, 1,021,500 shares (10,328) -
Retained earnings 72,770 50,559
---------- ---------
Total stockholders' equity 286,535 263,994
---------- ---------
$ 537,492 $ 483,893
========== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT
3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 118,263 $ 82,293 $ 330,826 $ 232,214
Operating expenses:
Pharmaceuticals and supplies 54,051 37,066 149,694 105,206
Practice compensation and benefits 22,158 15,702 62,445 43,761
Other practice costs 13,158 8,604 38,021 24,928
General and administrative 7,100 5,692 19,803 15,639
Depreciation and amortization 6,832 3,716 16,196 10,064
----------- ------------ ----------- -----------
103,299 70,780 286,159 199,598
----------- ------------ ----------- -----------
Income from operations 14,964 11,513 44,667 32,616
Other income (expense):
Interest income 65 74 141 250
Interest expense (3,016) (2,232) (8,984) (5,965)
----------- ------------ ----------- -----------
Income before income taxes 12,013 9,355 35,824 26,901
Income taxes 4,565 3,445 13,613 10,200
----------- ------------ ----------- -----------
Net income $ 7,448 $ 5,910 $ 22,211 $ 16,701
=========== ============ =========== ===========
Net income per share - basic $ 0.15 $ 0.13 $ 0.46 $ 0.37
=========== ============ =========== ===========
Shares used in per share calculations - basic 48,630 45,651 48,440 45,237
=========== ============ =========== ===========
Net income per share - diluted $ 0.15 $ 0.12 $ 0.44 $ 0.35
=========== ============ =========== ===========
49,926 48,275 50,052 48,032
Shares used in per share calculations - diluted =========== ============ =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT
4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
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, 1997 29,722 $ 297 $ 138,381 $ 74,757 $ - $ 50,559 $ 263,994
Medical practice transactions-value
of 472 shares to be issued - - - 3,982 - - 3,982
Purchase of 1,022 shares of Treasury Stock
- - - - (10,328) - (10,328)
Delivery of 2,083 shares from issuance
of Common Stock 2,083 21 6,147 (6,168) - - -
Exercise of options to purchase
Common Stock 887 9 2,366 - - - 2,375
Tax benefit from exercise of non-
qualified stock options - - 4,301 - - - 4,301
Net Income - - - - - 22,211 22,211
------ ---------- --------- ----------- ----------- --------- ----------
Balance at September 30, 1998 32,692 $ 327 $ 151,195 $ 72,571 $ (10,328) $ 72,770 $ 286,535
====== ========== ========= =========== =========== ========= ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT
5
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
---------------------
ENDED SEPTEMBER 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,211 $ 16,701
Noncash adjustments:
Depreciation and amortization 16,196 10,064
Deferred income taxes 5,492 4,121
Cash provided (used), net of effects of medical practice
transactions, by changes in:
Accounts receivable (27,560) (15,819)
Prepaids and other current assets (5,409) (1,018)
Other assets (1,088) 9
Accounts payable (9,592) 10,493
Due from/to affiliated physician groups 10,564 8,361
Income taxes receivable/payable 8,092 767
Other accrued liabilities 6,698 (518)
---------- ---------
Net cash provided by operating activities 25,604 33,161
---------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (17,278) (14,171)
Net payments in medical practice transactions (14,310) (23,632)
Other 1,266 -
---------- ---------
Net cash used in investing activities (30,322) (37,803)
---------- ---------
Cash flows from financing activities:
Proceeds from credit facility 31,000 51,000
Repayments of credit facility (4,000) (31,000)
Repayments of other indebtedness (19,015) (8,642)
Purchases of Treasury Stock (9,562) (6,418)
Proceeds from exercise of stock options 2,375 -
Net proceeds from issuance of common stock - 562
---------- ---------
Net cash provided by financing activities 798 5,502
---------- ---------
Increase (decrease) in cash and equivalents (3,920) 860
Cash and equivalents:
Beginning of period 5,000 3,429
---------- ---------
End of period $ 1,080 $ 4,289
========== =========
Interest paid $ 8,079 $ 5,652
Taxes paid 189 5,340
Noncash transactions:
Tax benefit from exercise of non-qualified stock options $ 4,301 $ 1,300
Value of Common Stock to be issued in medical practice transactions 3,982 8,221
Delivery of Common Stock to be issued in medical practice transactions 6,168 6,278
Debt issued in medical practice transactions 7,780 14,995
Treasury stock purchases subsequently settled 766 -
</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 that are normal and recurring in nature and 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 23, 1998.
