UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-26190 AMERICAN ONCOLOGY RESOURCES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 84-1213501 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 16825 NORTHCHASE DRIVE, SUITE 1300 HOUSTON, TEXAS 77060 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (713) 873-2674 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- AS OF AUGUST 14, 1996, 28,342,082 SHARES OF THE REGISTRANT'S COMMON STOCK WERE ISSUED AND OUTSTANDING. AMERICAN ONCOLOGY RESOURCES, INC. FORM 10-Q JUNE 30, 1996 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 11 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AMERICAN ONCOLOGY RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS EXCEPT SHARE AMOUNTS) JUNE 30, DECEMBER 31, 1996 1995 ----------- ------------ ASSETS (unaudited) Current assets: Cash and equivalents $ 3,849 $ 14,816 Short-term investments 13,633 44,967 Accounts receivable 44,698 31,152 Due from affiliated medical groups 766 1,271 Prepaids and other current assets 4,799 3,575 Income taxes receivable and deferred tax asset 3,989 11 -------- -------- Total current assets 71,734 95,792 Property and equipment, net 13,571 11,157 Management service agreements, net 205,945 164,522 Other assets 2,185 888 -------- -------- $293,435 $272,359 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term notes payable $ 12,608 Current maturities of long-term indebtedness $ 3,874 3,157 Accounts payable 14,116 10,249 Due to affiliated medical groups 1,065 1,153 Income taxes payable 4,253 Other accrued liabilities 6,058 4,648 -------- -------- Total current liabilities 25,113 36,068 Deferred income taxes 2,004 921 Long-term indebtedness 51,744 44,190 -------- -------- Total liabilities 78,861 81,179 -------- -------- Stockholders' equity: Preferred Stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding....... Common Stock, $.01 par value, 60,000,000 and 40,000,000 shares authorized, 28,342,082 and 27,476,450 shares issued and outstanding........................ 283 275 Additional paid-in capital............. 141,492 133,242 Common Stock to be issued, 15,804,775 and 15,261,972 shares................. 52,647 46,018 Retained earnings...................... 20,152 11,645 -------- -------- Total stockholders' equity........... 214,574 191,180 -------- -------- $293,435 $272,359 ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT. 3 AMERICAN ONCOLOGY RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 --------- --------- --------- --------- Revenue $47,374 $24,644 $88,124 $39,244 ------- ------- ------- ------- Operating expenses: Pharmaceuticals and supplies 18,806 9,164 33,997 14,236 Practice compensation and benefits 9,700 4,437 18,064 7,483 Other practice costs 5,668 2,806 10,463 4,527 General and administrative 3,711 2,261 6,580 4,153 Depreciation and amortization 2,192 1,142 4,094 1,883 ------- ------- ------- ------- 40,077 19,810 73,198 32,282 ------- ------- ------- ------- Income from operations 7,297 4,834 14,926 6,962 Other income (expense): Interest income 202 171 751 244 Interest expense (950) (1,556) (1,956) (2,173) ------- ------- ------- ------- Income before income taxes 6,549 3,449 13,721 5,033 Income taxes 2,489 1,381 5,214 1,983 ------- ------- ------- ------- Net income $ 4,060 $ 2,068 $ 8,507 $ 3,050 ======= ======= ======= ======= Net income per share $0.09 $0.06 $0.18 $0.09 ======= ======= ======= ======= Shares used in per share calculations 47,555 36,226 47,447 34,002 ======= ======= ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT. 4 AMERICAN ONCOLOGY RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED) ADDITIONAL COMMON COMMON STOCK PAID-IN STOCK TO RETAINED SHARES PAR VALUE CAPITAL BE ISSUED EARNINGS TOTAL ------ --------- ---------- --------- -------- -------- Balance at December 31,1995 27,476 $275 $133,242 $46,018 $11,645 $191,180 Medical practice transactions-value of 542,803 shares to be issued 6,629 6,629 Compensation value of non-employee options to purchase Common Stock 633 633 Exercise of options to purchase Common Stock 866 8 1,047 1,055 Tax benefit from exercise of non-qualified stock options 6,570 6,570 Net Income 8,507 8,507 ______ ______ ________ ________ ________ ________ Balance at June 30, 1996 28,342 $283 $141,492 $52,647 $20,152 $214,574 ====== ==== ======== ======= ======= ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT. 5 AMERICAN ONCOLOGY RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX-MONTHS ENDED JUNE 30, 1996 1995 --------- --------- Cash flows from operating activities: Net income $ 8,507 $ 3,050 Noncash adjustments: Depreciation and amortization 4,094 1,883 Deferred income taxes 1,073 414 Imputed interest on medical practice transactions 113 Cash provided, net of effects of medical practice transactions, by changes in: Accounts receivable (9,094) (6,637) Prepaids