AMERICAN ONCOLOGY RESOURCES INC /DE/ - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required)

For the fiscal year ended December 31, 1996

OR

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)

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)

Registrant's telephone number, including area code: (713) 873-2674

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock ($.01 par value)
(Title of class)

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 14, 1997 was $186,289,460.

There were 26,643,582 shares of the Registrant's Common Stock outstanding
on March 14, 1997.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement issued in connection with the
Registrant's 1997 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.

PART I

ITEM 1. BUSINESS

American Oncology Resources, Inc. (together with its subsidiaries, "AOR" or
the "Company") is a national physician practice management company focusing
exclusively on oncology. The Company provides comprehensive management services
under long-term agreements to 245 physicians practicing in 35 practices in 15
states. Affiliated physicians provide a broad range of medical services to
cancer patients, integrating the specialties of medical and gynecological
oncology, hematology, radiation oncology and stem cell transplantation. 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's affiliation strategy is designed to enhance the
affiliated physician groups' competitiveness while preserving their autonomy
regarding medical practice decisions.

The Company was incorporated in October 1992 under the laws of the state of
Delaware. In October 1992, Hematology Oncology Associates ("HOA") formed the
Company in a reorganization and recapitalization of the HOA physicians' medical
practices. The Company's principal executive offices are located at 16825
Northchase Drive, Suite 1300, Houston, Texas, and its telephone number is (281)
873-2674.

Cancer and Its Treatment

Cancer is a group of more than 100 complex diseases characterized by the
uncontrolled growth and spread of abnormal cells. Cancer treatment is provided
primarily by physicians utilizing chemotherapy, radiation therapy, surgery and
immunotherapy. Due to cancer's complexity and the variety of cancer treatment
therapies, physicians who treat cancer typically have had extensive, highly-
specialized training. Chemotherapy and immunotherapy are typically provided
under the care of a medical oncologist or hematologist, typically an internist
with additional subspecialty training in oncology. Radiation therapy is
typically provided under the care of a radiation oncologist, a physician with
additional subspecialty training in radiation oncology. The Company estimates
that at least 6,000 community-based physicians in the United States specialize
in oncology.

Because the treatment of cancer requires a multidisciplinary approach,
numerous health care professionals with different medical and surgical
specialties are involved in treating cancer patients. In addition, cancer
patients typically receive treatment in a variety of settings, including
hospitals, outpatient facilities and physicians' offices. The Company believes
that this system can result in uncoordinated treatment and is inherently
inefficient. In the Company's view, oncology group practices that provide
comprehensive, coordinated oncology services in outpatient facilities offer
high-quality, low-cost and convenient medical care to cancer patients.

Traditionally, most oncologists in the United States have practiced
individually or in small groups of two to five physicians, offering their
services to cancer patients in hospitals and, to a lesser extent, in outpatient
facilities. In recent years, however, there has been a trend among oncologists
to form larger group practices that provide a broader range of services to
cancer patients in outpatient settings, rather than in hospitals or other
inpatient settings. The Company believes this trend is attributable to several
factors, including (i) initiatives by governmental and private payors to contain
health care expenditures, (ii) the competitiveness and rising costs of medical
practice generally, (iii) advances in cancer therapies that permit treatment in
outpatient settings and (iv) patients' desire to receive treatment outside the
hospital. The Company believes that many of these large 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 practice. Such management relationships free
oncologists to practice medicine without sacrificing autonomy and control over
the medical aspects of their practices. The Company believes that these
physicians will seek long-term relationships with a management entity that
endeavors to (i) promote and facilitate the consolidation of physicians and
resources

1

into regional group practices providing comprehensive, outpatient oncology
services, (ii) assist in strategic and financial planning, (iii) develop and
expand managed care relationships, (iv) provide strategic information systems
and administrative policies and procedures, (v) assist in managing the
practices' expenditures, (vi) provide a source of capital to support practice
expansion and (vii) assist in physician recruitment and other significant
strategic decisions.

Growth Strategy

The Company's objective is to be the leading national physician practice
management company providing comprehensive services to an integrated network of
affiliated oncology physician groups. The Company intends to achieve this
objective by (i) focusing exclusively on oncology, (ii) affiliating with leading
oncology groups throughout the United States, (iii) expanding each affiliated
physician group's presence in its market by affiliating with additional, smaller
physician groups in that market and recruiting new physicians, (iv) assisting
affiliated physician groups in offering coordinated, comprehensive cancer care
by adding new services (for example, gynecological oncology and stem cell
transplantation) and (v) negotiating and expanding managed care relationships on
behalf of the affiliated physician groups and improving reimbursement from
payors. 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.

Management Services

The Company provides management services that extend to all business
aspects of an oncology group's operations. After establishing an oncology group
affiliation, the Company begins implementing the following policies, procedures
and systems necessary to provide the management services contemplated by its
management agreement with the group:

.STRATEGIC SERVICES. At each affiliated practice, a policy board composed
of equal representation from the Company and affiliated physicians is created to
develop and adopt a strategic plan designed to improve the performance of the
practice by (i) outlining physician recruiting goals, (ii) identifying services
and equipment to be added, desirable payor relationships and other oncology
groups that are possible affiliation candidates and (iii) facilitating
communication with other affiliated physician groups in the AOR network.

.FINANCIAL SERVICES. The Company provides comprehensive financial analysis
to each affiliated physician group in connection with managed care contracting
and billing, collection, reimbursement, tax and accounting services and also
implements its cash management system. In addition, the Company and the
affiliated physician group jointly develop a comprehensive budget that involves
the adoption of financial controls and cost containment measures.

.MANAGEMENT INFORMATION SYSTEMS. The Company implements its management
information system to facilitate and organize the exchange of clinical and
operational information among the Company's affiliated physicians. The Company
believes that an integrated information system will enable the Company and its
affiliated physicians to identify effective protocols and manage the costs of
cancer care in future years. The Company intends to significantly expand its
clinical information system in early 1998, with the goal of better understanding
and analyzing the means of providing high-quality, cost effective cancer care.

.ADMINISTRATIVE SERVICES. The Company manages the facilities used by the
affiliated physicians and, in consultation with the physicians, determines the
number and location of practice sites. The Company is implementing its
integrated management information system to support practice management, billing
functions and patient record keeping. The Company also provides comprehensive
purchasing services for drugs, supplies, equipment, insurance

2

and other costs. In addition, the Company provides the regulatory expertise to
assist the group in complying with increasingly complex laws and regulations
applicable to oncology practices.

.PERSONNEL MANAGEMENT. The Company employs and manages all nonmedical
personnel of the physician group, including the executive director, controller
and other administrative personnel. The Company evaluates these employees, makes
staffing decisions, provides and manages employee benefits and implements
personnel policies and procedures. The Company also provides similar
administrative services to the physician group's employees.

.CLINICAL RESEARCH SERVICES. Through its clinical research network, the
Company facilitates clinical research conducted by its affiliated physician
groups and markets the groups' ability to perform and manage clinical trials to
pharmaceutical and biotechnology companies. Clinical research conducted by the
oncology groups focuses on (i) improving cancer survival rates, (ii) enhancing
the cancer patient's quality of life, (iii) reducing the costs of cancer care
and (iv) developing new approaches to cancer diagnosis, treatment and post-
treatment monitoring. The Company believes that a well-managed clinical research
program enhances its affiliated oncologists' reputations and the Company's
ability to recruit new physicians.

.CLINICAL INITIATIVES AND STANDARDS. The Company organizes clinical
conferences for its affiliated physicians to discuss and identify clinical care,
research and educational strategies for the Company's network of affiliated
physicians. The Company also assists its affiliated physicians in developing
clinical practice guidelines for the different types of cancer and in operating
in accordance with standards of care required for accreditation by the Joint
Committee on Accreditation of Health Care Organizations and other managed care
accreditation bodies. The Company is also implementing a clinical information
system with the goal of facilitating the exchange of information among
affiliated physicians, permitting them to share clinical data and treatment
patterns and allowing ready access to current patient care as well as studies
regarding cancer therapies and research developments.

Operations of Oncology Groups

Since the Company's incorporation in October 1992, the Company has grown
rapidly from managing a single practice in one state to managing 35 practices in
15 states as of December 31, 1996.

December 31,
----------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Affiliated physicians.................... 227 148 42 9 6
States................................... 15 14 6 1 1

The Company estimates that most of the affiliated physician groups are
among the largest group practices providing medical oncology services in their
markets. The physician members of these groups have staff privileges at most
private hospitals in their markets and have long-standing relationships with
governmental and private payors.

The oncologists are employed by the affiliated physician group, not the
Company, and maintain control over all aspects of the provision of medical care
to their patients. The Company does not provide medical care to patients or
employ any of the non-physician personnel of its affiliated physician groups who
provide medical care. However, under the terms of the management agreements with
the affiliated physician groups, the Company is responsible for the compensation
and benefits of the groups' non-physician medical personnel, and the financial
statements of the Company reflect the costs of such compensation and benefits.

The affiliated physician groups offer a wide array of services to cancer
patients in outpatient settings, including professional medical services,
chemotherapy infusion, radiation oncology services, stem cell transplantation,
clinical laboratory and pharmacy services and patient education. The groups
employ a range of

3

personnel to provide these services, including medical assistants, nurses
(including oncology certified nurses), radiation therapy technicians, physicists
and laboratory and pharmacy technicians. The practice sites are generally
located in close proximity to other health care providers and typically are
equipped to provide the outpatient services necessary to treat and care for
cancer patients and their families.

Affiliation Structure

The Company's structure enables its affiliated physicians to retain their
autonomy through ownership and participation in their local professional
corporation or other entity, thereby maintaining local authority and control
over medical practice decisions. The Company believes that this local
governance structure is critical to its success.

Identifying appropriate physician groups and proposing, negotiating and
implementing economically attractive affiliations with them is a lengthy,
complex and costly process, typically requiring three to six months. In
connection with affiliating with an oncology group, the Company enters into a
management agreement with the group and purchases the group's nonmedical assets.
In consideration of these arrangements, the Company typically pays cash and
promissory notes and agrees to deliver shares of its Common Stock at specified
future dates. In addition, each affiliated physician and the physician group
enter into an employment agreement containing customary non-competition and
liquidating damages terms. The Company believes that the delivery of shares on
a delayed basis, the Company's affiliation structure and the compensation
formulas defined in the management agreements all serve to align the long-term
interests of the affiliated physicians with those of the Company.

All of the management agreements with the affiliated physician groups have
contractual terms of 40 years. These agreements cannot be terminated by the
physician groups without cause. As consideration for the Company's management
services, each management agreement provides for payment to the Company of a
management fee, which typically includes all practice costs (other than amounts
retained by physicians), a fixed fee, an amount equal to a percentage of the
affiliated physician group's net revenue (in most states) and, if certain
financial criteria are satisfied, a performance fee. In the event the physician
group breaches the agreement, the physician group must purchase the related
assets owned by the Company, including the unamortized portion of the management
agreement asset, at book value.