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Medical service revenue $ 156,203 $ 108,570 $ 435,873 $ 306,309
Amounts retained by medical practices 37,940 26,277 105,047 74,095
--------- --------- --------- ---------
Revenue $ 118,263 $ 82,293 $ 330,826 $ 232,214
========= ========= ========= =========
</TABLE>
7
<PAGE>
NOTE 3 - MEDICAL PRACTICE TRANSACTIONS
During the first nine months of 1998, the Company affiliated with eight oncology
practices and acquired two radiation oncology centers. During the first nine
months of 1997, the Company affiliated with eight medical oncology practices and
two radiation 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and transaction costs $ 4,739 $ 677 $ 14,310 $ 23,632
Liabilities assumed 283 398 1,255 3,202
Issuance of short-term and
subordinated notes 2,742 602 7,780 14,995
Common Stock to be issued 723 242 3,982 8,221
-------- -------- -------- --------
$ 8,487 $ 1,919 $ 27,327 $ 50,050
======== ======== ======== ========
</TABLE>
In conjunction with the medical practice transactions occurring since inception,
the Company is contingently obligated to pay up to an additional $1.3 million 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 probable. Any payment made will be allocated as an
intangible asset and amortized accordingly.
8
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(unaudited)
When the Company affiliates with an oncology practice, it records an intangible
asset for the excess of transaction consideration over the value of the tangible
assets acquired. Effective July 1, 1998, the Company changed its policy with
respect to amortization of its intangible assets. All existing and future
intangible assets will be amortized over a period not to exceed 25 years. Had
this policy been adopted as of January 1, 1997, amortization expense would have
increased by approximately $2.7 million and $3.2 million for the nine months
ended September 30, 1998 and 1997, respectively. Applying the Company's
historical tax rate, diluted earnings per share would have been reduced by $0.03
and $0.04 for the nine months ended September 30, 1998 and 1997, respectively.
See discussion at Part I, Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, under the caption, "Results of
Operations."
For transactions completed through September 30, 1998, the scheduled issuance of
the shares of Common Stock that the Company is committed to deliver over the
passage of time is 857,168 in 1998, 5,238,554 in 1999, 5,491,960 in 2000,
1,768,236 in 2001, 2,025,918 in 2002 and 944,291 thereafter. Although such
shares are not yet issued or outstanding, such shares are considered as
outstanding for the purpose of earnings per share calculations.
NOTE 4 - CAPITALIZATION
As part of affiliating with medical practices as 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 nine months of 1998, options to purchase 1,008,500 shares of
Common Stock at $11.63 to $15.67 per share were granted under the Company's
various stock option plans, 483,000 of which was granted to executive officers
and directors. During the first nine months of 1998, options to purchase
886,720 shares of Common Stock at $1.34 to $11.81 per share were exercised, of
which 820,800 were exercised by executive officers and directors. During the
first nine months of 1998, options to purchase 219,450 shares of Common Stock
were canceled. At September 30, 1998, there were options to purchase 5,611,484
shares of Common Stock outstanding under the Company's various stock option
plans at exercise prices of $1.34 to $24.18 per share.
In October 1998, the Company completed its repurchase of 3,000,000 shares of the
Company's Common Stock as authorized by the Board of Directors on August 13,
1996. From August 1998 through September 1998, the Company repurchased
1,021,500 shares of Common Stock, at a weighted average price of $10.11, to be
held as treasury stock. 1,767,500 shares of Common Stock were repurchased and
issued in connection with medical practice transactions and exercise of stock
options during 1997. The remaining 211,000 shares of Common Stock were
repurchased during October 1998.
Effective May 14, 1998, the stockholders of the Company approved an amendment to
the Company's Key Employee Stock Option Plan ("Plan") to increase the number of
shares available for grants under the Plan to 10% from 7% of the Company's
outstanding Common Stock (including shares to be issued at future specified
dates). In addition, effective May 14, 1998, the Company's stockholders
approved amendments to the Company's Non-Employee Director Stock Option Plan
(the "Director Plan"): (i) providing for a grant to each non-employee director
who has not previously been elected by the stockholders to the Board of
Directors, at the time of his or her election, of an option to purchase 5,000
shares of the Company's Common Stock, at a price determined in accordance with
the Director Plan; (ii) increasing the amount of the automatic annual grant to
each other non-employee director from an option to purchase 2,000 shares to an
option to purchase 3,000 shares, at a price determined in accordance with the
Director Plan; and (iii) providing for an additional automatic annual grant to
each non-employee director of an option to purchase 1,000 shares for each Board
committee to which such director is appointed.