and other current assets (1,151) (472) Income taxes receivable 644 Other assets (769) (1,362) Accounts payable 2,485 1,720 Due to/from affiliated medical practices 724 1,398 Income taxes payable (2,298) Other accrued liabilities 1,082 2,957 -------- -------- Net cash provided by operating activities 5,410 2,951 -------- -------- Cash flows from investing activities: Net sales of short-term investments 31,334 858 Acquisition of property and equipment (3,255) (1,528) Net payments in medical practice transactions (29,976) (35,809) -------- -------- Net cash used by investing activities (1,897) (36,479) -------- -------- Cash flows from financing activities: Proceeds from bank indebtedness 35,000 Repayment of bank indebtedness (35,000) Repayment of other indebtedness (15,535) (8,506) Debt financing costs (411) Collection of stockholder notes 100 Net proceeds from issuance of common stock 1,055 111,029 -------- -------- Net cash (used) provided by financing activities (14,480) 102,212 -------- -------- Increase (decrease) in cash and equivalents (10,967) 68,684 Cash and equivalents: Beginning of period 14,816 3,349 -------- -------- End of period $ 3,849 $ 72,033 ======== ======== Interest paid $ 1,398 $ 1,200 Taxes paid $ 5,791 $ 5 Noncash transactions: Tax benefit from exercise of non-qualified stock options $ 6,570 Value of Common Stock to be issued in medical practice transactions $ 6,629 $ 21,896 Debt issued in medical practice transactions $ 11,078 $ 10,135 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT 6 AMERICAN ONCOLOGY RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and in accordance with Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contained in this report reflect only normal recurring adjustments considered necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. To conform to the presentation for the three months ended June 30, 1996, certain expenses were reclassified in the condensed consolidated statement of operations for the six months ended June 30, 1996. This reclassification had no effect on net income for any period. The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosures on contingent assets and liabilities. Because of inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. These unaudited condensed consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10K filed with the Securities and Exchange Commission on March 25, 1996. NOTE 2 - MEDICAL SERVICE REVENUE Medical service revenue for services to patients by the medical groups affiliated with the Company is recorded when services are rendered based on established or negotiated charges reduced by contractual adjustments and allowances for doubtful accounts. Differences between estimated contractual adjustments and final settlements are reported in the period when final settlements are determined. Medical service revenue of the affiliated medical groups is reduced by the contractual amounts retained by the medical groups to arrive at the Company's revenue. The following presents the amounts included in the determination of the Company's revenue (in thousands): THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 ------- ------- -------- ------- Medical service revenue................ $62,391 $32,594 $115,902 $51,484 Amounts retained by medical practices.. 15,017 7,950 27,778 12,240 ------- ------- -------- ------- Revenue................................ $47,374 $24,644 $ 88,124 $39,244 ======= ======= ======== ======= Management service agreements at end of period................... 28 12 28 12 7 Item 2. AMERICAN ONCOLOGY RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 3 - MEDICAL PRACTICE TRANSACTIONS During the first six months of 1995 and 1996, the Company, through wholly-owned subsidiaries, acquired certain non-medical assets of, and entered into long-term management service agreements with, five and six medical oncology practices, respectively. The transactions have been accounted for as asset purchases. The following presents the aggregate consideration required to complete those transactions (in thousands): THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 ------- ------- ------- ------- Cash and transaction costs....... $10,625 $ 7,405 $29,976 $35,809 Liabilities assumed.............. 832 818 1,799 5,308 Issuance of short-term and subordinated notes.............. 4,263 1,910 11,078 10,135 Issuance of Common Stock to be issued.................... 