Competition

The business of providing health care services generally, and of managing
and providing oncology services specifically, is intensely competitive. The
Company is aware of several competitors specializing in the management of
oncology practices; in addition, several health care companies with established
operating histories and significantly greater resources than the Company are
also providing at least some management services to oncologists. Furthermore,
the Company believes that others in the health care industry may adopt
strategies similar to those of the Company. The Company's revenues depend on the
continued success of its affiliated physician groups. These physician groups
face competition from several sources, including sole practitioners, single and
multi-specialty groups, hospitals and managed care organizations.

Regulation

General. The health care industry is highly regulated and there can be no
assurance that the regulatory environment in which the Company operates will not
change significantly and adversely in the future. In general, regulation of
health care providers and companies is increasing.

There are currently several federal and state initiatives designed to amend
regulations relating to the provision of health care services, the access to
health care, the costs of health care and the manner in which health

4

care providers are reimbursed for their services. However, it is not possible to
predict whether any such initiatives will be enacted as legislation or, if
enacted, what their form, effective dates or impact on the Company will be.

Every state imposes licensing requirements on individual physicians and on
facilities and services operated or provided by physicians. Many states require
regulatory approval, including certificates of need, before establishing certain
types of health care facilities, offering certain services or making
expenditures in excess of statutory thresholds for health care equipment,
facilities or programs. The execution of a management agreement with a
physician group currently does not require any health care regulatory approval
on the part of the Company or the physician group. However, in connection with
the expansion of existing operations and the entry into new markets, the Company
and its affiliated physician groups may become subject to additional regulation.

Fee-Splitting; Corporate Practice of Medicine. The laws of many states
prohibit physicians from splitting professional fees with non-physicians and
prohibit non-physician entities, such as the Company, from practicing medicine
and from employing physicians to practice medicine. The laws in most states
regarding the corporate practice of medicine have been subjected to relatively
limited judicial and regulatory interpretation. The Company believes its current
and planned activities do not constitute fee-splitting or the practice of
medicine as contemplated by these statutes and interpretations. However, there
can be no assurance that future interpretations of such laws will not require
structural and organizational modifications of the Company's existing
relationships with the affiliated physician groups. In addition, statutes in
some states in which the Company does not currently operate could require the
Company to modify its affiliation structure.

Medicare Fraud and Abuse Provisions. Federal law prohibits the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare or state health program patients or patient care
opportunities, or in return for the purchase, lease or order of any item or
service that is covered by Medicare or a state health program. Pursuant to this
law, the federal government has pursued a policy of increased scrutiny of joint
ventures and other transactions among health care providers in an effort to
reduce potential fraud and abuse relating to Medicare costs. The applicability
of these provisions to many business practices in the health care industry,
including the Company's management agreements with physician groups, has not
been subject to judicial and regulatory interpretation.

The Medicare and Medicaid anti-kickback amendments (the "Anti-Kickback
Amendments") provide criminal penalties for individuals or entities
participating in the Medicare or Medicaid programs who knowingly and willfully
offer, pay, solicit or receive remuneration in order to induce referrals for
items or services reimbursed under such programs. In addition to federal
criminal penalties, the Social Security Act also establishes the intermediate
sanction of excluding violators from participation in the Medicare or Medicaid
programs.

A violation of the Anti-Kickback Amendments requires several elements: (i)
the offer, payment, solicitation or receipt of remuneration; (ii) the intent to
induce referrals; (iii) the ability of the parties to make or influence
referrals of patients; (iv) the provision of services that are reimbursable
under Medicare or state health programs; and (v) patient coverage under the
Medicare program or a state health program. Management believes that the Company
is receiving compensation under the management agreements for management
services. The Company also believes that it is not in a position to make or
influence referrals of patients or services reimbursed under Medicare or state
health programs to its affiliated physician groups. Consequently, the Company
does not believe that the management fees payable to it should be viewed as
remuneration for referring or influencing referrals of patients or services
covered by such programs as prohibited by the Anti-Kickback Amendments. The
Company is not a provider or supplier of services or items reimbursed by
Medicare or state health programs.

In 1991, the Inspector General of the United States Department of Health
and Human Services published "Safe Harbor Regulations," defining safe harbors
for certain arrangements that do not violate the Anti-Kickback Amendments. One
of the safe harbors specifically provided is a safe harbor for personal services
and management

5

contracts. Under this safe harbor, "remuneration" prohibited by the Anti-
Kickback Amendments will not include any payment made by a principal to an agent
as compensation for services of the agent as long as certain standards are met.
To the Company's knowledge, there have been no agency interpretations or case
law decisions of management agreements similar to the Company's that would
indicate that such agreements do not fall within a safe harbor. Further, the
Company believes that since it is not a provider of medical services, and is not
in a position to refer patients to any particular medical practice, the
remuneration it receives for providing services does not violate the Anti-
Kickback Amendments.

Prohibitions on Certain Referrals. The Omnibus Budget Reconciliation Act of
1993 ("OBRA") includes a provision that significantly expands the scope of the
Ethics in Patient Referral Act, also known as the "Stark Bill." The Stark Bill
originally prohibited a physician from referring a Medicare or Medicaid patient
to any entity for the provision of clinical laboratory services if the physician
or a family member of the physician had an ownership interest or compensation
relationship with the entity. The revisions to the Stark Bill included in OBRA
prohibit a referral to an entity in which the physician or a family member has
an ownership interest or compensation relationship if the referral is for any of
a list of "designated health services." The list of designated health services
includes radiation therapy; however, the legislation specifically provides that
a request by a radiation oncologist for radiation therapy does not constitute a
referral if such services are furnished by (or under the supervision of) the
radiation oncologist. The list of designated health services does not include
chemotherapy services. The Company does not believe that the Stark Bill will
adversely affect the operations of the Company.

Prohibitions on Certain Compensation Arrangements. The OBRA legislation
also prohibits physician group practices from developing compensation or bonus
arrangements that are directly related to the volume or value of referrals by a
physician in the group for designated health services. While there are no
regulatory guidelines or case law interpretations of this provision of OBRA, the
Company believes that the compensation arrangements of the affiliated physician
groups administered by the Company are in compliance with the OBRA requirements.

Antitrust. The Company and its affiliated physician groups are subject to a
range of antitrust laws that prohibit anti-competitive conduct, including price
fixing, concerted refusals to deal and division of market. The Company believes
it is in compliance with such federal and state laws, but there can be no
assurance that a review of the Company's business would not result in a
determination that could adversely affect the operations of the Company and its
affiliated physician groups.

Regulatory Compliance. The Company recognizes that health care regulations
will continue to change and, as a result, regularly monitors developments in
health care law. The Company expects to modify its agreements and operations
from time to time as the business and regulatory environment changes. While the
Company believes it will be able to structure all its agreements and operations
in accordance with applicable law, there can be no assurance that its
arrangements will not be successfully challenged.

Employees

As of December 31, 1996, the Company employed 937 people. In addition, as
of December 31, 1996, the affiliated physician groups employed 1,034 people
(excluding the affiliated physicians). Under the terms of the management
agreements with the affiliated physician groups, the Company is responsible for
the practice compensation and benefits of the groups' non-physician medical
personnel. No employee of the Company or of any affiliated physician group is a
member of a labor union or subject to a collective bargaining agreement. The
Company considers its relations with its employees to be good.

6

Service Mark

The Company has registered the service marks "American Oncology Resources"
and "AOR" with the United States Patent and Trademark Office.

ITEM 2. PROPERTIES

The Company leases 45,750 square feet of space at 16825 Northchase Drive,
Suite 1300, in Houston, Texas, where the Company's headquarters are located. In
addition, the Company has acquired land with a cost of approximately $1.3
million for use in development of integrated cancer centers in South Carolina
and Arizona.

The Company also leases, subleases or occupies the facilities of a majority
of the affiliated physician groups. The Company anticipates that, as its
affiliated group practices grow, expanded facilities will be required.

ITEM 3. LEGAL PROCEEDINGS

The provision of medical services by the affiliated physicians with which
the Company contracts entails an inherent risk of professional liability claims.
The Company does not control the practice of medicine by physicians or the
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. Because the practices purchase and resell
pharmaceutical products provided by the practices, they face the risk of product
liability claims. Although the Company has not been a party to any claims,
suits or complaints relating to services and products provided by the Company,
or physicians affiliated with the Company, there can be no assurances that such
claims will not be asserted against the Company in the future. The Company
maintains insurance coverage that it believes to be adequate both as to risks
and amounts. In addition, pursuant to the management services agreements with
the affiliated physician groups, the affiliated practices and the Company are
required to maintain comprehensive professional liability insurance. Successful
malpractice claims asserted against the Company or one of the affiliate
physician groups could, however, have a material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1996.

7

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq Stock Market's National
Market under the symbol AORI. The high and low closing sale prices of the
Common Stock, as reported by Nasdaq, were as follows for the quarterly periods
indicated. All stock prices have been adjusted to reflect a 2-for-1 split of
the Company's Common Stock that was effected as a stock dividend on June 10,
1996.

Year Ended December 31, 1995 High Low
------- -------
Fiscal Quarter Ended June 30, 1995(1) $ 14.13 $ 12.75
Fiscal Quarter Ended September 30, 1995 $ 21.94 $ 13.38
Fiscal Quarter Ended December 31, 1995 $ 24.31 $ 17.00

Year Ended December 31, 1996

Fiscal Quarter Ended March 31, 1996 $ 24.81 $ 18.19
Fiscal Quarter Ended June 30, 1996 $ 26.00 $ 20.06
Fiscal Quarter Ended September 30, 1996 $ 22.25 $ 6.25
Fiscal Quarter Ended December 31, 1996 $ 11.25 $ 7.31
________________
(1) The Common Stock commenced trading on the date the Company's initial public
offering ("IPO") was effective, June 13, 1995.

As of March 14, 1997, there were approximately 6,000 holders of record of
the Common Stock. The Company has not declared or paid any cash dividends on its
Common Stock. The payment of cash dividends in the future will depend on the
Company's earnings, financial condition, capital needs and other factors deemed
pertinent by the Company's board of directors, including the limitations, if
any, on the payment of dividends under state law and then-existing credit
agreements. It is the present policy of the Company's board of directors to
retain earnings, if any, to finance the operations and expansion of the
Company's business. The Company's credit facility currently requires creditor
approval for the payment of cash dividends.