9
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(unaudited)
NOTE 5 - INDEBTEDNESS
Short-term notes payable
Short-term notes payable bear interest at 7% and have original maturities of
less than one year. The notes are payable to affiliated physicians and relate
to medical practice transactions.
<TABLE>
<CAPTION>
Long-term indebtedness
Long-term indebtedness consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Subordinated notes $ 83,088 $ 80,710
Credit facility 93,000 66,000
Capital lease obligations and other 2,032 1,634
---------- ---------
178,120 148,344
Less current maturities (12,553) (8,628)
---------- ---------
$ 165,567 $139,716
========== =========
</TABLE>
Subordinated Notes
The subordinated notes are issued in substantially the same form in different
series and are payable to affiliated physicians and relate to medical practice
transactions. Substantially all of the notes outstanding at September 30, 1998
and December 31, 1997 bear interest at 7% per annum, are due in installments
through 2005 and are subordinated to senior bank and certain other debt. If the
Company fails to make a payment under any of the notes, the respective physician
group can terminate the related management services agreement for cause.
Credit Facility
The Company has a loan agreement and revolving credit/term facility ("Credit
Facility") with First Union National Bank ("First Union") individually and as
Agent for twelve additional lenders ("Lenders"). Under the terms of the Credit
Facility, the amount available for borrowings is $150 million through October
31, 2002. Borrowings under the Credit Facility may be used to finance medical
group transactions, provide working capital or for other general corporate
purposes. At September 30, 1998, the Company had an outstanding balance of $93
million under the Credit Facility. The Company has classified this facility as
long-term due to its ability and intent to maintain the borrowings beyond the
next twelve months.
Borrowings under the Credit Facility are secured by all securities owned by the
Company, including all capital stock of the Company's subsidiaries, and all
management service agreements. At the Company's option, funds may be borrowed
at the Base interest rate or the London Interbank Offer Rate (LIBOR) plus an
amount determined under a defined formula. The Base rate is selected by First
Union and is defined as their prime rate or Federal Funds Rate plus 1/2%.
Interest on amounts outstanding under Base rate loans is due quarterly, while
interest on LIBOR related loans is due at the end of each applicable interest
period or quarterly, if earlier.
The Company is subject to restrictive covenants under the Credit Facility,
including the maintenance of certain financial ratios. The Credit Facility
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's and the Lenders' consent. At September 30, 1998, the
Company was in compliance with all applicable debt covenants. Derivatives
Derivatives
As of August 31, 1998, the Company entered into an interest rate swap agreement
with a financial institution to reduce the impact of changes in interest rates
on its floating rate debt. The agreement effectively fixed the interest rate on
floating rate debt at a rate of 5.93% per annum for notional principal amount of
$80.0 million through August 30, 1999. The notional amount of the swap
agreement is used to measure interest to be paid or received and does not
represent the amount of exposure to credit loss. The use of this swap agreement
had an insignificant impact on interest expense for the quarter and nine months
ended September 30, 1998. As of September 30, 1998, the effective weighted
average interest rate on all outstanding draws under the Credit Facility was
6.0%.
Master Lease
In December 1997, the Company entered into a $75 million master lease agreement
related to integrated cancer centers that the lessor thereunder may construct.
Under the agreement, the lessor purchases the properties, pays for the
construction costs and thereafter leases the facilities to the Company. The
initial term of the lease is for five years and can be renewed in one-year
increments if approved by the lessor. The lease provides for substantial
residual value guarantees and includes purchase options at original cost on each
option.
NOTE 6 - EARNINGS PER SHARE
During 1997, the Company adopted the provisions of Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share," (FAS 128), which
requires the Company to disclose "basic" and "diluted" earnings per share and to
restate all prior periods presented for comparative purposes. The Company has
restated all prior periods presented to comply with the provisions of FAS 128.
The computation of basic earnings per share is based on a weighted average
number of Common Stock and Common Stock to be issued shares outstanding during
the periods. The computation of the diluted earnings per share is based on a
weighted average number of Common Stock and Common Stock to be issued shares
outstanding during the periods as well as all dilutive potential Common Stock
calculated under the treasury stock method.
