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, 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
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 NOVEMBER 13, 1996, 27,488,682 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE ISSUED AND OUTSTANDING.
AMERICAN ONCOLOGY RESOURCES, INC.
FORM 10-Q
SEPTEMBER 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 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)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -----------
ASSETS (UNAUDITED)
Current assets:
Cash and equivalents $ 3,988 $ 14,816
Short-term investments 4,083 44,967
Accounts receivable 50,144 31,152
Due from affiliated medical groups 750 1,271
Prepaids and other current assets 7,963 3,575
Income taxes receivable and deferred tax asset 2,437 11
-------- --------
Total current assets 69,365 95,792
Property and equipment, net 15,860 11,157
Management service agreements, net 228,998 164,522
Other assets 1,909 888
-------- --------
$316,132 $272,359
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable $ 2,796 $ 12,608
Current maturities of long-term indebtedness 4,429 3,157
Accounts payable 15,701 10,249
Due to affiliated medical groups 2,385 1,153
Income taxes payable 4,253
Other accrued liabilities 7,116 4,648
-------- --------
Total current liabilities 32,427 36,068
Deferred income taxes 2,695 921
Long-term indebtedness 56,400 44,190
-------- --------
Total liabilities 91,522 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, 28,360,082
and 27,476,450 shares issued and
outstanding 284 275
Additional paid-in capital 141,276 133,242
Common Stock to be issued, 16,998,666 and
15,261,972 shares 58,595 46,018
Retained earnings 24,455 11,645
-------- --------
Total stockholders' equity 224,610 191,180
-------- --------
$316,132 $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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
---------- --------- ---------- ---------
Revenue $53,701 $25,497 $141,825 $64,741
------- ------- -------- -------
Operating expenses:
Pharmaceuticals and supplies 22,674 8,953 56,671 23,189
Practice compensation and benefits 10,936 5,014 29,000 12,497
Other practice costs 6,114 3,050 16,577 7,577
General and administrative 3,775 2,809 10,355 6,962
Depreciation and amortization 2,420 1,356 6,514 3,239
------- ------- -------- -------
45,919 21,182 119,117 53,464
------- ------- -------- -------
Income from operations 7,782 4,315 22,708 11,277
Other income (expense):
Interest income 222 971 973 1,215
Interest expense (1,064) (513) (3,020) (2,686)
Other income (net) 1,502 1,502
------- ------- -------- -------
Income before income taxes 6,940 6,275 20,661 11,308
Income taxes 2,637 1,621 7,851 3,604
------- ------- -------- -------
Net income $ 4,303 $ 4,654 $ 12,810 $ 7,704
======= ======= ======== =======
Net income per share $0.09 $0.10 $0.27 $0.20
======= ======= ======== =======
Shares used in per share
calculations 47,448 45,630 47,447 37,878
======= ======= ======== =======
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 1,736,694 shares to be
issued 12,577 12,577
Compensation value of non-employee
options to purchase Common Stock 368 368
Exercise of options to purchase
Common Stock 884 9 1,089 1,098
Tax benefit from exercise of
non-qualified stock options 6,577 6,577
Net Income 12,810 12,810
------ ------ ------- ------- -------- --------
Balance at September 30, 1996 28,360 $284 $141,276 $58,595 $24,455 $224,610
====== ==== ========== ========= ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
-5-
AMERICAN ONCOLOGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE-MONTHS
ENDED SEPTEMBER 30,
1996 1995
------------ ---------
Cash flows from operating activities:
Net income $ 12,810 $ 7,704
Noncash adjustments:
Depreciation and amortization 6,514 3,239
Deferred income taxes 1,764 294
Imputed interest on medical practice transactions 113
Cash provided (used), net of effects of medical
practice transactions, by changes in:
Accounts receivable (14,431) (6,879)
Prepaids and other current assets (3,976) (1,377)
Income taxes receivable 2,203
Other assets (501) (1,362)
Accounts payable 4,047 1,225
Due to/from affiliated medical practices 1,914 1,233
Income taxes payable (2,298)
Other accrued liabilities 1,878 5,222
-------- --------
Net cash provided by operating activities 10,037 9,299
-------- --------
Cash flows from investing activities:
Net sales (purchases) of short-term investments 40,884 (44,000)
Acquisition of property and equipment (5,766) (2,349)
Net payments in medical practice transactions (39,574) (43,350)
-------- --------
Net cash used by investing activities (4,456) (89,699)
-------- --------
Cash flows from financing activities:
Proceeds from bank indebtedness 35,000
Repayment of bank indebtedness (35,000)
Repayment of other indebtedness (17,226) (8,672)
Debt financing costs (281) (411)
Collection of stockholder notes 100
Net proceeds from issuance of Common Stock 1,098 111,001
-------- --------
Net cash (used) provided by financing activities (16,409) 102,018
-------- --------