RECENT SALES OF UNREGISTERED SECURITIES

In connection with each affiliation transaction between the Company and an
oncology group, the Company purchases the nonmedical assets of, and enters into
a long-term management agreement with, that oncology group. In consideration for
that arrangement, the Company typically pays cash, issues subordinated
promissory notes (in general, payable on each of 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 specified future
dates (in general, on each of the third through fifth anniversaries of the
closing date). The price per share is the lower of the average of the closing
price per share for the five days preceding the date of the letter of intent or
the closing date with respect to such affiliation transaction.

8

The following table describes all sales by the Company of the Company's
securities during 1996. Each sale was a private placement made in connection
with a physician transaction, described in general in the preceding paragraph,
to affiliated oncologists, the overwhelming majority of whom are accredited
investors. No underwriter was involved in any such sale and no commission or
similar fee was paid with respect thereto. Each sale was not registered under
the Securities Act of 1933 in reliance on Section 4(2) of such Act and Rule 506
enacted thereunder.

Date of Number of Number of Shares Aggregate Principal
Transaction Physicians of Common Stock (1) Amount of Notes
- --------------------------------------------------------------------------------
1/96 2 23,684 $ 346,000
2/96 1 45,584 551,000
3/96 7 116,298 3,000,000
3/96 4 163,676 2,919,000
4/96 4 40,318 1,217,000
4/96 1 5,798 165,000
5/96 3 210,048 2,100,000
7/96 3 74,861 781,000
7/96 1 165,529 517,000
8/96 2 89,584 990,000
9/96 12 770,589 7,067,000
9/96 1 30,724 232,000
10/96 1 28,825 487,000
10/96 1 23,880 760,000
11/96 2 258,992 2,400,000
11/96 3 158,800 1,190,000
11/96 2 106,059 573,000
_________________
(1) In connection with each affiliation transaction, the Company
unconditionally agrees to deliver shares of Common Stock at specified
future dates. The number of shares has been adjusted to reflect a two-for-
one stock split effected as a stock dividend in June 1996.

9

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data of the Company set forth below are
qualified by reference to, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this report.

YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992(1)
---- ---- ---- ---- -------
(in thousands, except per share data)

STATEMENT OF OPERATIONS DATA:
Revenue........................................................ $205,460 $ 99,174 $20,410 $ 7,177 $ 4,399
Operating expenses:
Pharmaceuticals and supplies.................................. 85,210 35,763 7,575 2,461 1,990
Practice compensation and benefits............................ 41,350 19,766 4,001 1,809
Other practice costs.......................................... 23,495 12,032 2,258 885 837
General and administrative.................................... 14,095 9,406 4,367 2,076 726
Depreciation and amortization................................. 9,343 4,655 746 219
Reorganization................................................ 626(2)
-------- -------- ------- ------- -------
173,493 81,622 18,947 7,450 5,466
-------- -------- ------- ------- -------
Income (loss) from operations.................................. 31,967 17,552 1,463 (273) (1,067)
Interest income................................................ 1,062 2,007 143 52 9
Interest expense............................................... (4,307) (3,690) (237) (96) (61)
Other, net..................................................... 1,600(3)
-------- -------- ------- ------- -------

Income (loss) before taxes..................................... 28,722 17,469 1,369 (317) (1,119)
Income taxes(4)................................................ 11,072 5,852 126
-------- -------- ------- ------- -------
Net income (loss).............................................. $ 17,650 $ 11,617 $ 1,243 $ (317) $(1,119)
======== ======== ======= ======= =======
Net income (loss) per share.................................... $0.37 $0.29 $0.04 $(0.01) $(0.04)
======== ======== ======= ======= =======
Shares used in per share computations(5)....................... 47,549 40,138 29,810 26,404 24,898
======== ======== ======= ======= =======

DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992(1)
---- ---- ---- ---- -------
(in thousands)
BALANCE SHEET DATA:
Working capital (deficit).................................... $ 42,972 $ 59,724 $ 6,653 $(1,175) $ 1,137
Management service agreements................................ 240,034 164,522 40,444 1,545 --
Total assets................................................. 339,400 272,359 55,709 5,413 3,359
Long-term debt............................................... 81,707 44,190 18,703 79 985
Stockholders' equity......................................... 221,854 191,180 30,977 1,288 376

(1) The information through the ten months ended October 31, 1992 included in
the full year of 1992 are for Hematology Oncology Associates ("HOA"), the
Company's predecessor.
(2) Amount represents costs incurred in the reorganization of HOA.
(3) Consists of life insurance proceeds of $2,091,000, less lease termination
costs of $491,000.
(4) No taxes are provided for 1992 and 1993 due to operating losses.
(5) See Note 1 to the Company's Consolidated Financial Statements. For
information concerning the number of shares of Common Stock that the Company
is obligated to issue at specified future dates to physicians whose groups
have affiliated with the Company, see Note 3 to the Company's Consolidated
Financial Statements.

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

AOR provides comprehensive management services under long-term agreements
to 35 oncology practices, which provide a broad range of medical services to
cancer patients, integrating the specialties of medical and gynecological
oncology, hematology, radiation oncology and stem cell transplantation. Since
the Company's incorporation in October 1992, it has grown rapidly from managing
six affiliated physicians in one state to 245 affiliated physicians in 15
states:

MARCH 14, DECEMBER 31,
--------- ------------------------
1997 1996 1995 1994
---- ---- ---- ----
Affiliated physicians.............. 245 227 148 42
States............................. 15 15 14 6

The Company obtains management agreements with, and purchases the
nonmedical assets of, oncology practices. Under the terms of the management
agreements, the Company provides comprehensive management services to its
affiliated physician groups, including operational and administrative services,
and furnishes personnel, facilities, supplies and equipment. The physician
groups, in return, agree to practice medicine exclusively in affiliation with
the Company under the management agreements. All of the Company's revenue
consists of management fees paid under the terms of the management agreements.
Management fees include all practice costs (other than amounts retained by
physicians), a fixed monthly fee, an amount equal to a percentage of each
affiliated physician group's net revenue (in most states) and, if certain
financial criteria are satisfied, a performance fee. For the year ended December
31, 1996, only one of the Company's affiliated physician groups contributed more
than 10% of the Company's revenue. For the year ended December 31, 1995, two of
the Company's affiliated physician groups contributed more than 10% of the
Company's revenue. For the year ended December 31, 1994, three of the Company's
affiliated physician groups contributed more than 10% of the Company's revenue.

In 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. In 1995, the payor
mix was 27% for Medicare and Medicaid, 51% for managed care and 22% for private
insurance and other payors. In 1994, the payor mix was 29% for Medicare and
Medicaid, 46% for managed care and 25% for private insurance and other payors.
The payor mix varies from physician group to physician group and changes as a
result of new management agreements. Because of the number of physician groups
with which the Company has recently affiliated and the different payor mix of
each affiliated physician group, meaningful year-to-year payor trends cannot yet
be identified.

11

RESULTS OF OPERATIONS

The following table sets forth the percentages of revenue represented by
certain items reflected in the Company's Statement of Operations. The
information that follows should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto included elsewhere herein.

Year Ended December 31,
-----------------------
1996 1995 1994
-----------------------
Revenue....................................... 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Pharmaceuticals and supplies............ 41.5 36.1 37.1
Practice compensation and
benefits.............................. 20.1 19.9 19.6
Other practice costs.................... 11.4 12.1 11.1
General and administrative.............. 6.9 9.5 21.4
Depreciation and amortization........... 4.5 4.7 3.7
Net interest.................................. 1.6 1.7 .4
Other income.................................. (1.6)
----- ----- -----
Income before income taxes.................... 14.0 17.6 6.7
Income taxes.................................. 5.4 5.9 .6
----- ----- -----
Net income.................................... 8.6% 11.7% 6.1%
===== ===== =====

1996 COMPARED TO 1995

The Company entered into or amended management agreements with seventeen
and fifteen oncology groups in 1996 and 1995, respectively, the results of which
are included in the Company's operating results from the dates of affiliation.
Changes in results of operations year to year were caused primarily by
affiliations with these oncology practices.

Overall, the Company experienced a decrease in operating margins from 1995
to 1996, with earnings before taxes, interest, depreciation and amortization
(EBITDA), as a percentage of revenue, declining from 22.4% to 20.1%. The decline
in margins was the result of a number of factors, including (i) the introduction
of a number of chemotherapy agents which are used in combination with or in
addition to existing therapies, some of which have significantly lower margins
than the existing chemotherapy regimens, (ii) a shift to payors with lower
reimbursement rates (principally Medicare), (iii) difficulty in efficiently
integrating practices that affiliated with the Company in late 1995 and 1996 and
(iv) higher discounts to managed care payors. However, the Company benefited
from lower general and administrative costs and other practice costs, in each
case as a percentage of revenue. To address the decline in margins, the Company
has adopted a number of strategies, including increasing the timing and level of
reimbursement as well as enhancing purchasing power by establishing a
pharmaceutical formulary and initiating preferred pharmaceutical relationships.

Revenue. Revenue increased from $99.2 million in 1995 to $205.5 million in
1996, an increase of $106.3 million or 107%. Of this increase, $35.3 million
was attributable to the addition of seventeen affiliated physician groups during
1996 and approximately $46.9 million was the result of providing services for a
full year under management agreements entered into with fifteen oncology
practices during 1995. The remaining $24.1 million was attributable to internal
growth for physician practices affiliated with the Company prior to December 31,
1995. This growth was the result of expansion of services, increases in patient
volume, recruitment of additional physicians, amendments to four existing
management service agreements to affiliate with established practices and, to a
lesser extent, increases in charges for certain physician services.

12

Pharmaceuticals and Supplies. Pharmaceuticals and supplies, which include
drugs, medications and other supplies used by the affiliated physician groups,
increased from $35.8 million for 1995 to $85.2 million for 1996, an increase of
$49.4 million, or 138%. Of this increase, $16.6 million was attributable to the
addition of seventeen affiliated physician groups during 1996 and approximately
$19.6 million was the result of providing services for a full year under
management agreements entered into with fifteen oncology practices during 1995.
The remaining $13.2 million increase was attributable to the same internal
growth factors mentioned above in conjunction with the revenue increase. As a
percentage of revenue, pharmaceuticals and supplies increased from 36.1% for
1995 to 41.5% for 1996. This increase was primarily due to a shift in the
revenue mix to a higher percentage of drug revenue, the introduction of a number
of new chemotherapy agents and, to a lesser extent, lower reimbursement from
payors. 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 adversely impact the Company's margins with respect to such
items. The Company has adopted a number of strategies to address this matter,
including establishing a pharmaceutical formulary and initiating preferred
pharmaceutical relationships.