10
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(unaudited)
The table summarizes the determination of shares used in earnings per share
calculations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
Basic 1998 1997 1998 1997
------- ------- ------- -------
Outstanding at end of period:
Common Stock 32,692 29,014 32,692 29,014
Common Stock to be issued 16,326 16,815 16,326 16,815
Treasury Stock (1,022) - (1,022) -
------- ------- ------- -------
47,996 45,829 47,996 45,829
Effect of weighting 634 (178) 444 (592)
------- ------- ------- -------
Shares used in per share calculations 48,630 45,651 48,440 45,237
======= ======= ======= =======
Diluted
Outstanding at end of period:
Common Stock 32,692 29,014 32,692 29,014
Common Stock to be issued 16,326 16,815 16,326 16,815
Treasury Stock (1,022) - (1,022) -
------- ------- ------- -------
47,996 45,829 47,996 45,829
Effect of weighting and assumed conversions
of dilutive stock options 1,930 2,446 2,056 2,203
------- ------- ------- -------
Shares used in per share calculations 49,926 48,275 50,052 48,032
======= ======= ======= =======
</TABLE>
NOTE 7 - RECENT PRONOUNCEMENTS
Effective April 1, 1998, the Company adopted FASB Statement No. 130,
"Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income, comprehensive income is
comprised of "other comprehensive income," which includes all charges and
credits to equity that are not the result of transactions with owners of the
Company's Common Stock. Net income and comprehensive income were the same for
the quarter and the nine months ended September 30, 1998.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's
financial statements as of and for the year ending December 31, 2000. This
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Management expects to implement this Statement for the year
ended December 31, 2000 and does not expect such implementation to have a
material effect on the Company's operations.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which is effective for the Company's
financial statements as of and for the year ending December 31, 1998. This
Statement requires reporting of summarized financial results for the operating
segments as well as establishes standards for related disclosures about products
and services, geographic areas and major customers. Primary disclosure
requirements include total segment revenues, total segment profit or loss and
total segment assets. The Company is evaluating the impact of this Statement on
its current reporting and expects to adopt the new standard for its year ended
December 31, 1998.
11
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
American Oncology Resources, Inc. (the "Company") provides comprehensive
management services to its affiliated oncology practices, including operational
and clinical research services and data management, and furnishes personnel,
facilities, supplies and equipment. These affiliated practices provide a broad
range of medical services to cancer patients, integrating the specialties of
medical oncology, hematology, radiation oncology, diagnostic radiology and stem
cell transplantation. Substantially all of the Company's revenue consists of
management fees and includes all medical practice operating costs for which the
Company is contractually responsible.
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 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 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 cancer 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, (v) negotiating and expanding managed
care relationships and (vi) expanding the clinical research operations of the
affiliated physician groups. 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 cancer 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. Forward-looking statements often include
words like "believe", "plan", "expect", "intend" or "estimate". 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 (including results of
operations impacted by changes in cancer therapies or the manner in which cancer
care is delivered), the ability to construct integrated cancer centers and to
operate them profitably, 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 Annual Report on Form 10-K for the year ended
December 31, 1997 and subsequent filings with the Securities and Exchange
Commission for a more detailed discussion of such risks and uncertainties. Many
of these risks and uncertainties are beyond the Company's ability to control or
predict. 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, the Company has grown rapidly
from managing six affiliated physicians in one state to 350 affiliated
physicians in 18 states as of September 30, 1998. For the nine months ended
September 30, 1998, as well as the first nine months of 1997, no affiliated
physician group contributed more than 10% of the Company's revenue. For the
first nine months of 1998, the payor mix of the affiliated physician groups'
medical practice revenue, expressed as a percentage, was 33% for Medicare and
Medicaid, 48% for managed care and 19% for private insurance and other payors.
For the first nine months of 1997, the payor mix of the affiliated physician
groups' medical practice revenue, expressed as a percentage, was 33% for
Medicare and Medicaid, 47% for managed care, and 20% for private insurance and
other payors.
12
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
When affiliating with an oncology group, the Company records an intangible asset
for the excess of transaction consideration over the value of the nonmedical
tangible assets acquired. In response to recent action taken and viewpoints
expressed by certain financial and regulatory organizations regarding the
amortization periods used by the physician practice management industry as a
whole, the Company has changed the amortization period of its intangible assets
from 40 to 25 years on a prospective basis beginning July 1, 1998. This change
resulted in an increase of amortization expense charged against earnings in the
quarter ended September 30, 1998. Had this policy been adopted January 1, 1997,
amortization expense would have increased by approximately $2.7 million and $3.2
million for the nine months ended September 30, 1998 and 1997, respectively.
Applying the Company's historical tax rate, diluted earnings per share would
have been reduced by $0.03 and $0.04 for the nine months ended September 30,
1998 and 1997, respectively. This adjustment does not reflect in any way a
change in management's estimate of the value and expected duration of its
relationships with its physician groups. This change in estimate has no impact
on cash flow or earnings before interest, taxes, depreciation and amortization.