2,480 8,072 6,629 21,896 ------- ------- ------- ------- $18,200 $18,205 $49,482 $73,148 ======= ======= ======= ======= In conjunction with the medical practice transactions occurring in the first six months of 1996, the Company is contingently obligated to pay up to an additional $2,570,000 in future years, depending on the achievement of certain financial objectives. Such liability, if any, will be recorded in the period in which the outcome of the contingency becomes known. Any payment made will be allocated to the long-term management services agreements entered into and will not immediately be charged to expense. The Company has committed to issue shares of Common Stock pursuant to completed acquisition transactions as follows: 112,428 in 1996; 2,570,074 in 1997; 2,933,712 in 1998; 4,994,450 in 1999; 4,688,004 in 2000 and 506,107 in 2001 through 2003. Although such shares are not issued or outstanding for legal purposes, such shares are considered as outstanding for per share calculations. The accompanying unaudited condensed consolidated financial statements include the results of operations derived from the management service agreements from their respective effective dates. The following unaudited pro forma information presents the results of operations assuming all 1995 and 1996 transactions were consummated on January 1, 1995. Such pro forma information is based on the historical financial information of the medical practices and does not include operational or other changes which might have been effected pursuant to the Company's management of the nonmedical aspects of such practices. The pro forma information presented below is for illustrative information only and is not necessarily indicative of results which would have been achieved or results which may be achieved in the future (in thousands except share amounts): SIX MONTHS ENDED JUNE 30, 1996 1995 ----------- ------------ Revenue................. $93,825 $77,863 Net income.............. 8,305 4,630 Net income per share.... 0.18 0.10 NOTE 4 - CAPITALIZATION As part of entering into long-term management agreements with medical practices described in Note 3, the Company has nonforfeitable commitments to issue shares of Common Stock at specified future dates for no further consideration. Common Stock to be issued is shown as a separate component in stockholders' equity and the amounts, upon issuance of the shares, will be reclassified to par value and additional paid-in capital. During the first six months of 1996, options to purchase 338,400 shares of Common Stock at $20.68 to $24.18 per share were granted under the Company's various stock option plans, of which 150,000 were granted to 8 Item 2. AMERICAN ONCOLOGY RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) executive officers and directors. During the first six months of 1996, options to purchase 865,632 shares of Common Stock at $1.34 to $6.13 per share were exercised, of which 848,132 were exercised by executive officers and directors. At June 30, 1996, there were options to purchase 5,160,918 shares of Common Stock outstanding under the Company's various stock option plans at exercise prices of $1.34 to $24.18 per share. Effective May 9, 1996, the Company's stockholders approved an increase in the number of shares of Common Stock authorized to be issued to 60,000,000 shares. On May 16, 1996, the Board of Directors of the Company declared a two-for-one stock split of the Company's Common Stock which was paid on June 10, 1996 to stockholders of record on May 31, 1996. All references herein to the number of shares and per share amounts have been adjusted to reflect the effect of the split. On August 13, 1996, the Board of Directors of the Company authorized the repurchase of 3,000,000 shares of Common Stock from time to time in public or private transactions. NOTE 5 - INDEBTEDNESS Indebtedness consists of the following (in thousands): JUNE 30, 1996 DECEMBER 31, 1995 -------------- ------------------ Promissory notes to physicians.. $53,004 $44,443 Other........................... 2,614 2,904 ------- ------- 55,618 47,347 Less current maturities......... (3,874) (3,157) ------- ------- $51,744 $44,190 ======= ======= The Company has a loan agreement and revolving credit/term facility (Credit Facility) with First Union National Bank of North Carolina (First Union) under which the Company can borrow up to $35,000,000 to finance medical group transactions. At June 30, 1996, the Company had no outstanding balance under the Credit Facility. Effective August 9, 1996, the Company obtained a commitment from First Union to increase the Company's Credit Facility from $35 million to $150 million. The Company has a $5,000,000 Master Lease Agreement to provide equipment financing for use in operations. At June 30, 1996, the Company has no outstanding balance under the Agreement. NOTE 6 - EARNINGS PER SHARE The computation of earnings per share is based on the weighted average number of Common Stock and Common Stock equivalent shares outstanding during the periods in accordance with the requirements of the Securities and Exchange Commission (SEC). All options to purchase Common Stock, shares issued and commitments to issue Common Stock at specified future dates, which were issued or granted within one year prior to the initial SEC filing at prices less than the initial public offering price, are assumed to have been outstanding Common Stock equivalents under the treasury stock method for each of the periods presented up to the effective date of the initial public offering. Fully diluted earnings per share has not been presented because it does not differ materially from the primary per share computations. 