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
located at the affiliated physician practice sites, increased from $19.8 million
in 1995 to $41.4 million in 1996, an increase of $21.6 million or 109%. Of this
increase, $6.7 million was attributable to the addition of seventeen affiliated
physician groups during 1996 and approximately $10.9 million was the result of
providing services for a full year under management agreements entered into with
fifteen oncology practices during 1995. The remaining $4.0 million increase was
attributable to the same internal growth factors mentioned above in conjunction
with the revenue increase. As a percentage of revenue, practice compensation and
benefits increased from 19.9% for 1995 to 20.1% for 1996. Practice compensation
and benefit costs relative to patient volumes decreased as a result of economies
of scale. However, these improvements 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,
increased from $12.0 million in 1995 to $23.5 million in 1996, an increase $11.5
million or 96%. Of this increase, $3.2 million was attributable to the addition
of seventeen affiliated physician groups during 1996 and approximately $6.0
million was the result of providing services for a full year under management
agreements entered into with fifteen oncology practices during 1995. The
remaining $2.3 million increase was attributable to the same internal growth
factors mentioned above in conjunction with the revenue increase. As a
percentage of revenue, other practice costs decreased from 12.1% for 1995 to
11.4% for 1996. This decrease was principally due to economies of scale gained
from the Company's rapid growth.

General and Administrative. General corporate expenses increased from $9.4
million in 1995 to $14.1 million in 1996, an increase of $4.7 million or 50%.
This increase was primarily attributable to the addition of personnel and
greater support costs associated with the Company's rapid growth since December
31, 1995. As a percentage of revenue, general and administrative expenses
decreased from 9.5% for 1995 to 6.9% for 1996, primarily as a result of
economies of scale.

Depreciation and Amortization. Depreciation and amortization expenses
increased from $4.7 million in 1995 to $9.3 million in 1996, an increase of $4.6
million or 98%. Of this increase, $1.3 million resulted from the Company's
entering into or amending management agreements with, and acquiring the
nonmedical assets of, seventeen affiliated physician groups during 1996. The
remaining $3.3 million increase was primarily attributable to depreciation and
amortization from practices affiliated with the Company in 1995 as well as
investments in equipment, leasehold improvements and management information
systems during 1996.

13

Interest. Net interest expense increased from $1.7 million in 1995 to $3.2
million in 1996, an increase of $1.5 million or 88%. The increase was the
result of higher levels of debt, principally incurred to finance transactions
with seventeen oncology practices during 1996. As a percentage of revenue, net
interest expense decreased from 1.7% in 1995 to 1.6% in 1996. Indebtedness to
physicians increased from approximately $57 million at December 31, 1995 to
approximately $66 million at December 31, 1996. In the future, management
expects that net interest expense as a percentage of revenue will increase
slightly due to anticipated debt related to medical practice transactions and
the development of integrated cancer centers.

Income Taxes. Income tax expense increased from the prior year as a result
of the Company's increased profitability as well as a change in the Company's
composition of revenue by state since 1995. For 1996, the Company recognized a
tax provision of $11.1 million resulting in an effective rate of 38.5% compared
to 38% for 1995 adjusted for non-taxable non-recurring life insurance proceeds
of $2.1 million.

1995 COMPARED TO 1994

The Company entered into management agreements with five and fifteen
oncology groups in 1994 and 1995, respectively, the results of which are
included in the Company's operating results from the dates of affiliation.
Changes in results of operations year to year were caused primarily by
affiliations with these oncology practices.

Revenue. Revenue increased from $20.4 million in 1994 to $99.2 million in
1995, an increase of $78.8 million or 386%. Of this $78.8 million, $51 million
was attributable to the addition of fifteen affiliated physician practices
during 1995 and $22 million was primarily the result of providing services for a
full year under management agreements entered into with five oncology practices
during 1994. The remaining $5.8 million was the result of increases in medical
practice revenue of the physician practices affiliated with the Company prior to
December 31, 1993. This growth in medical practice revenue resulted from the
expansion of services, increases in patient volume and, to a lesser extent,
increases in charges for certain physician services.

Pharmaceuticals and Supplies. Pharmaceuticals and supplies, which include
drugs, medications and other supplies used by the affiliated physician groups,
increased from $7.6 million for 1994 to $35.8 million for 1995, an increase of
$28.2 million, or 371%. Of this increase, $16.7 million was attributable to the
addition of fifteen affiliated physician groups during 1995. The remaining
$11.5 million increase was principally the result of the expansion of services
and increase in patient volume of practices affiliated with the Company prior to
December 31, 1994. As a percentage of revenue, pharmaceuticals and supplies
decreased from 37.1% for 1994 to 36.1% for 1995. This decrease was primarily
the result of operating and volume purchasing efficiencies.

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
located at the affiliated physician practice sites, increased from $4.0 million
in 1994 to $19.8 million in 1995, an increase of $15.8 million or 395%. Of the
1995 increase, $11.2 million was attributable to the addition of fifteen
affiliated physician groups during December 1995. As a percentage of revenue,
practice compensation and benefits increased from 19.6% for 1994 to 19.9% for
1995. This increase as a percentage of revenue was primarily the result of the
addition in 1995 of affiliated physician groups with higher staffing levels and
more sites of service than those of physician groups that affiliated with the
Company before 1995.

Other Practice Costs. Other practice costs, which consist of rent,
utilities, repairs and maintenance, insurance and other direct practice costs,
increased from $2.3 million in 1994 to $12.0 million in 1995, an increase of
$9.7 million or 422%. Of the 1995 increase, $6.6 million was attributable to the
addition of fifteen affiliated physician groups during 1995. As a percentage of
revenue, other practice costs increased from 11.1% for 1994 to 12.1% for 1995.
This increase was principally due to higher occupancy costs of physician groups
affiliating with the Company after December 31, 1994.

14

General and Administrative. General corporate expenses increased from $4.4
million in 1994 to $9.4 million in 1995, an increase of $5.0 million or 114%.
This increase was primarily attributable to the addition of personnel and
greater support costs associated with the Company's rapid growth since
December 31, 1994. As a percentage of revenue, general and administrative
expenses decreased from 21.4% for 1994 to 9.5% for 1995, primarily as a result
of economies of scale.

Depreciation and Amortization. Depreciation and amortization expenses
increased from $746,000 in 1994 to $4.7 million in 1995, an increase of $4.0
million or 536%. Of the increase, $2.7 million resulted from the Company's
entering into management agreements with, and acquiring the nonmedical assets
of, fifteen affiliated physician groups during 1995. The remaining $1.3 million
increase was primarily attributable to investment in equipment, leasehold
improvements and management information systems during 1995.

Interest. Net interest expense increased from $94,000 in 1994 to $1.7
million in 1995, an increase of $1.6 million. The increase was the result of
higher levels of debt. The debt was incurred to finance transactions with
fifteen oncology practices during 1995. As a percentage of revenue, net interest
expense increased from .4% in 1994 to 1.7% in 1995. Indebtedness to physicians
increased from approximately $18 million at December 31, 1994 to approximately
$57 million at December 31, 1995.

Other Income. During 1995, the Company recorded a benefit of $2.1 million
in connection with life insurance proceeds resulting from the untimely death of
a physician shareholder in an affiliated physician group. In addition, other
income reflects a charge of $491,000 consisting of abandoned leasehold
improvements and noncancelable rents as a result of the third quarter
consolidation and relocation of administrative facilities.

Income Taxes. Income tax expense increased dramatically from the prior year
as a result of the Company's increased profitability and unavailability in 1995
of net operating loss carryforwards which were fully utilized during 1994. For
1995, the Company recognized a tax provision of $5.8 million resulting in an
effective rate of 38% adjusted for the non-taxable non-recurring life insurance
proceeds of $2.1 million.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact included in this section and elsewhere
in this report are forward-looking statements and, although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. The following are certain important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements"). All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.

Growth Strategy; Rapid Growth. The Company's strategy is to grow through
transactions with additional oncology groups and through the expansion of its
affiliated physician groups. Identifying appropriate physician groups and
proposing, negotiating and implementing economically attractive affiliations
with them can be a lengthy, complex and costly process. There can be no
assurance that the Company will continue to be successful in identifying and
establishing relationships with additional oncology groups. The Company has
experienced rapid growth in its business and staff. Continued rapid growth may
impair the Company's ability to efficiently provide its management services to
its affiliated physician groups and to adequately manage and supervise its
employees. The Company's future results could be materially adversely affected
if it is unable to manage growth effectively.

Dependence on Affiliated Physician Groups. The Company's revenue depends
on revenue generated by the physician groups with which the Company has
long-term management agreements. There can be no assurance that

15

existing and future physician groups with which the Company affiliates will
maintain successful medical practices, that the management agreements with the
affiliated physician groups will not be terminated or that any of the key
members of a particular physician group will continue practicing with such
group. Loss of revenue by the affiliated physician groups could have a material
adverse effect on the Company.

Competition. The business of providing health care related services is
intensely competitive. The Company is aware of at least four competitors
specializing in the management of oncology practices and several health care
companies with established operating histories and significant resources are
currently providing at least some management services to oncologists. In
addition, there are other companies with substantial resources that may decide
to enter the oncology practice management business. The Company's revenues
depend on the continued success of its affiliated physician groups. The
physician groups face competition from several sources, including sole
practitioners, single and multi-specialty groups, hospitals and managed care
organizations. See "Business--Competition."

Reductions in Third-Party Reimbursement. Physician groups typically bill
various third-party payors, such as governmental programs (e.g. Medicare and
Medicaid), private insurance plans and managed care plans, for the health care
services provided to their patients. These third-party payors are increasingly
negotiating the prices charged for medical services, pharmaceuticals and other
supplies, with the goal of lowering reimbursement and utilization rates.
Third-party payors can also deny reimbursement for medical services,
pharmaceuticals and other supplies if they determine that a treatment was not
performed in accordance with treatment protocols established by such payors or
for other reasons. Loss of revenue by the Company's affiliated physician groups
caused by cost containment efforts could have a material adverse effect on the
Company. To the extent that patients or enrollees covered by a contract require
more frequent or extensive care than is anticipated by the physician groups, the
revenue to the affiliated physician groups derived from such contract may be
insufficient to cover the costs of the services provided. Insufficient revenue
under capitated or other risk-sharing contracts could have a material adverse
effect on the Company.

Health Care Regulation. The health care industry is highly regulated at
the federal and state levels. The Company believes its business is in material
compliance with applicable law. The relationships between the Company and its
affiliated physician groups, however, are unique and many aspects of these
relationships have not been the subject of judicial or regulatory
interpretation. There can be no assurance that a review of the Company's
business by courts or by health care, tax, labor or other regulatory authorities
would not result in determinations that could adversely affect the Company's
operations or that the health care regulatory environment will not change so as
to restrict the Company's existing operations or potential for expansion. There
are currently several federal and state initiatives designed to amend
regulations relating to the provision of health care services, the access to
health care, the costs of health care and the manner in which health care
providers are reimbursed for their services. However, it is not possible to
predict whether any such initiatives will be enacted as legislation or, if
enacted, what their form, effective dates or impact on the Company will be. See
"Business--Regulation."