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating expenses:
Pharmaceuticals and supplies 45.7 45.0 45.2 45.3
Practice compensation and benefits 18.7 19.1 18.9 18.8
Other practice costs 11.1 10.5 11.5 10.7
General and administrative 6.0 6.9 6.0 6.8
Depreciation and amortization 5.8 4.5 4.9 4.3
Net interest expense 2.5 2.6 2.7 2.5
------ ------ ------ ------
Income before income taxes 10.2 11.4 10.8 11.6
Income taxes 3.9 4.2 4.1 4.4
------ ------ ------ ------
Net income 6.3% 7.2% 6.7% 7.2%
====== ====== ====== ======
</TABLE>
1998 COMPARED TO 1997
The Company affiliated with eight and ten oncology groups in the first nine
months of 1998 and 1997, respectively. 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 nine
months of 1997 to the first nine months of 1998 were caused, in part, by
affiliations with these oncology practices. Same market growth, as used in the
following discussion of revenue, consists of revenue growth for all oncology
practices within a metropolitan service area in which the Company has operations
in both periods.
Revenue. Revenue in the third quarter of 1998 increased $36.0 million, or
43.7%, to $118.3 million from $82.3 million in the same period last year.
Revenue for the first nine months of 1998 increased by $98.6 million, or 42.5%,
over the comparable prior year period. Same market growth in 1998 increased
$23.8 million, or 29%, for the third quarter and $65.4 million, or 28%, for the
first nine months over the same periods from the prior year. This growth was
primarily the result of expansion of services, increases in patient volume and
recruitment of or affiliation with additional physicians. The remaining $12.2
million for the third quarter and $33.2 million for the first nine months was
primarily attributable to affiliations with oncology practices in new markets.
13
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Pharmaceuticals and Supplies. Pharmaceuticals and supplies, which include
drugs, medications and other supplies used by the affiliated physician groups,
increased $17.0 million, or 45.8%, to $54.1 million for the third quarter of
1998 from $37.1 million for the third quarter of 1997. Pharmaceuticals and
supplies increased $44.5 million, or 42.3%, for the first nine months of 1998
over the comparable period of the prior year. These increases were principally
attributable to the same factors that caused revenue to increase. As a
percentage of revenue, pharmaceuticals and supplies increased to 45.7% for the
third quarter of 1998 from 45.0% in 1997 and decreased to 45.2% for the first
nine months of 1998 from 45.3% in the first nine months of 1997. Management
expects that third-party payors will continue to negotiate the reimbursement
rate for 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 adversely impact the Company's margins with respect to such
items. The Company has adopted a number of strategies to address this matter,
including maintaining and improving existing preferred pharmaceutical
relationships and initiating new ones; however, the Company can give no
assurance that these strategies will continue to be successful in mitigating
future increases in drug costs.
Practice Compensation and Benefits. Practice compensation and benefits,
which include the salaries, wages and benefits of the affiliated physician
groups' employees (excluding affiliated physicians) and the Company's employees
who are located at the affiliated physician practice sites and business offices,
increased $6.5 million, or 41.1%, to $22.2 million in the third quarter of 1998
from $15.7 million in the third quarter of 1997. Practice compensation and
benefits increased $18.7 million, or 42.7%, for the first nine months of 1998
over the comparable period for the prior year. This increase was principally
attributable to the same factors that caused revenue to increase. As a
percentage of revenue, practice compensation and benefits decreased to 18.7% in
the third quarter and increased to 18.9% for the first nine months of 1998, as
compared to 19.1% and 18.8% in the comparable periods of 1997. The decrease
from third quarter 1997 is primarily the result of economies of scale.
Other Practice Costs. Other practice costs, which consist of rent,
utilities, repairs and maintenance, insurance and other direct practice costs,
increased $4.6 million, or 52.9%, to $13.2 million in the third quarter of 1998
from $8.6 million in the third quarter of 1997. For the nine months ended
September 30, 1998, practice costs increased $13.1 million, or 52.5%, over the
comparable prior year period. Such increase was principally attributable to the
same factors that caused revenue to increase. As a percentage of revenue, other
practice costs increased to 11.1% from 10.5% for the third quarter and to 11.5%
from 10.7% for the first nine months of 1998 and 1997, respectively. These
increases are attributable to increased stem cell and radiation revenue, which
have associated direct costs for third-party services and equipment maintenance,
respectively, that are included in other practice costs.
General and Administrative. General corporate expenses increased $1.4
million, or 24.7%, to $7.1 million in the third quarter of 1998 from $5.7
million in the third quarter of 1997. General and administrative expenses
increased $4.2 million, or 26.6%, for the first nine months of 1998 over the
comparable period of 1997. This increase was primarily attributable to the
addition of personnel and greater support costs associated with the Company's
rapid growth since September 1997. As a percentage of revenue, general and
administrative expenses were 6.0% for the third quarter and 6.0% for the first
nine months of 1998, down from 6.9% and 6.8% in the third quarter and first nine
months of 1997, respectively. Such decreases were primarily the result of
economies of scale.