Increase (decrease) in cash and equivalents (10,828) 21,618
Cash and equivalents:
Beginning of period 14,816 3,349
-------- --------
End of period $ 3,988 $ 24,967
======== ========
Interest paid $ 2,497 $ 1,878
Taxes paid 6,210 79
Noncash transactions:
Tax benefit from exercise of non-qualified stock
options 6,577
Value of Common Stock to be issued in medical practice
transactions 12,577 25,016
Debt issued in medical practice transactions 19,885 14,001
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 all
adjustments, which are normal and recurring in nature, considered necessary for
a fair presentation of the financial position and the results of operations for
the interim periods presented. To conform to the presentation for the three
months ended September 30, 1996, certain expenses were reclassified in the
condensed consolidated statement of operations for the nine months ended
September 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ---
Medical service revenue $70,417 $33,146 $186,319 $84,630
Amounts retained by medical
practices 16,716 7,649 44,494 19,889
------- ------- -------- -------
Revenue $53,701 $25,497 $141,825 $64,741
======= ======= ======== =======
Management service agreements
at end of period 31 14 31 14
-7-
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - MEDICAL PRACTICE TRANSACTIONS
During the first nine 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, seven and nine 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
--------- -------- --------- --------
Cash and transaction costs $ 9,598 $ 7,541 $39,574 $43,350
Liabilities assumed 857 1,030 2,656 6,338
Issuance of short-term and
subordinated notes 8,807 3,866 19,885 14,001
Common Stock to be issued 5,949 3,120 12,577 25,016
------- ------- ------- -------
$25,211 $15,557 $74,692 $88,705
======= ======= ======= =======
In conjunction with the medical practice transactions occurring in the first
nine 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;
2,962,436 in 1998; 5,134,762 in 1999; 4,842,680 in 2000 and 1,376,286 in 2001
through 2003. Although such shares are not yet issued or outstanding, such
shares are considered as outstanding for per share calculations.
The accompanying unaudited condensed consolidated financial statements include
the results of operations derived from the management service agreements from
their respective effective dates. The following unaudited pro forma information
presents the results of operations assuming all 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):
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
-------------- ---------------
Revenue $159,964 $131,276
Net income 14,373 10,163
Net income per share 0.29 0.25
NOTE 4 - OTHER INCOME
In September 1995 the Company recorded a benefit of $2,090,600 in connection
with life insurance proceeds resulting from the untimely death of a physician
shareholder in an affiliated medical practice. In addition, other income
reflects a charge of $589,000 consisting of abandoned leasehold improvements and
noncancelable rents as a result of the consolidation and relocation of
administrative facilities.
-8-
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5- 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 nine months of 1996, options to purchase 341,800 shares of
Common Stock at $7.21 to $24.18 per share were granted under the Company's
various stock option plans, of which 150,000 were granted to executive officers
and directors. During the first nine months of 1996, options to purchase
883,632 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. During the
first nine months of 1996, options to purchase 117,200 shares of Common Stock
were canceled. At September 30, 1996, there were options to purchase 5,126,518
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. Through November 13, 1996, 879,400 shares have been
repurchased by the Company. Such shares will be held as treasury stock.
NOTE 6- INDEBTEDNESS
Indebtedness consists of the following (in thousands):
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
Promissory notes to physicians $58,189 $44,443
Other 2,640 2,904
------- -------
60,829 47,347
Less current maturities (4,429) (3,157)
------- -------
$56,400 $44,190
======= =======
The Company has a loan agreement and revolving credit facility (Credit Facility)
with First Union National Bank of North Carolina (First Union) individually and
as Agent for the Lenders, which was amended as of October 30, 1996, to increase
the amount available for borrowing thereunder to $150 million. Proceeds of
loans may be used to finance medical group transactions, for working capital and
for general corporate purposes. At September 30, 1996, the Company had no
outstanding balance under the Credit Facility.
The Company has a $5,000,000 Master Lease Agreement to provide equipment
financing for use in operations. At September 30, 1996, the Company had no
outstanding balance under the Master Lease Agreement.
-9-
AMERICAN ONCOLOGY RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7- 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.