Risks Inherent in Provision of Medical Services. The Company's affiliated
physician groups are involved in the delivery of health care services to the
public and are exposed to the risk of professional liability claims. Claims of
this nature, if successful, could result in damage awards to the claimants in
excess of the limits of any applicable insurance coverage. Insurance against
losses related to claims of this type can be expensive and varies widely from
state to state. The Company and its affiliated physician groups maintain
liability insurance in amounts and coverages believed to be usual and customary.
Nevertheless, successful malpractice claims asserted against the physician
groups or the Company could have a material adverse effect on the Company. See
"Legal Proceedings."

Dependence on Key Personnel. The Company depends on the services of its
executive officers for the management of the Company and the implementation of
its business strategy. The Company has obtained key man life insurance on its
chief executive officer and its president. Nevertheless, the Company could be
materially

16

adversely affected if the chief executive officer, president or other executive
officers were unwilling or unable to continue in the Company's employ. See
"Directors and Executive Officers of the Registrant."

Volatility of Stock Price. From time to time, there may be significant
volatility in the market price for the Common Stock. Quarterly results of the
Company, changes in general conditions in the economy, the financial markets or
the health care industry, or other developments affecting the Company or its
competitors could cause the market price of the Common Stock to fluctuate
substantially. In addition, in recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to their operating performance. See "Market for Registrant's Common
Equity and Related Stockholder Matters."

Dividend Policy and Prohibitions. The Company does not intend to pay cash
dividends on the Common Stock in the foreseeable future and anticipates that
future earnings will be retained to finance future operations and expansion.
The Company's credit agreement with First Union National Bank of North Carolina,
N.A. ("First Union") prohibits the Company from paying dividends and making
other distributions on its Common Stock. See "Market for Registrant's Common
Equity and Related Stockholder Matters" and Liquidity and Capital Resources.

Anti-Takeover Provisions. Certain provisions of the Company's Certificate
of Incorporation and certain provisions of the General Corporation Law of
Delaware (the state in which the Company is incorporated) may make it difficult
to change control of the Company and to replace incumbent management. For
example, the Company's Certificate of Incorporation permits the Board of
Directors, without stockholder approval, to issue additional shares of Common
Stock or to establish one or more classes or series of Preferred Stock having
the number of shares, designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the Board of
Directors can establish. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.

SUMMARY OF OPERATIONS BY QUARTER

The following table presents unaudited quarterly operating results for 1996
and 1995. The Company believes that all necessary adjustments have been
included in the amounts stated below to present fairly the quarterly results
when read in conjunction with the Consolidated Financial Statements. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or predictive of future periods.

1996 QUARTER ENDED 1995 QUARTER ENDED
------------------------------- -------------------------------
DEC 31 SEP 30 JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31
------ ------ ------ ------ ------ ------ ------ ------
(In thousands, except per share data)

Net revenue...................................... 63,635 53,701 47,374 40,750 34,433 25,497 24,644 14,600
Income from operations........................... 9,259 7,782 7,297 7,629 6,275 4,315 4,834 2,128
Net income....................................... 4,840 4,303 4,060 4,447 3,913 4,654 2,068 982
Net income per share............................. .10 .09 .09 .09 .09 .10 .06 .03

17

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital primarily to obtain management agreements
with, and to purchase the nonmedical assets of, oncology medical practices.
During 1995, the Company paid total consideration of $150 million for management
agreements with fifteen physician groups, including cash and transaction costs
of $51 million. During 1996, the Company paid total consideration of $91
million for management agreements with 17 physician groups including cash and
transaction costs of $46 million.

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 a $150 million syndicated revolving
credit facility ("Credit Facility") with First Union National Bank of North
Carolina ("First Union"), as agent for the various lenders. The Company has
relied primarily on management fees received from its affiliated physician
groups to fund its operations. Cash derived from operations was $7.0 million in
1996, a decrease of $7.4 million from 1995. The decrease was due to significant
accelerated payments made to the affiliated physician groups for tax purposes in
December 1996 that were not made in December 1995, increases in payments for
taxes and pharmaceuticals, as well as delays in collection of cash from
receivables resulting in an increase in days sales outstanding to 68 days at
December 31, 1996 from 64 days at December 31, 1995. The effect of the
accelerated payments to the affiliated physician groups reversed in the first
quarter of 1997. The Company is taking actions to decrease days sales
outstanding in the future including increased use of electronic billing and
collection methods.

During 1996, the Company borrowed $23 million under the Credit Facility to
fund medical practice transactions and the purchase of treasury stock.
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 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.

At December 31, 1996, the Company had working capital of $43.0 million and
cash and equivalents of $3.4 million. The Company also had $32.8 million of
current liabilities, including approximately $9.8 million of short-term notes
and long-term indebtedness maturing before December 31, 1997. The Company
currently expects that its principal use of funds in the near future will be in
connection with future transactions with oncology groups, the purchase of
additional shares of treasury stock, the purchase of medical equipment and the
acquisition of real estate for the development of integrated cancer centers. The
Company expects that cash generated from operations and amounts available under
the Credit Facility will be adequate to satisfy the Company's cash requirements
for the next 12 months.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to Consolidated Financial Statements, which
appears on page 21 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

18

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on May 8, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Election of Directors" information required by Item 10 of Form 10-K as to
directors and certain executive officers of the Company and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on May 8, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Executive Compensation" information required by Item 11 of Form 10-K as to
directors and certain executive officers of the Company and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on May 8, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Security Ownership of Certain Beneficial Owners and Management" information
required by Item 12 of Form 10-K as to directors, certain executive officers and
certain beneficial owners of the Company and is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on May 8, 1997, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Certain Relationships and Related Transactions" information required by Item 13
of Form 10-K as to directors and certain executive officers of the Company and
is incorporated herein by reference.

19

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

1. Financial Statements: See Item 8 of this report.

2. Financial Statement Schedules: See Item 8 of this report.

3. Exhibit Index

Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of the Company as
amended (filed as Exhibit 3.1 to Form 10-Q
for the quarter ended September 30, 1996 and
incorporated herein by reference)

3.2 By-Laws of the Company, as amended (filed as
Exhibit 3.2 to Form 10-Q for the quarter
ended September 30, 1996 and incorporated
herein by reference)

10.1 Credit Facility (filed as Exhibit 10.1 to
Form 10-Q for the quarter ended September 30,
1996 and incorporated herein by reference)

11 Statement Re - Computation of Per Share
Earnings

21.1 Subsidiaries of the Registrant

23(a) Consent of Independent Accountants

27 Financial Data Schedule

(b) Reports on Form 8-K.

During the fiscal quarter ended December 31, 1996, the Registrant filed no
reports on Form 8-K.

20

AMERICAN ONCOLOGY RESOURCES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements as of December 31, 1996 and 1995 and for the
three years ended December 31, 1996:
Page
----
Report of Independent Accountants.............................. 22
Consolidated Balance Sheet..................................... 23
Consolidated Statements of Operations.......................... 24
Consolidated Statements of Stockholders' Equity................ 25
Consolidated Statements of Cash Flows.......................... 26
Notes to Consolidated Financial Statements..................... 27

Financial statement schedules have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.

21

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
American Oncology Resources, Inc.

In our opinion, the consolidated financial statements listed in the index on
page 21 present fairly, in all material respects, the financial position of
American Oncology Resources, Inc. and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Houston, Texas
March 14, 1997

22

AMERICAN ONCOLOGY RESOURCES, INC.

CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)

December 31,
--------------
1996 1995
---- ----

ASSETS
Current assets:
Cash and equivalents.................................................................. $ 3,429 $ 14,816
Short-term investments................................................................ 44,967
Accounts receivable................................................................... 61,183 31,152
Prepaids and other current assets..................................................... 5,775 3,586
Due from affiliated physician groups.................................................. 5,356 1,271
-------- --------
Total current assets............................................................... 75,743 95,792
-------- --------
Property and equipment:
Land.................................................................................. 1,336
Computers and software................................................................ 6,200 2,403
Equipment, furniture and fixtures..................................................... 13,830 9,615
Leasehold improvements................................................................ 3,778 1,566
-------- --------
25,144 13,584
Less - accumulated depreciation and amortization...................................... (6,201) (2,427)
-------- --------
18,943 11,157
Management service agreements, net of amortization of $8,343 and $3,072................. 240,034 164,522
Other assets............................................................................ 4,680 888
-------- --------
$339,400 $272,359
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of indebtedness.................................................... $ 9,783 $ 15,765
Accounts payable...................................................................... 15,148 10,249
Due to affiliated physician groups.................................................... 616 1,153
Accrued compensation costs............................................................ 1,806 1,225
Accrued interest payable.............................................................. 2,325 1,753
Income taxes payable.................................................................. 641 4,267
Other accrued liabilities............................................................. 2,452 1,656
-------- --------
Total current liabilities.......................................................... 32,771 36,068
Deferred income taxes................................................................... 3,068 921
Long-term indebtedness.................................................................. 81,707 44,190
-------- --------
Total liabilities.................................................................. 117,546 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 shares authorized,
28,369,482 and 27,476,450 shares issued and
27,371,422 and 27,476,450 shares outstanding......................................... 284 275
Additional paid-in capital............................................................ 139,804 133,242
Common stock to be issued, 17,462,782 and 15,261,972 shares........................... 61,225 46,018
Treasury stock, 998,060 shares........................................................ (8,530)
Retained earnings..................................................................... 29,071 11,645
-------- --------
Total stockholders' equity......................................................... 221,854 191,180
-------- --------
Commitments and contingencies (Note 9)..................................................
-------- --------
$339,400 $272,359
======== ========

The accompanying notes are an integral part of this statement.

23

AMERICAN ONCOLOGY RESOURCES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)

Year ended December 31,
-----------------------------
1996 1995 1994
-------- -------- -------

Revenue................................ $205,460 $ 99,174 $ 20,410
-------- -------- --------
Operating expenses:
Pharmaceuticals and supplies......... 85,210 35,763 7,575
Practice compensation and benefits... 41,350 19,766 4,001
Other practice costs................. 23,495 12,032 2,258
General and administrative........... 14,095 9,406 4,367
Depreciation and amortization........ 9,343 4,655 746
-------- -------- --------
173,493 81,622 18,947
-------- -------- --------
Income from operations................. 31,967 17,552 1,463
Other income (expense):
Interest income...................... 1,062 2,007 143
Interest expense..................... (4,307) (3,690) (237)
Other, net........................... 1,600
-------- -------- --------
Income before income taxes............. 28,722 17,469 1,369
Income taxes........................... 11,072 5,852 126
-------- -------- --------
Net income............................. $ 17,650 $ 11,617 $ 1,243
======== ======== ========
Net income per share................... $ 0.37 $0.29 $0.04
======== ======== ========
Shares used in per share calculations.. 47,549 40,138 29,810
======== ======== ========

The accompanying notes are an integral part of this statement.