Depreciation and Amortization. Depreciation and amortization expense
increased $3.1 million, or 83.9%, to $6.8 million in the third quarter of 1998
from $3.7 million in the third quarter of 1997. For the nine-month period ended
September 30, 1998, depreciation and amortization increased $6.1 million, or
60.9%, over the comparable prior year period. This increase was primarily due to
the change in amortization periods mentioned above, as well as the result of
amortization of intangible assets associated with the Company's affiliating with
physician groups, investments in equipment, leasehold improvements and
management information systems. Management expects depreciation and amortization
to increase in future periods due to planned affiliations with physician groups
and investments in management information systems.
14
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Interest. Net interest expense increased $800,000, or 36.7%, to $3.0
million in the third quarter of 1998 from $2.2 million in the second quarter of
1997. Interest expense increased $3.0 million, or 50.6%, for the first nine
months of 1998 over the comparable period in 1997. These increases were the
result of higher levels of debt, principally incurred to finance transactions
with thirteen oncology groups since September 30, 1997. As a percentage of
revenue, net interest expense was 2.5% for the third quarter and 2.7% for the
first nine months of 1998 compared to 2.6% and 2.5% for the third quarter and
first nine months of 1997, respectively. Indebtedness to physicians was $83.1
million and $73.6 million at September 30, 1998 and 1997, respectively.
Income Taxes. Income tax expense increased from the prior year as a result
of the Company's increased profitability. For the first nine months of 1998,
the Company recognized a tax provision of $13.6 million resulting in an
effective tax rate of 38.0% as compared to 37.9% for the first nine months of
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to enter into management agreements with,
and to purchase the nonmedical assets of, medical and radiation oncology
practices. During the first nine months of 1998, the Company paid total
consideration of $27.3 million, including cash and transaction costs of $14.3
million, in connection with affiliations with seven medical oncology groups and
one radiation oncology group and the acquisition of two radiation oncology
centers. During the comparable period of the prior year, the Company paid total
consideration of $50.1 million, including cash and transaction costs of $23.6
million, for affiliations with ten physician groups.
To fund its recent growth and development, the Company has satisfied its
transaction and working capital needs through borrowings under a $150 million
syndicated revolving credit facility ("Credit Facility") with First Union
National Bank, ("First Union"), as agent for the various lenders. In addition,
as part of the Credit Facility, the Company has recently obtained a $75 million
end-loaded leasing facility, related to integrated cancer centers. The Company
has relied primarily on management fees received from its affiliated physician
groups to fund its operations.
During the first nine months of 1998, the Company borrowed $27.0 million, net of
$4.0 million in reductions, under the Credit Facility to fund medical practice
transactions and the development of integrated cancer centers. Borrowings under
the Credit Facility bear interest at a rate equal to a rate based on prime rate
or LIBOR, 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 services agreements and the capital stock of the Company's
subsidiaries are pledged as security under the Credit Facility. The Company is
currently in compliance with the Credit Facility covenants.
Cash provided by operations was $25.6 million in the first nine months of 1998,
a decrease of $7.6 million from the same period of 1997. The decrease was due
to an increase in accounts receivable from revenue growth, the deferral of
certain annual fourth quarter payments into the first quarter of 1998 and, to a
lesser extent, working capital for new product lines. Cash used in investing
activities was $30.3 million in the nine months ended September 30, 1998
compared to $37.8 million for the same period of the previous year. This
decrease is attributable to a higher level of medical practice transactions in
1997, as mentioned above. Such decrease was partially offset by an increase in
capital expenditures over the prior year. Cash provided by financing activities
was $800,000 for the first nine months of 1998 compared to $5.5 million in the
previous year. Such decrease is primarily due to one-time payments in 1998,
totaling $14.0 million for short-term notes payable issued in connection with a
certain medical practice transaction.
At September 30, 1998, the Company had net working capital of $72.4 million
compared to $43.9 million at December 31, 1997. Such increase is due primarily
to an increase in revenue combined with a decrease in short-term notes payable.
The Company also had $70.9 million of current liabilities, including
approximately $12.6 million of long-term indebtedness maturing before September
30, 1999. The Company's debt to total capitalization was 38.3% at September 30,
1998 compared to 38.1% at December 31, 1997.