9 ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The table summarizes the determination of shares used in per share calculations (in thousands): THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 ------ ------- ------ ------- Outstanding at end of period: Common Stock............................ 28,342 27,464 28,342 27,464 Common Stock to be issued............... 15,805 13,888 15,805 13,888 ------ ------ ------ ------ 44,147 41,352 44,147 41,352 Effect of weighting and assumed share equivalents for grants and issuances at less than the weighted average price................................. 3,408 (6,348) 3,330 (8,384) Effect of weighting and assumed share equivalents for grants and issuances at less than the initial public offering price........................ - 1,222 - 1,034 ------ ------- ------- ------ Shares used in per share calculations.. 47,555 36,226 47,447 34,002 ====== ====== ====== ====== 10 ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION American Oncology Resources, Inc. (the "Company") enters into management agreements with, and purchases the nonmedical assets of, oncology medical practices. Under the terms of the management agreements, the Company provides comprehensive management services to its affiliated oncology practices, including operational and administrative services, and furnishes personnel, facilities, supplies and equipment. These practices provide a broad range of medical services to cancer patients, integrating the specialties of medical oncology, hematology and radiation oncology. The Company's revenue consists of management fees and includes the reimbursement of all medical practice operating costs. In recent years, there has been a trend among oncologists to form larger group practices that provide a broad range of services to cancer patients in outpatient settings, rather than in hospitals or other inpatient settings. The Company believes that the coordinated delivery of comprehensive cancer care in an outpatient setting offers high quality care that is more cost-effective than traditional approaches and is increasingly preferred by patients, payors and physicians. The Company believes that many of these larger oncology practices recognize the need for outside managerial, financial and business expertise to more efficiently manage the increasingly complex, burdensome and time-consuming nonmedical aspects of their practices and that such practices will increasingly elect to enter into management relationships with entities such as the Company. The Company's objective is to be the leading national physician practice management company providing comprehensive services to an integrated network of affiliated oncology practices. The Company intends to achieve this objective by (i) focusing exclusively on oncology, (ii) affiliating with leading oncology practices throughout the United States, (iii) expanding each affiliated oncology group's presence in its market, (iv) assisting affiliated oncology practices in offering coordinated, comprehensive cancer care and (v) negotiating and expanding managed care relationships. Based on the Company's success in expanding its business to date, the Company believes that it has effective strategies for achieving its objective of becoming the leading national oncology practice management company. RESULTS OF OPERATIONS Since the Company's incorporation in October 1992, it has grown rapidly from managing six affiliated physicians in one state to 195 affiliated physicians and 28 oncology practices in fifteen states as of June 30, 1996. For the first six months of 1995, four of the Company's affiliated physician groups each contributed more than 10% of the Company's revenue. For the first six months of 1996, only one of the Company's affiliated physician groups contributed more than 10% of the Company's revenue which was 12% of total revenue. For the first six months of 1995, the payor mix of the affiliated physician groups' medical practice revenue, expressed as a percentage, was 27% for Medicare and Medicaid, 50% for managed care and 23% for private insurance and other payors. For the first six months of 1996, the payor mix of the affiliated physician groups' medical practice revenue, expressed as a percentage, was 33% for Medicare and Medicaid, 45% for managed care and 22% for private insurance and other payors. As a result of the Company's rapid growth, the Company's limited period of affiliation with the physician practices and the different payor and patient mixes of the practices, the Company does not believe that the period-to-period comparisons and percentage relationships within periods are fully meaningful at this time. 11 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. THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1996 1995 1996 1995 -------------- ------------- ------------- ------------ Revenue.............................. 