24

AMERICAN ONCOLOGY RESOURCES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)

Common Stock Additional Common Treasury Retained Stockholder
--------------------- paid-in Stock to Stock earnings notes
Shares Par Value capital be issued Cost (deficit) receivable Total
--------- --------- ---------- --------- -------- --------- ----------- ----------

Balance at December 31, 1993...... 8,220 $ 82 $ 2,076 $ 445 $ (1,215) $ (100) $ 1,288

Issuances of Common Stock....... 7,008 70 19,772 19,842
Series B notes exchanged
for Common Stock.............. 38 1 159 160
Medical practice transactions-
value of 5,393,956 shares to
be issued..................... 8,366 8,366
Compensation value of
non-employee options to
purchase Common Stock......... 78 78
Net income...................... 1,243 1,243
--------- --------- --------- --------- -------- --------- ----------- ----------
Balance at December 31, 1994...... 15,266 153 22,085 8,811 28 (100) 30,977

Issuances of Common Stock....... 12,199 122 110,875 110,997
Medical practice transactions-
value of 9,628,388 shares to
be issued..................... 37,207 37,207
Compensation value of non-
employee options to pur-
chase Common Stock............ 250 250
Exercise of options to
purchase Common Stock......... 12 32 32
Repayment of promissory notes... 100 100
Net income...................... 11,617 11,617
--------- --------- --------- --------- -------- --------- ----------- ----------
Balance at December 31, 1995...... 27,477 275 133,242 46,018 11,645 0 191,180

Medical practice transactions-
value of 2,313,250 shares to
be issued..................... 15,312 15,312
Purchase of 1,110,500 shares of
Treasury Stock................ $ (9,414) (9,414)
Delivery of 112,440 shares of
Common Stock to be issued
from Treasury................. (555) (105) 884 (224)
Exercise of options to pur-
chase Common Stock............ 892 9 1,116 1,125
Tax benefit from exercise of
non-qualified stock options... 6,001 6,001
Net income...................... 17,650 17,650
--------- --------- --------- --------- -------- --------- ----------- ----------
Balance at December 31, 1996...... 28,369 $ 284 $ 139,804 $ 61,225 $ (8,530) $ 29,071 $ 0 $ 221,854
========= ========= ========= ========= ======== ========= =========== ==========

The accompanying notes are an integral part of this statement.

25

AMERICAN ONCOLOGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

Year ended December 31,
--------------------------
1996 1995 1994
---- ---- ----

Cash flows from operating activities:
Net income................................................................. $ 17,650 $ 11,617 $ 1,243
Noncash adjustments:
Depreciation and amortization............................................ 9,343 4,655 746
Deferred income taxes.................................................... 2,130 876 111
Imputed interest on medical practice transactions........................ 122 315
Cash provided (used), net of effects of
medical practice transactions, by changes in:
Accounts receivable...................................................... (24,084) (9,190) (1,780)
Prepaids and other current assets........................................ (2,088) (2,566) (411)
Other assets............................................................. 252 152
Accounts payable......................................................... 1,670 3,033 988
Due from/to affiliated physician groups.................................. (2,524) (873) 847
Income taxes payable..................................................... 2,672 4,186 4
Other accrued liabilities................................................ 2,068 2,059 685
--------- -------- --------
Net cash provided by operating activities.............................. 6,959 14,364 2,585
--------- -------- --------
Cash flows from investing activities:
Sales of short-term investments............................................ 44,967 323,991
Purchases of short-term investments........................................ (368,100) (858)
Acquisition of property and equipment...................................... (10,030) (3,705) (1,046)
Net payments in medical practice transactions.............................. (46,221) (51,312) (15,256)
Other...................................................................... (3,052)
--------- -------- --------
Net cash used by investing activities.................................. (14,336) (99,126) (17,160)
--------- -------- --------
Cash flows from financing activities:
Proceeds from Credit Facility.............................................. 23,000 35,000
Repayment of Credit Facility............................................... (35,000)
Repayment of other indebtedness............................................ (17,444) (14,489) (2,962)
Debt financing costs....................................................... (1,277) (411) (284)
Proceeds from exercise of stock options.................................... 1,125 32
Purchase of Treasury Stock................................................. (9,414)
Net proceeds from issuance of Common Stock................................. 110,997 19,842
Collection of promissory notes............................................. 100
--------- -------- --------
Net cash provided (used) by financing activities....................... (4,010) 96,229 16,596
--------- -------- --------
Increase (decrease) in cash and equivalents................................. (11,387) 11,467 2,021
Cash and equivalents:
Beginning of period........................................................ 14,816 3,349 1,328
--------- -------- --------
End of period.............................................................. $ 3,429 $ 14,816 $ 3,349
========= ======== ========
Interest paid............................................................... $ 3,735 $ 2,104 $ 99
Taxes paid.................................................................. 6,567 790 10
Noncash transactions:
Tax benefit from exercise of non-qualified stock options................... 6,001
Value of Common Stock to be issued in medical practice transactions........ 15,312 37,207 8,366
Delivery of Common Stock to be issued in medical practice transactions..... 884
Debt issued in medical practice transactions............................... 25,295 50,817 18,343
Debt assumed in medical practice transactions.............................. 684 4,712

The accompanying notes are an integral part of this statement.

26

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

American Oncology Resources, Inc. (the Company), a Delaware corporation, is
a physician practice management company focusing exclusively on oncology. The
Company provides comprehensive management services under long-term agreements to
35 medical oncology practices in 15 states at December 31, 1996. These
practices provide a comprehensive range of medical services to cancer patients,
integrating the multiple specialties of cancer care, including medical and
gynecological oncology, hematology, radiation oncology and stem cell
transplantation.

The following is a summary of the Company's significant accounting
policies:

Principles of consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated.

Use of estimates

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 of contingent assets and
liabilities. Because of inherent uncertainties in this process, actual future
results could differ from those expected at the reporting date.

Cash equivalents and investments

The Company considers all highly liquid debt securities with original
maturities of three months or less to be cash equivalents. At December 31,
1995, the Company considered all investments in debt securities as available for
use in current operations and therefore classified them as available for sale.

Revenue recognition

The Company's revenues represent the contractual fees earned under its
long-term management service agreements with affiliated physician groups. Under
the agreements, the Company is contractually responsible and at risk for the
operating costs of the affiliated physician groups with the exception of amounts
retained by physicians. The Company's revenues include the reimbursement of all
affiliated physician group operating costs and the fixed and variable
contractual management fees as defined and stipulated in the agreements.
Contractual fees are accrued when collection is probable.

Property and equipment

Property and equipment is stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of three to ten years for equipment, computers and software, furniture and
fixtures and the lesser of ten years or the remaining lease term for leasehold
improvements.

27

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Management service agreements

Management service agreements consist of the costs of purchasing the rights
to manage oncology medical groups. These costs are amortized on a straight-line
basis over the initial noncancelable 40-year terms of the related management
service agreements. Under the long-term agreements, the affiliated physician
groups have agreed to provide medical services on an exclusive basis only
through facilities managed by the Company. The agreements are noncancelable
except for performance defaults. In the event an affiliated physician group
breaches the agreement, or if the Company terminates with cause, the physician
group is required to purchase all related tangible and intangible assets,
including the unamortized portion of the management service agreement, at the
then net book value.

The carrying value of the management service agreements is reviewed for
impairment when events or changes in circumstances indicate their recorded cost
may not be recoverable. If the review indicates that the undiscounted cash
flows from operations of the related management service agreement over the
remaining amortization period is less than the recorded amount of the management
service agreement, the Company's carrying value of the management service
agreement will be reduced to its estimated fair value.

Other assets

The costs associated with obtaining long-term financing are capitalized and
amortized over the terms of the related debt agreements.

Income taxes

Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities using the enacted tax rates in effect in the years in
which the differences are expected to reverse. In estimating future tax
consequences, all expected future events are considered other than enactments of
changes in the tax law or rates.

Fair Value of Financial Instruments

The Company's receivables, payables, prepaids and accrued liabilities are
current and on normal terms and, accordingly, are believed by management to
approximate fair value. Management also believes that subordinated notes issued
to affiliated physicians approximate fair value when current interest rates for
similar debt securities are applied.

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, issued Common Stock and
commitments to issue Common Stock at specified future dates which were issued or
granted within one year prior to the initial SEC filing in June 1995 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.

28

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The following table summarizes the determination of shares used in per
share calculations (in thousands):

Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
Outstanding at end of period:
Common Stock......................... 27,371 27,476 15,266
Common Stock to be issued............ 17,463 15,262 5,994
-------- -------- --------
44,834 42,738 21,260
Effect of weighting and assumed share
equivalents for grants and issuances
at less than the weighted-average or
initial public offering price as
applicable........................... 2,715 (2,600) 8,550
-------- -------- --------
Shares used in per share calculations.. 47,549 40,138 29,810
======== ======== ========
Reclassifications

Certain amounts previously reported have been reclassified to conform with
their 1996 presentation.

NOTE 2 - REVENUE

Medical service revenue for services to patients by the physician 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 physician
groups is reduced by the contractual amounts retained by the physician groups to
arrive at the Company's revenue. Substantially all of the amounts retained by
affiliated physician groups for 1996, 1995 and 1994 was contractually guaranteed
as a minimum percentage of medical service revenue.

The following presents the amounts included in the determination of the
Company's revenues (in thousands):
Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- ---------
Medical service revenue................ $269,380 $129,709 $ 25,612
Amounts retained by affiliated
physician groups....................... 63,920 30,535 5,202
-------- -------- --------
Revenue................................ $205,460 $ 99,174 $ 20,410
======== ======== ========
Management service agreements at
year end............................. 35 22 7

In 1996, 11% of the Company's revenues were derived from one affiliated
physician group, which was the only group that provided 10% of more of revenues.
In 1995, 15% and 11% of the Company's revenues were derived from two affiliated
physician groups that provided 10% or more of revenues. In 1994, 95% of the
Company's revenues were derived from three affiliated physician groups that
provided 10% or more of revenues.