15
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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 Company expects that the existing cash and investment balances,
cash generated from operations and borrowing capacity under the Credit Facility
will be adequate to satisfy the Company's cash requirements for the next twelve
months. The Company is currently studying various alternatives to expand its
current credit capacity and finance its growth beyond the next twelve months.
Although the Company currently believes it will be able to secure such
financing, it can give no assurance that it will be able to obtain such
financing on terms as favorable as the current terms under the Credit Facility.
YEAR 2000 ISSUE
General
- -------
The "Year 2000 problem" describes computer programs that use two rather than
four digits to define the applicable year, and thus cannot distinguish between
the year 1900 and the year 2000. These programs are present in the Company's
computer systems and are incorporated into equipment. Certain of the Company's
computer hardware and software, building infrastructure components (e.g., alarm
systems and HVAC systems) and medical equipment (e.g., linear accelerators,
which are used to provide radiation therapy) that are date sensitive may contain
programs with the Year 2000 problem. If uncorrected, the problem could result
in computer system and program failure or equipment malfunctions that could
disrupt business operations or affect patient treatment.
Project
- -------
The Company's Year 2000 Project is divided into four major sections:
applications software, equipment, customers and suppliers. The Company's Year
2000 Project includes education, inventory and assessment of applications at
risk, analysis and planning, testing and correction of each of these sections.
The Company's strategy also includes development of contingency plans to address
potential disruption of operations arising from the Year 2000 problem.
Applications Software
- ----------------------
The Company recognizes that investment in information systems and
state-of-the-art medical equipment is integral to its operations. The majority
of the Company's technology expenditures for 1998 and 1999 relates to the
development and implementation of a clinical information system that is
currently being tested in one of the Company's affiliated practices. This system
provides an interactive electronic format for capturing the entire spectrum of
care that a patient receives and creates an electronic medical record. This
system does not replace any existing systems and is believed to be Year 2000
compliant. The majority of the costs related to the implementation are expected
to be capitalized and amortized over the life of the asset.
In 1994, the Company began a project to replace the existing practice management
systems (billing and collection systems) with a common system to improve
efficiency and consistency among its affiliated practices. The Company made a
strategic decision in 1997 to utilize a common vendor for the clinical
information and practice management systems. This practice management system is
being tested in one of the affiliated practices and will begin to be implemented
in the first quarter of 1999. The system is believed to be Year 2000 compliant,
and the majority of the costs related to the implementation are expected to be
capitalized and amortized over the life of the asset. Any remaining practice
management systems not replaced by the new system during the first half of 1999
are expected to be Year 2000 compliant by March 1999. The Company will complete
the testing of these systems in its Year 2000 test facility by June 1999. Costs
to upgrade the practice management systems that are not converted to the common
vendor but are upgraded under the existing vendor would be expensed; however,
such costs are not expected to be material.
In 1996, the Company's management incorporated a business strategy to
accommodate the rapid growth of its operations. One component of this strategy
was the investment in developing an integrated financial system throughout its
network of affiliated physicians. This financial system is Year 2000 compliant
and has been implemented in two locations. The Company intends to complete the
implementation of this financial system throughout its network of affiliated
physicians by mid-1999. The costs incurred to date in developing such financial
system have been capitalized through the initial implementation date.
16
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
The Company relies almost entirely on purchased applications systems. Through
software maintenance agreements with the respective vendors, these systems
continue to be updated and supported after their purchase. Due to this strategy
and a reliance on industry standard query/reporting packages, the Company has
not engaged in any significant in-house system development projects.
Equipment
- ---------
The Company has reviewed the Year 2000 readiness of the linear accelerators and
associated equipment and systems used in the affiliated radiation oncology
practices with its vendors who have certified that, with minor upgrades, these
systems will be Year 2000 compliant. These systems will be upgraded during the
first quarter of 1999. The Company is in the process of evaluating the Year 2000
compliance of other clinical equipment at this time and expects to complete this
process by January 1999. Any such costs to upgrade equipment will be expensed.
Customers
- ---------
The Company bills and collects for medical services from numerous third party
payors in operating its business. These third parties include fiscal
intermediaries that process claims and make payments on behalf of the Medicare
program as well as insurance companies, HMO's and other private payors. As part
of the Company's Year 2000 strategy, a comprehensive survey has been sent to all
significant payors to assess their timeline for Year 2000 compliance and the
impact to the Company of any potential interruptions in services or payments.
The Company is working to accumulate the results by December 31, 1998.