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Operating expenses:.................. Pharmaceuticals and supplies........ 39.7 37.2 38.6 36.3 Practice compensation and benefits.. 20.5 18.0 20.5 19.1 Other practice costs................ 12.0 11.4 11.9 11.5 General and administrative.......... 7.8 9.2 7.5 10.6 Depreciation and amortization....... 4.6 4.6 4.6 4.8 Net interest........................ 1.6 5.6 1.3 4.9 ----- ----- ----- ----- Income (loss) before income taxes.... 13.8 14.0 15.6 12.8 Income taxes......................... 5.2 5.6 5.9 5.0 ----- ----- ----- ----- Net income (loss).................... 8.6% 8.4% 9.7% 7.8% ===== ===== ===== ===== COMPARISON OF THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1996 AND THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 1995 The Company entered into management agreements with five oncology practices in the first six months of 1995 and six oncology practices in the first six months of 1996, the results of which are included in the Company's operating results from the dates of affiliation. Changes in results of operations from the second quarter and first six months of 1995 to the second quarter and first six months of 1996 were caused primarily by affiliations with these oncology practices. Revenue. Revenue for the second quarter ended June 30, 1996 increased $22.7 million or 92% over the comparable prior year period. Revenue for the six months ended June 30, 1996 increased $48.9 million or 125% over the comparable prior year period. Of these increases for the second quarter and six months ended June 30, 1996, $18.8 million and $32.4 million, respectively, was attributable to the addition of sixteen affiliated oncology practices after June 30, 1995. The remaining increase in revenue of $3.9 million for the second quarter and $16.5 million for the first six months period was attributable to increases in medical practice revenue of the physician practices affiliated with the Company prior to June 30, 1995. Same practice revenue for physician practices affiliated with the Company prior to June 30, 1995 increased 16% and 19% for the second quarter and six months ended June 30, 1996, respectively, over the like prior year period of operations. This growth in practice revenue resulted from the expansion of services, increases in patient volume and, to a lesser extent, price adjustments for certain physician services. Pharmaceuticals and Supplies. Pharmaceuticals and supplies, which include drugs, medications and other supplies used by the affiliated physician practices, for the second quarter ended June 30, 1996 increased $9.6 million or 105% over the comparable prior year period. Pharmaceuticals and supplies for the six months ended June 30, 1996 increased $19.8 million or 139% over the comparable prior year period. Of these increases for the second quarter and six months ended June 30, 1996, $7.4 million and $12.5 million, respectively, was attributable to the addition of sixteen affiliated oncology practices after June 30, 1995. The remaining increase is principally the result of the expansion of services and increase in patient volume of practices affiliated with the Company prior to June 30, 1995. As a percentage of revenue, pharmaceuticals and supplies increased from 36.3% in the first six months of 1995 to 38.6% in the first six months of 1996. Decreases in the cost of pharmaceuticals and supplies as a percentage of drug revenue due to volume purchasing efficiencies and improved vendor contracts were offset by lower reimbursement rates caused by a shift in payor mix, higher discounts to payors and practice integration issues including delays in implementation of financial policies and procedures as well as discipline in payor contract administration due to the Company's rapid growth. Management expects third-party payors to continue to negotiate medical services, pharmaceuticals (including chemotherapy drugs) and other supplies, with the goal of lowering reimbursement and utilization rates. 