The table summarizes the determination of shares used in per share calculations
(in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
--------- -------- --------- -------
Outstanding at end of period:
Common Stock 28,360 27,476 28,360 27,476
Common Stock to be issued 16,999 14,252 16,999 14,252
------ ------ ------ ------
45,359 41,728 45,359 41,728
Effect of weighting and assumed share
equivalents for grants and issuances at
less than the weighted average price 2,089 3,902 2,088 (3,850)
------ ------ ------ ------
Shares used in per share calculations 47,448 45,630 47,447 37,878
====== ====== ====== ======
NOTE 8 - SUBSEQUENT MEDICAL PRACTICE TRANSACTIONS
In October and November 1996, the Company completed the acquisition of the
nonmedical assets and entered into long-term management agreements with four
additional medical practices. Total consideration consisted of cash of $6.2
million, short-term notes of $1.5 million, promissory notes aggregating $4.2
million, and 576,556 shares of Common Stock to be delivered at specific future
dates as follows: 109,557 in 1999, 109,557 in 2000, 357,442 in 2001 through
2003.
-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 all medical practice operating costs for which the
Company is contractually responsible.
In recent years, there has been a trend among oncologists to form larger group
practices that provide a broad range of services to cancer patients in
outpatient settings, rather than in hospitals or other inpatient settings. The
Company believes that the coordinated delivery of comprehensive cancer care in
an outpatient setting offers high quality care that is more cost-effective than
traditional approaches and is increasingly preferred by patients, payors and
physicians. The Company believes that many of these larger oncology practices
recognize the need for outside managerial, financial and business expertise to
more efficiently manage the increasingly complex, burdensome and time-consuming
nonmedical aspects of their practices and that such practices will increasingly
elect to enter into management relationships with entities such as the Company.
The Company's objective is to be the leading national physician practice
management company providing comprehensive services to an integrated network of
affiliated oncology practices. The Company intends to achieve this objective by
(i) focusing exclusively on oncology, (ii) affiliating with leading oncology
practices throughout the United States, (iii) expanding each affiliated oncology
group's presence in its market, (iv) assisting affiliated oncology practices in
offering coordinated, comprehensive cancer care and (v) negotiating and
expanding managed care relationships. Based on the Company's success in
expanding its business to date, the Company believes that it has effective
strategies for achieving its objective of becoming the leading national oncology
practice management company.
FORWARD LOOKING STATEMENTS
The statements contained in this report, in addition to historical information,
are forward looking statements based on the Company's current expectations, and
actual results may vary materially. The Company's business and financial
results are subject to various risks and uncertainties, including the Company's
continued ability to enter into affiliations with new physician practices and to
successfully integrate such practices, the results of operations of groups
currently affiliated with the Company, competition, reductions in third party
reimbursement for services rendered by physician groups affiliated with the
Company, health care regulation and other risks generally affecting the health
care industry. These forward looking statements are provided as a framework for
the Company's results of operations. The Company does not intend to provide
updated information other than as otherwise required by applicable law.
RESULTS OF OPERATIONS
Since the Company's incorporation in October 1992, it has grown rapidly from
managing six affiliated physicians in one state to 215 affiliated physicians and
31 oncology practices in fifteen states as of September 30, 1996. For the first
nine months of 1995, four of the Company's affiliated physician groups each
contributed more than 10% of the Company's revenue. For the first nine months of
1996, only one of the Company's affiliated physician groups contributed more
than 10% of the Company's revenue which was 11% of total revenue. For the first
nine months of 1995, the payor mix of the affiliated physician groups' medical
practice revenue, expressed as a percentage, was 27% for Medicare and Medicaid,
51% for managed care and 22% for private insurance and other payors. For the
first nine months of 1996, the payor mix of the affiliated physician groups'
medical practice revenue, expressed as a percentage, was 34% for Medicare and
Medicaid, 45% for managed care and 21% for private insurance and other payors.
As a result of the Company's rapid growth, the
-11-
ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1996 1995 1996 1995
----- ----- ----- -----
Revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Pharmaceuticals and supplies 42.2 35.1 40.0 35.8
Practice compensation and
benefits 20.4 19.7 20.4 19.3
Other practice costs 11.4 12.0 11.7 11.7
General and administrative 7.0 11.0 7.3 10.7
Depreciation and amortization 4.5 5.3 4.6 5.0
Net interest income (expense) (1.6) 1.8 (1.4) (2.3)
Other income 5.9 2.3
----- ----- ----- -----
Income (loss) before income taxes 12.9 24.6 14.6 17.5
Income taxes 4.9 6.4 5.5 5.6
----- ----- ----- -----
Net income (loss) 8.0% 18.2% 9.0% 11.9%
===== ===== ===== =====
COMPARISON OF THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1995
The Company entered into management agreements with seven oncology practices
in the first nine months of 1995 and nine oncology practices in the first nine
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
third quarter and first nine months of 1995 to the third quarter and first nine
months of 1996 were caused primarily by affiliations with these oncology
practices.