29

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

For the years ended December 31, 1996, 1995 and 1994, the affiliated
physician groups derived approximately 33%, 27% and 29%, respectively, of their
medical service revenue from services provided under the Medicare and state
Medicaid programs and 45%, 51% and 46%, respectively, from contractual, fee-for-
service arrangements with managed care programs, none of which individually
aggregated more than 10% of medical service revenue. The remaining 22%, 22% and
25%, respectively, was derived from various non-contracted fee-for-service
payors. Capitation revenues were less than 1% of total revenue in 1996, 1995
and 1994. Changes in the payor reimbursement rates, particularly Medicare due to
its concentration, or affiliated physician groups' payor mix can affect the
Company's revenues.

Under its management service agreements, receivables generated by
affiliated physician groups from patient services are purchased at their net
collectible value on a full recourse basis by the Company; thus, the Company
does not have an allowance for doubtful accounts. As a result, the Company's
accounts receivable are a function of medical service revenue of the affiliated
physician groups rather than the Company's revenue. Such receivables are
recorded by the affiliated physician groups net of contractual adjustments and
allowances for doubtful accounts and are not collateralized. Receivables from
the Medicare and state Medicaid programs are considered to have minimal credit
risk and no other payor comprised more than 10% of accounts receivable at
December 31, 1996.

NOTE 3 - MEDICAL PRACTICE TRANSACTIONS

From January 1994 through December 31, 1996, the Company entered into long-
term management service agreement transactions with 33 oncology physician
groups.

The consideration paid for the physician groups to enter into long-term
management service agreements and for the nonmedical assets of the physician
groups, primarily receivables and fixed assets, has been accounted for as asset
purchases. Total consideration includes the assumption by the Company of
specified liabilities, the estimated value of nonforfeitable commitments by the
Company to issue Common Stock at specified future dates for no additional
consideration, short-term and subordinated notes, cash payments and related
transaction costs as follows (in thousands):

Year ended
December 31,
----------------------------
1996 1995 1994
-------- -------- --------
Cash and transaction costs......... $ 46,221 $ 51,312 $ 15,256
Short-term and subordinated notes.. 25,295 50,817 18,343
Common Stock to be issued.......... 15,312 37,207 8,366
Liabilities assumed................ 3,794 11,014 2,780
-------- -------- --------
Total costs........................ $ 90,622 $150,350 $ 44,745
======== ======== ========

30

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

During 1996, the Company acquired the nonmedical assets and entered into or
amended long-term management services agreements with 17 oncology physician
groups on the effective dates indicated as follows: March 1, Cancer Center of
Kansas, P.A. of Wichita, Kansas, total consideration of $12,547,000 including
163,676 shares of Common Stock to be issued with a value of $1,926,000; March 1,
Coram Physician Services of Fairfax, Virginia, total consideration of
$15,518,000 including 116,298 shares of Common Stock to be issued with a value
of $1,375,000; May 1, San Antonio Tumor and Blood Clinic, P.A. and Drs. Cohen,
Gordon and Lopez, P.A. of San Antonio, Texas, total consideration of $12,479,000
including 210,048 shares of Common Stock to be issued with a value of
$1,980,000; September 1, Central Texas Diagnostic Center, P.A. of Austin, Texas,
total consideration of $18,863,000 including 770,589 shares of Common Stock to
be issued with a value of $4,157,000; November 1, Hematology-Oncology
Associates, P.A. of Jacksonville, Florida, total consideration of $8,012,000
including 258,992 shares of Common Stock to be issued with a value of
$1,113,000; and, in January through November of 1996, twelve smaller
transactions with physician groups in Durham, North Carolina; Denver, Colorado;
Portland, Oregon; Tucson, Arizona; San Antonio, Texas; Independence, Missouri;
Flagstaff, Arizona and Orange Park, St. Augustine and Ocala, Florida; for total
consideration of $23,203,000 which includes 793,647 shares of Common Stock to be
issued with a value of $4,761,000.

During 1995, the Company acquired the nonmedical assets and entered into
long-term management services agreements with 16 oncology physician groups on
the effective dates indicated as follows: January 1, Southwestern Radiation
Oncology, Ltd. and Miked, Inc. of Tucson, Arizona, total consideration of
$10,249,000 including 1,378,000 shares of Common Stock to be issued with a value
of $2,897,000; March 1, Pikes Peak Cancer Specialists, P.C. and Paul N.
Anderson, M.D., P.C. of Colorado Springs, Colorado, total consideration of
$8,799,000 including 910,000 shares of Common Stock to be issued with a value of
$1,916,000; March 1, Cancer Care Associates, P.A. of Tulsa, Oklahoma, total
consideration of $26,309,000 including 2,888,000 shares of Common Stock to be
issued with a value of $6,431,000; March 15, Hematology and Oncology
Associates, P.A. of Greenville, South Carolina, total consideration of
$9,587,000 including 1,098,000 shares of Common Stock to be issued with a value
of $2,580,000; April 1, Hematology-Oncology Medical Associates, Inc. of
Pittsburgh, Pennsylvania, total consideration of $18,205,000 including 1,622,000
shares of Common Stock to be issued with a value of $8,072,000; August 1, James
River Clinic, P.C. and Mattern, Schultz & Booth Company of Hampton, Virginia,
total consideration of $7,602,000 including 172,000 shares of Common Stock to be
issued with a value of $1,517,000; October 1, Riverview Cancer Care Medical
Associates, P.C. of Rexford, New York, total consideration of $9,101,000
including 206,000 shares of Common Stock to be issued with a value of
$2,774,000; October 1, Capital District Hematology Oncology Associates, P.C. of
Latham, New York, total consideration of $16,060,000 including 308,000 shares of
Common Stock to be issued with a value of $4,203,000; December 1, Triad
Hematology-Oncology Associates, P.L.L.C. of Winston-Salem, North Carolina, total
consideration of $4,185,000 including 64,000 shares of Common Stock to be issued
with a value of $663,000 and, in September through December of 1995, the
following seven smaller transactions in Raleigh, North Carolina; Asheville,
North Carolina; Boulder, Colorado; Jacksonville, Florida; Las Vegas, Nevada;
Winston-Salem, North Carolina and Pittsburgh, Pennsylvania, for total
consideration of $40,253,000 which includes 626,000 shares of Common Stock to be
issued with a value of $6,154,000.

During 1994, the Company acquired the nonmedical assets and entered into
long-term management services agreements with five oncology physician groups on
the effective dates indicated as follows: April 1, Oncology & Hematology
Associates, Inc. of Indianapolis, Indiana, total consideration of $10,687,000
including 2,484,000 shares of Common Stock to be issued with a value of
$3,050,000; April 29, South Denver Oncology/Hematology, P.C. of Denver,
Colorado, total consideration of $3,224,000 including 416,000 shares of Common
Stock to be issued with a value of $511,000; August 1, Hematology Clinic, P.C.
of Portland, Oregon,

31

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

total consideration of $9,140,000 including 778,000 shares of Common Stock to be
issued with a value of $1,194,000; December 1, Oncology & Hematology Clinics of
Kansas City, P.C. of Missouri and Kansas, total consideration of $12,072,000
including 816,000 shares of Common Stock to be issued valued at $1,719,000;
December 1, Hematology & Oncology Physicians, P.C. of Tucson, Arizona, total
consideration of $9,622,000 including 900,000 shares of Common Stock to be
issued valued at $1,893,000.

In conjunction with two medical practice transactions occurring in 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
affiliated long-term management services agreements and will be amortized over
the remaining life of that asset.

The shares of Common Stock to be issued at specified future dates were
valued at a discount from the estimated fair value of a delivered share after
considering all relevant factors, including normal discounts for marketability
due to the time delay in delivery of the shares, estimates of the value of the
respective management service agreements and proximate sales of Common Stock for
cash. The Common Stock in the transactions is to be delivered under the terms
of the respective agreements for periods up to seven years. The Common Stock to
be delivered is discounted at weighted-averages of 39%, 38% and 52% for 1996,
1995 and 1994, respectively, from comparable cash sales of Common Stock.

For transactions completed through December 31, 1996, the scheduled
issuance of the shares of Common Stock that the Company is committed to deliver
over the passage of time are 2,570,074 in 1997, 2,962,425 in 1998, 5,244,319 in
1999, 4,952,237 in 2000, 1,158,712 in 2001 and 575,015 thereafter.

The accompanying financial statements include the results of operations
derived from the management services agreements from their respective effective
dates. The following unaudited pro forma information presents the results of
operations of the Company for the year ended December 31, 1995 as if the 1996
and 1995 transactions had been consummated on January 1, 1995 and for the year
ended December 31, 1996 as if the 1996 transactions were consummated on
January 1, 1996. Such pro forma information is based on the historical
financial information of the physician groups and does not include operational
or other changes which might have been affected pursuant to the Company's
management of the nonmedical aspects of such groups.

The unaudited 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 per share amounts):

Pro forma (unaudited)
Year Ended December 31,
------------------------
1996 1995
--------- ---------
Revenue........................ $ 224,956 $ 175,533
Net income..................... 17,857 12,750
Net income per share........... 0.37 0.29

32

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 4 - INDEBTEDNESS

Indebtedness consists of the following (in thousands):

December 31,
------------------
1996 1995
------- --------
Short-term notes payable............. $ 4,219 $ 12,608
Subordinated notes................... 62,113 44,443
Credit Facility...................... 23,000
Capital lease obligations and other.. 2,158 2,904
------- --------
91,490 59,955
Less - current maturities............ (9,783) (15,765)
------- --------
$81,707 $ 44,190
======= ========

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 physicians with whom the
Company entered into long-term management agreements and relate to medical
practice transactions.

Subordinated notes

The subordinated notes are issued in substantially the same form in
different series and are payable to the physicians with whom the Company entered
into management agreements. Substantially all of the notes outstanding at
December 31, 1996 and 1995 bear interest at 7%, are due in installments through
2003 and are subordinated to senior bank and certain other debt. If the Company
fails to make payment under any of the notes, the respective physician group can
terminate the related management service agreement for cause.

Credit Facility

The Company has a loan agreement and revolving credit/term facility (Credit
Facility) with First Union National Bank of North Carolina (First Union)
individually and as Agent for seven additional lenders (Lenders), which was
amended as of October 30, 1996 to increase the amount available for borrowing
thereunder to $150 million through October 31, 2001. Proceeds of loans may be
used to finance medical group transactions, provide working capital or for other
general corporate uses. At December 31, 1996, the Company had an outstanding
balance of $23 million under the Credit Facility which consisted of multiple
draws with maturities up to 91 days. The Company has classified this facility
as long term due to its ability and intent to renew the obligations through
1997.

Borrowings under the Credit Facility are secured by capital stock of the
Company's subsidiaries and all material contracts, including management service
agreements. At the Company's option, funds may be borrowed at the Base interest
rate or the London Interbank Offer Rate up to London Interbank Offer Rate plus
1.5% (determined under a specific formula). The Base rate is selected by First
Union and is defined as their prime rate plus up to 1/4% or Federal Funds Rate
plus 1/2%. Interest on amounts outstanding under Base rate loans is due

33

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

quarterly while interest on London Interbank Offer Rate related loans is due
upon maturity. The weighted average interest rate outstanding on draws under
the Credit Facility at December 31, 1996 was 6.60%.