12 Practice Compensation and Benefits. Practice compensation and benefits, which include the salaries, wages and benefits of the affiliated physician practices' employees (excluding affiliated oncologists) and the Company's employees located at the affiliated physician practice sites, for the second quarter ended June 30, 1996 increased $5.2 million or 119% over the comparable prior year period. Practice compensation and benefits for the six months ended June 30, 1996 increased $10.6 million or 141% over the comparable prior year period. Of these increases for the second quarter and six months ended June 30, 1996, $4.2 million and $7.1 million, respectively, was attributable to the addition of sixteen affiliated oncology practices after June 30, 1995. As a percentage of revenue, practice compensation and benefits increased from 19.1% in the first six months of 1995 to 20.5% in the first six months of 1996. Decreases in practice compensation and benefit costs relative to patient volumes from economies of scale were offset by lower reimbursement rates caused by a shift in payor mix, higher discounts to payors and practice integration issues due to the Company's rapid growth. Other Practice Costs. Other practice costs, which consist of rent, utilities, repairs and maintenance, insurance and other direct practice costs, for the second quarter ended June 30, 1996 increased $2.9 million or 102% over the comparable prior year period. Other practice costs for the six months ended June 30, 1996 increased $5.9 million or 131% over the comparable prior year period. Of these increases for the second quarter and six months ended June 30, 1996, $2.3 million and $3.8 million, respectively, was attributable to the addition of sixteen affiliated oncology practices after June 30, 1995. As a percentage of revenue, other practice costs increased from 11.5% in the first six months of 1995 to 11.9% in the first six months of 1996. General and Administrative. General corporate expenses for the second quarter ended June 30, 1996 increased $1.4 million or 64% over the comparable prior year period. General corporate expenses for the six months ended June 30, 1996 increased $$2.4 million or 58% over the comparable prior year period. This increase was primarily attributable to the addition of personnel and greater support costs associated with the Company's rapid growth since June 30, 1995. As a percentage of revenue, general and administrative expenses decreased from 10.6% in the first six months of 1995 to 7.5% in the first six months of 1996, primarily as a result of economies of scale. Depreciation and Amortization. Depreciation and amortization expenses for the second quarter ended June 30, 1996 increased $1.0 million or 92% over the comparable prior year period. Depreciation and amortization for the six months ended June 30, 1996 increased $2.2 million or 117% over the comparable prior year period. The second quarter and six months ended June 30, 1996 increase was primarily the result of the Company's entering into management agreements with, and acquiring the nonmedical assets of, sixteen affiliated oncology practices after June 30, 1995. Interest. Net interest expense for the second quarter ended June 30, 1996 decreased $637,000 or 46% over the comparable prior year period. Net interest expense for the six months ended June 30, 1996 increased $724,000 or 37.5% over the comparable prior year period. The decrease was primarily attributable to interest earnings in the first six months of 1996 on higher cash and short-term investment balances than during the first six months of 1995 and the absence of draws on the Credit Facility in 1996. As a percentage of revenue, net interest expense decreased from 4.9% in the first six months of 1995 to 1.3% in the first six months of 1996. At June 30, 1996 the Company had no outstanding balance under the Credit Facility. Income Taxes. For the six months ended June 30, 1995 and 1996, the Company recognized a tax provision of $2.0 million and $5.2 million, respectively, at estimated annual effective rates of 39.4% and 38%, respectively. The Company's composition of revenue by state has significantly changed as the Company has affiliated with sixteen oncology practices in seven new states since June 30, 1995. The effective annual tax rates represent management's best estimate of the tax provision based on the existing state revenue mix. 13 LIQUIDITY AND CAPITAL RESOURCES The Company requires capital primarily to obtain management agreements with, and to purchase the nonmedical assets of, oncology medical practices. From its incorporation through June 30, 1996, the Company has entered into management agreements with 28 oncology practices. To fund this rapid growth and development, the Company has satisfied its transaction and working capital needs through a recapitalization, private debt and equity financings and borrowings under the Credit Facility with First Union National Bank of North Carolina. To fund its operations, the Company relies primarily on management fees received from its affiliated physician practices. Cash derived from operations was $5.4 million for the first six months of 