Revenue. Revenue for the third quarter ended September 30, 1996 increased
$28.2 million or 111% over the comparable prior year period. Revenue for the
nine months ended September 30, 1996 increased $77.1 million or 119% over the
comparable prior year period. Of these increases for the third quarter and
nine months ended September 30, 1996, $20.1 million and $46.1 million,
respectively, was attributable to the addition of seventeen affiliated oncology
practices after September 30, 1995. The remaining increase in revenue of $8.1
million for the third quarter and $31.0 million for the first nine months period
was attributable to increases in medical practice revenue of the physician
practices affiliated with the Company prior to September 30, 1995. Same
practice revenue for physician practices affiliated with the Company prior to
September 30, 1995 increased 25% and 21% for the third quarter and nine months
ended September 30, 1996, respectively, over the like prior year periods of
operations. This growth in practice revenue resulted from the recruitment of
new physicians, 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 third quarter ended September 30, 1996 increased $13.7
million or 153% over the comparable prior year period. Pharmaceuticals and
supplies for the nine months ended September 30, 1996 increased $33.5 million or
144% over the comparable prior year period. Of these increases for the third
quarter and nine months ended September 30, 1996, $8.6 million and $18.6
million, respectively, was attributable to the addition of seventeen affiliated
oncology practices after September 30, 1995. The remaining increase is
principally the result of the expansion of services and increase in patient
volume of
-12-
ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
practices affiliated with the Company prior to September 30, 1995. As a
percentage of revenue, pharmaceuticals and supplies increased from 35.8% in the
first nine months of 1995 to 40.0% in the first nine months of 1996. This
increase was primarily due to a shift in the revenue mix to a higher percentage
of drug revenue which has direct associated pharmaceutical costs. In addition,
the increase was due to lower reimbursement rates caused by a shift in payor
mix, higher discounts to payors and practice integration factors 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 that third-party payors will continue to negotiate medical
services, pharmaceuticals (including chemotherapy drugs) and other supplies,
with the goal of lowering reimbursement and utilization rates, and that such
lower reimbursement and utilization rates as well as shifts in revenue mix may
continue to reduce the Company's margins with respect to such items.
Practice Compensation and Benefits. Practice compensation and benefits, which
include the salaries, wages and benefits of the employees of the affiliated
physician practices (excluding affiliated oncologists) and the employees of the
Company who are located at the affiliated physician practice sites, for the
third quarter ended September 30, 1996 increased $5.9 million or 118% over the
comparable prior year period. Practice compensation and benefits for the nine
months ended September 30, 1996 increased $16.5 million or 132% over the
comparable prior year period. Of these increases for the third quarter and nine
months ended September 30, 1996, $4.1 million and $9.6 million, respectively,
was attributable to the addition of seventeen affiliated oncology practices
after September 30, 1995. As a percentage of revenue, practice compensation and
benefits increased from 19.3% in the first nine months of 1995 to 20.4% in the
first nine 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 factors resulting from 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
third quarter ended September 30, 1996 increased $3.1 million or 100% over the
comparable prior year period. Other practice costs for the nine months ended
September 30, 1996 increased $9.0 million or 119% over the comparable prior year
period. Of these increases for the third quarter and nine months ended
September 30, 1996, $2.1 million and $5.1 million, respectively, was
attributable to the addition of seventeen affiliated oncology practices after
September 30, 1995. As a percentage of revenue, other practice costs remained
unchanged at 11.7% in the first nine months of 1995 as compared to the same
period in 1996.
General and Administrative. General corporate expenses for the third quarter
ended September 30, 1996 increased $1.0 million or 34% over the comparable prior
year period. General corporate expenses for the nine months ended September 30,
1996 increased $3.4 million or 49% over the comparable prior year period. These
increases were primarily attributable to the addition of personnel and greater
support costs associated with the Company's rapid growth since September 30,
1995. As a percentage of revenue, general and administrative expenses decreased
from 10.7% in the first nine months of 1995 to 7.3% in the first nine months of
1996, primarily as a result of economies of scale.
Depreciation and Amortization. Depreciation and amortization expenses for the
third quarter ended September 30, 1996 increased $1.1 million or 78% over the
comparable prior year period. Depreciation and amortization for the nine months
ended September 30, 1996 increased $3.3 million or 101% over the comparable
prior year period. The third quarter and nine months ended September 30, 1996
increases were primarily the result of amortization of intangible assets
associated with the Company's entering into management agreements with, and
acquiring the nonmedical assets of, seventeen affiliated oncology practices
after September 30, 1995.