Vendors
- -------
The Company is currently evaluating third party vendors of medical supplies and
pharmaceuticals in order to determine whether their services and products will
be interrupted or malfunction due to the Year 2000 problem. The Company's
pharmaceuticals purchase ordering system is a proprietary system developed by a
third party vendor and is utilized under the Company's purchasing contract with
such vendor. This relationship has been identified and prioritized as the most
critical in the vendor evaluation process. The third party vendor is currently
upgrading its pharmaceuticals purchase ordering system at no cost to the
Company. The upgraded software is expected to be certified as Year 2000
compliant by the vendor and is scheduled for implementation by the second
quarter of 1999.
Risks
- -----
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material customers. The Company believes that, with the implementation of new
business systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
Costs
- -----
The Company believes that the Year 2000 - related remediation costs incurred
through 1998 have not been material to its results of operations. The Company
is not yet able to reasonably estimate the total costs to be incurred for
completion of its Year 2000 strategy. Some replacements and upgrades would take
place in the normal course of business.
The foregoing assessment is based on information currently available to the
Company. The Company can provide no assurance that applications and equipment
that the Company believes to be Year 2000 compliant will not experience
problems. Failure by the Company or third parties on which it relies to resolve
Year 2000 problems could have a material adverse effect on the Company's results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
17
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In connection with each affiliation transaction between the Company and a
physician group, the Company purchases the nonmedical assets of, and enters into
a long-term management agreement with, that physician 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 deliver shares of Common Stock at future
specified dates (in general, on each of the third through fifth anniversaries of
the closing date).
The following table describes all unregistered sales by the Company of the
Company's securities during the first nine months of 1998. Each sale was a
private placement made in connection with a physician transaction, as described
in general in the preceding paragraph. The overwhelming majority of the
affiliated physicians 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>
3/98 3 61,276 $ 1,140,000
3/98 6 115,758 1,504,000
5/98 6 111,923 778,000
6/98 1 16,824 300,000
6/98 2 39,077 549,000
6/98 1 6,320 -
7/98 1 20,058 251,000
8/98 3 41,136 901,000
9/98 1 88,250 1,689,000
<FN>
1) In connection with each affiliation transaction, the Company unconditionally
agrees to deliver shares of Common Stock at specified future dates.
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation, as amended (incorporated by
reference from Form 10-Q for the period ended June 30, 1997)
3.2 By-Laws, as amended (incorporated by reference from Form 10-Q
for the period ended June 30, 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
During the third quarter of 1998, the Company did not file any Current
Reports on Form 8-K.
18
<PAGE>
AMERICAN ONCOLOGY RESOURCES, INC.
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: November 13, 1998 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 Certificate of Incorporation, as amended (incorporated by
reference from Form 10-Q for the period ended June 30, 1997)
3.2 By-Laws, as amended (incorporated by reference from Form
10-Q for the period ended June 30, 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>
AMERICAN ONCOLOGY RESOURCES, INC.
STATEMENT RE-COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET INCOME $ 7,448 $ 5,910 $ 22,211 $ 16,701
============== ============= ============= =============
OUTSTANDING AT END OF PERIOD:
Shares of Common Stock 32,692 29,014 32,692 29,014
Commitments to issue Common Stock at specific future dates 16,326 16,815 16,326 16,815
Treasury Stock (1,022) - (1,022) -
Effect of weighting 634 (178) 444 (592)
-------------- ------------- ------------- -------------
Total shares used in per share calculation - basic 48,630 45,651 48,440 45,237
============== ============= ============= =============
Net income per share - basic $ 0.15 $ 0.13 $ 0.46 $ 0.37
============== ============= ============= =============
ASSUMING FULL DILUTION:
Outstanding per above 48,630 45,651 48,440 45,237
Options to purchase Common Stock 5,611 5,817 5,611 5,817
Effect of weighting and treasury stock method (4,315) (3,193) (3,999) (3,022)
-------------- ------------- ------------- -------------
Total shares used in per share calculation - diluted 49,926 48,275 50,052 48,032
============== ============= ============= =============
Net income per share - diluted $ 0.15 $ 0.12 $ 0.44 $ 0.35
============== ============= ============= =============
</TABLE>
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1080
<SECURITIES> 0
<RECEIVABLES> 122099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 143386
<PP&E> 68598
<DEPRECIATION> (19816)
<TOTAL-ASSETS> 537492
<CURRENT-LIABILITIES> 70942
<BONDS> 0
<COMMON> 327
0
0
<OTHER-SE> 286208
<TOTAL-LIABILITY-AND-EQUITY> 537492
<SALES> 0
<TOTAL-REVENUES> 118263
<CGS> 0
<TOTAL-COSTS> 103299
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2951
<INCOME-PRETAX> 12013
<INCOME-TAX> 4565
<INCOME-CONTINUING> 7448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7448
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