1996, an increase of $2.4 million over the comparable period of 1995. The increase is due primarily to the operations of the sixteen oncology practices affiliated with the Company since June 30, 1995. On January 31, 1996, the Company's $35 million revolving credit facility with First Union National Bank of North Carolina (Credit Facility) was amended to reduce the fees and interest payable under the agreement and to amend certain of the financial and other covenants in the agreement to make them more favorable to the Company. Borrowings under the Credit Facility bear interest at a rate equal to a rate based on prime rate or the London Interbank Offer Rate, based on a defined formula. The Credit Facility contains affirmative and negative covenants, including the maintenance of certain ratios, restrictions on sales, leases or other dispositions of properties, restrictions on other indebtedness and prohibitions on the payment of dividends. The Company's Management Service Agreements and its equity ownership in its subsidiaries are pledged as security under the Credit Facility. There were no borrowings in the first six months of 1996 and as of June 30, 1996, the entire $35 million was available under the Credit Facility. Effective August 9, 1996, the Company obtained a commitment from First Union to increase the Company's Credit Facility to $150,000,000. At June 30, 1996, the Company had working capital of $46.6 million and cash equivalents and short-term investments of $17.5 million. The Company also had $25.1 million of current liabilities, including approximately $3.9 million of long-term indebtedness maturing before June 30, 1997. The Company currently expects that its principal use of funds in the near future will be in connection with anticipated transactions with affiliated physician groups and the purchase of furniture and equipment. The Company expects that the existing cash and investment balances, cash generated from operations, amounts available under the Credit Facility will be adequate to satisfy the Company's cash requirements for the next 12 months. 14 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS (a) May 9, 1996 annual meeting of stockholders. (b) The following individuals, constituting the entire Board of Directors, were elected as directors at the meeting: Russell L. Carson, Lloyd K. Everson, M.D., Kyle M. Fink, M.D, Richard B. Mayor, Magaral S. Murali, M.D., Robert A. Ortenzio, Andrew M. Paul, Leonard M. Riggs, Jr., M.D., Edward E. Rogoff, M.D., R. Dale Ross (c) Election of Directors Votes Withheld For Authority --------- --------- Nominee: -------- Russell L.Carson 9,499,860 29,450 Lloyd K. Everson, M.D. 9,499,860 29,450 Kyle M. Fink, M.D. 9,499,860 29,450 Richard B. Mayor 9,499,860 29,450 Magaral S. Murali, M.D. 9,499,860 29,450 Robert A. Ortenzio 9,499,860 29,450 Andrew M. Paul 9,499,860 29,450 Leonard R. Riggs, Jr., M.D. 9,499,860 29,450 Edward E. Rogoff, M.D. 9,499,860 29,450 R. Dale Ross 9,499,860 29,450 Other Matters - ------------- Description of Votes Votes Matter For Against Abstentions - ----------------------------- --------- --------- ----------- Approval of amendment to the Company's Certificate of Incorporation increasing the amount of Common Stock Authorized to be issued by the Company from 40,000,000 shares to 60,000,000 shares 9,502,715 25,695 900 Approval of amendment to the Company's 1993 Non-Employee Director Stock Option Plan 8,467,165 1,059,095 3,050 Ratification of appointment of Price Waterhouse LLP as the Company's independent accountants 9,526,080 2,830 400 No broker non-votes were recorded. 15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AMERICAN ONCOLOGY RESOURCES, INC. (a) Exhibits Exhibit Number Description ------ ----------- 3.1 Articles of Incorporation, as amended 3.2 By-Laws, as amended 10.1 Amendment to the American Oncology Resources, Inc. 1993 Non- Employee Director Stock Option Plan 11 Statement Re-Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K The Company did not file any Reports on Form 8-K during the quarter ended June 30, 1996. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1996 AMERICAN ONCOLOGY RESOURCES, INC. By: /s/ R. DALE ROSS ------------------------- R. Dale Ross, Chairman of the Board and Chief Executive Officer By: /s/ L. FRED POUNDS ----------------------- L. Fred Pounds, Vice President of Finance and Chief Financial Officer 17 AMERICAN ONCOLOGY RESOURCES, INC. EXHIBIT INDEX Exhibit Number Description of Exhibits 3.1 Articles of Incorporation, as amended (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference) 3.2 By-Laws, as amended (filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference 10.1 Amendment to the American Oncology Resources, Inc. 1993 Non-Employee Director Stock Option Plan 11 Statement Re-Computation of Per Share Earnings 27 Financial Data Schedule 18