Interest. Net interest changed from income of $458,000 for the third quarter
ended September 30, 1995 to expense of $842,000 in the same period of 1996. The
decrease resulted from the Company's expenditure after September 30, 1995 of
remaining proceeds of its June 1995 initial public offering of common stock and
the corresponding decrease in interest revenue therefrom. Net interest expense
for the nine months ended
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ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1996 increased $576,000 or 39% over the comparable prior year
period. The increase was primarily attributable to interest expense on debt
issued for seventeen additional medical practice transactions since September
30, 1995. In the future, management expects that net interest expense as a
percentage of revenue will increase slightly due to anticipated debt related to
medical practice transactions and the development of integrated cancer centers.
Income Taxes. For the nine months ended September 30, 1995 and 1996, the
Company recognized a tax provision of $3.6 million and $7.9 million,
respectively, at estimated annual effective rates of 31.9% and 38.0%,
respectively. The Company's composition of revenue by state has significantly
changed as the Company has affiliated with seventeen oncology practices in four
new states since September 30, 1995. The effective annual tax rates represent
management's best estimate of the tax provision based on the existing state
revenue mix.
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ITEM 2. AMERICAN ONCOLOGY RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 September 30, 1996, the Company has entered into
management agreements with 31 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, borrowings under
the Credit Facility with First Union National Bank of North Carolina, and an
initial public offering in June 1995. To fund its operations, the Company
relies primarily on management fees received from its affiliated physician
practices. Cash derived from operations was $9.7 million for the first nine
months of 1996, an increase of $400,000 over the comparable period of 1995. The
increase is due primarily to the operations of the seventeen oncology practices
affiliated with the Company since September 30, 1995.
On January 31, 1996, the Company entered into the First Amended and Restated
Loan Agreement with First Union National Bank of North Carolina (First Union),
as agent for the Lenders, which provided for a revolving credit facility of up
to $35,000,000 (the Credit Facility). The Credit Facility was subsequently
amended on September 24, 1996 to alter certain of the fees and interest payable
under the Credit Facility in connection with a further amendment thereto which
became effective October 30, 1996. Borrowings under the Credit Facility bear
interest at a rate equal to a rate based on prime rate or the London Interbank
Offer Rate, based on a defined formula. The Credit Facility contains
affirmative and negative covenants, including the maintenance of certain
financial ratios, restrictions on sales, leases or other dispositions of
property, restrictions on other indebtedness and prohibitions on the payment of
dividends. The Company's Management Service Agreements, its equity ownership in
its subsidiaries and all other securities owned by the Company (other than
treasury shares of the Company) are pledged as security under the Credit
Facility. There were no borrowings under the Credit Facility in the first nine
months of 1996, and, as of September 30, 1996, the entire $35 million was
available under the Credit Facility. Effective October 30, 1996, the Credit
Facility was amended to increase the amount available under the Credit Facility
to $150 million. At that time, First Union also syndicated the Credit Facility
to several additional lenders.
At September 30, 1996, the Company had working capital of $36.9 million and
cash equivalents and short-term investments of $8.1 million. The Company also
had $32.4 million of current liabilities, including approximately $2.8 million
of short-term notes payable and $4.4 million of long-term indebtedness maturing
before September 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, the repurchase of shares of Common Stock, the
purchase of medical equipment and the acquisition of real estate for the
development of integrated cancer centers. The Company expects that the existing
cash and investment balances, cash generated from operations, amounts available
under the Credit Facility will be adequate to satisfy the Company's cash
requirements for the next 12 months.
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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 First Amendment to Amended and Restated Loan Agreement by and among
American Oncology Resources, Inc., the lenders (as defined therein) and First
Union National Bank of North Carolina, individually and as Agent for the
Lenders, dated as of September 24, 1996
10.2 Second Amended and Restated Loan Agreement by and among First
Union National Bank of North Carolina, as Agent, various Lenders and American
Oncology Resources, Inc., as Borrower, dated as of October 30, 1996
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
September 30, 1996.
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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, 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
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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 First Amendment to Amended and Restated Loan Agreement by and
among American Oncology Resources, Inc., the lenders (as defined
therein) and First Union National Bank of North Carolina,
individually and as Agent for the Lenders, dated as of September
24, 1996
10.2 Second Amended and Restated Loan Agreement by and among First
Union National Bank of North Carolina, as Agent, various Lenders
and American Oncology Resources, Inc., as Borrower, dated as of
October 30, 1996
11 Statement Re - Computation of Per Share Earnings
27 Financial Data Schedule
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