The Company is subject to restrictive covenants under the facility,
including the maintenance of certain financial ratios. The agreement limits
certain activities such as additional indebtedness, sales of assets,
investments, capital expenditures, mergers and consolidations and the payment of
dividends. Under certain circumstances, additional medical practice
transactions may require First Union and the Lenders' consent.

Capital lease obligations and other

Leases for medical and office equipment are capitalized using effective
interest rates between 7.5% and 11.5%. At December 31, 1996 and 1995, the gross
amount of assets recorded under the capital leases was $3,710,000 and $2,956,000
and the related accumulated amortization was $1,431,000 and $564,000.
Amortization expense is included with depreciation. Total future capital lease
payments are $2,352,000. Other indebtedness consists principally of installment
notes and bank debt, with varying interest rates, assumed in medical practice
transactions.

Maturities

Future principal maturities, including capital lease obligations, is
$5,564,000 in 1997, $8,579,000 in 1998, $13,175,000 in 1999, $11,382,000 in
2000, $34,220,000 in 2001 and $14,351,000 thereafter.

Master Lease

On May 1, 1995, the Company entered into a $5,000,000 master lease
agreement to provide equipment financing for use in operations. As of
December 31, 1996, the Company had no financed equipment under the agreement.

34

NOTE 5 - INCOME TAXES

The Company's income tax provision consists of the following (in
thousands):

Year ended December 31,
-----------------------------
1996 1995 1994
--------- -------- --------
Federal:
Current................................. $ 7,787 $ 4,352 $ 7
Deferred................................ 1,914 815 480
State:
Current................................. 1,155 701 8
Deferred................................ 216 61
-------- -------- -------
11,072 5,929 495
Reversal of valuation allowance due to net
operating loss utilization.................. (77) (369)
-------- -------- -------
$ 11,072 $ 5,852 $ 126
======== ======== =======

The difference between the effective income tax rate and the amount which
would be determined by applying the statutory U.S. income tax rate before income
taxes is as follows:

Year ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
Provision for income taxes at U.S.
statutory rates............................ 35.0% 35.0% 34.0%
State income taxes, net of federal benefit... 3.5 3.0 2.7
Nontaxable life insurance proceeds........... (4.2)
Nondeductible items and other................ .1 (.5)
Reversal of valuation allowance due to
net operating loss utilization............. (.4) (27.0)
------ ------ ------
38.5% 33.5% 9.2%
====== ====== ======

35

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Deferred income taxes are comprised of the following (in thousands):

December 31,
-------------------
1996 1995
------- -------
Deferred tax assets:
Deferred rent....................... $ 48 $ 6
Accrued expenses.................... 29
Other............................... 111 41
------ ------
$ 159 $ 76
====== ======
Deferred tax liabilities:
Amortization of management service
agreements......................... $2,973 $ 945
Depreciation........................ 140 17
Prepaid expenses.................... 86 24
------ ------
$3,199 $ 986
====== ======

NOTE 6 - OTHER INCOME, NET

Other income, net in 1995 consists of a gain from life insurance proceeds
of $2,090,000 less lease termination costs of $490,000.

NOTE 7 - STOCKHOLDERS' EQUITY

On August 13, 1996, the Board of Directors of the Company authorized the
purchase of up to 3,000,000 shares of the Company's Common Stock in public or
private transactions. During November and December 1996, the Company purchased
1,110,500 shares of Common Stock at an average price of $8.48 to be held as
treasury stock. On November 19, 1996, the Company issued 112,440 shares from
treasury stock to affiliated physicians in connection with a 1993 medical
practice transaction.

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.

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.

In June 1995, the Company consummated its initial public offering of
10,925,000 shares of Common Stock. Proceeds from the offering were
$105,743,000, net of commissions and expenses of $8,970,000. Of this amount,
$35,000,000 was used to repay amounts outstanding under the Company's credit
facility. The remainder was used for general corporate purposes and working
capital needs, including medical practice transactions.

36

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Effective May 2, 1995, the Company's stockholders approved an increase in
the authorized number of shares of Common Stock to 40,000,000 shares. The
Company's stockholders also approved an increase in the number of shares
available for grant under the Affiliate Stock Option Plan to 500,000 shares.

In February 1995, the Company issued for cash 1,273,642 shares of Common
Stock for $4.13 per share, of which 1,209,192 shares were purchased by the
Company's major stockholder and certain executive officers, directors and
employees.

In 1994, the Company issued 7,045,632 shares of Common Stock for
$20,002,000, of which 6,118,036 shares were purchased by the Company's major
stockholder and certain executive officers, directors and employees.

As part of entering into long-term management services agreements with
physician practices described in Note 3, the Company has made 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. The amounts, upon issuance of the shares,
are reclassified to other equity accounts as appropriate.

NOTE 8 - STOCK OPTIONS

The Company's 1993 Key Employee Stock Option Plan (Plan) provides that
employees may be granted options to purchase Common Stock. Total shares
available for grant are limited to 5% of the outstanding common shares plus the
shares to be issued to physician groups at specified future dates. Individual
option vesting and related terms are determined by the Compensation Committee of
the Board of Directors. However, the Plan provides that the options granted may
be incentive options at an exercise price no less than fair value at the grant
date or 85% of fair value in the case of nonqualified options, option terms may
not exceed ten years. Individual option grants vest ratably over time,
generally five years. Effective November 7, 1996, the Board of Directors
exchanged 626,100 options with exercise prices of $18.10 to $24.18 for new
options with an exercise price of $8.79 which approximated fair value on the
date of grant.

Under the terms of the Company's Chief Executive Officer Stock Option Plan
and Agreement and the Everson Stock Option Plan and Agreement, two executives
were granted 3,693,798 non-qualified options to purchase Common Stock with an
exercise price effectively equal to the fair market value at the date of grant.
The options vested on the date of the Company's initial public offering and
expire between 2000 and 2003. The Company's ability to grant further options
under these plans ceased on the date of the Company's initial public stock
offering. At December 31, 1996, 2,883,000 Common Stock options with a weighted-
average exercise price of $3.43 per share were outstanding and exercisable under
the terms of these plans.

The Company's 1993 Non-Employee Director Stock Option Plan provides that up
to 200,400 options to purchase Common Stock can be granted. The options vest in
6 months or ratably over 4 years, have a term of 10 years and exercise prices
effectively equal to the fair market value at the date of grant. As of
December 31, 1996, 88,000 options were outstanding and 70,000 were exercisable.

37

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company's 1993 Affiliate Stock Option Plan, as amended, provides that
options to purchase up to 1,000,000 shares of Common Stock can be granted.
Options under the plan have a term of 10 years. All individual option grants
vest ratably over the vesting periods of 3 to 5 years. Effective November 7,
1996, the Board of Directors exchanged 61,500 options with exercise prices of
$18.10 to $24.18 for new options with an exercise price of $8.79 which
approximated fair value on the date of grant. Of the outstanding options to
purchase shares of Common Stock granted under this plan, 239,000 were granted to
physician employees of the affiliated physician groups and 9,500 were granted
to other employees of the affiliated physician groups. In 1996 and 1995, the
fair value of the options granted to non-employees was $13.06 and $1.92,
respectively. Compensation expense will be recognized over the respective
vesting periods. Expense of $106,000 and $62,000 was recognized in 1996 and
1995, respectively.

All of the Company's Common Stock options vest automatically upon a change
in control of the Company, as defined.

The following summarizes the activity for all option plans:

Weighted
Average
Shares Exercise Price
--------- --------------

Balance, December 31, 1993.. 1,425,000 $ 1.34

Granted................... 1,906,000 2.96
Canceled.................. (33,000) 1.34
---------
Balance, December 31, 1994.. 3,298,000 2.28

Granted................... 2,549,000 8.78
Exercised................. (12,000) 2.67
Canceled.................. (49,000) 3.17
---------
Balance, December 31, 1995.. 5,786,000 5.14

Granted 1,080,000 13.53
Exercised................. (893,000) 1.70
Canceled.................. (1,154,000) 19.09
---------
Balance, December 31, 1996.. 4,819,000 4.30
=========

38

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The following table summarizes information about the Company's stock options
outstanding at December 31, 1996:

Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ------------ ---------------- -------------- ----------- --------------

$ 1 to 3 2,095,000 5.1 years $ 2.29 1,798,000 $ 2.33
4 to 9 2,676,000 6.8 5.62 1,627,000 4.47
15 to 24 48,000 8.9 18.55 34,000 20.26
------------ -----------
1 to 24 4,819,000 6.1 4.30 3,459,000 3.51
============ ===========

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-
Based Compensation." Accordingly, no compensation cost has been recognized for
fixed options granted to Company employees. Had compensation cost for the
Company's five stock option plans been determined based on the fair value at the
grant date for awards in 1996 and 1995 consistent with the provisions of SFAS
No. 123, the Company's pro forma net income and net income per share would have
been as follows:

Pro forma
Year Ended December 31,
-----------------------
1996 1995
---- ----

Net income............................... $ 16,656 $ 10,406
Net income per share..................... 0.35 0.26

During the initial phase-in of SFAS No. 123, this pro forma is not likely
to be representative of the effects on reported net income for future years as
options granted prior to 1995 are not included in the calculation.

Options granted in 1996 and 1995 had weighted-average fair values of $6.04
and $4.72, respectively. The fair value of each Common Stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants from all plans in
1996 and 1995:

1996 1995
------ ------
Expected life (years).................... 5 5
Risk-free interest rate.................. 5.1% 5.7%
Expected volatility (post IPO)........... 87% 83%
Expected dividend yield.................. 0% 0%

39

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 9 - COMMITMENTS AND CONTINGENCIES

The Company leases office space and certain equipment under noncancelable
operating lease agreements. Total future minimum lease payments, including
escalation provisions and leases with entities affiliated with physician groups,
are $9,450,000 in 1997, $7,222,000 in 1998, $6,071,000 in 1999, $4,857,000 in
2000, $4,294,000 in 2001 and $11,245,000 thereafter. Rental expense under
noncancelable operating leases was $8,565,000 in 1996, $4,459,000 in 1995 and
$874,000 in 1994.

The Company and its affiliated physician groups maintain insurance with
respect to medical malpractice risks on a claims-made basis in amounts believed
to be customary and adequate. Management is not aware of any outstanding claims
or unasserted claims probable of assertion against it or its affiliated
physician groups which would have a material impact on the Company's financial
position or results of operations.

NOTE 10 - RELATED PARTIES

The management services agreement activity between the Company and the
affiliated physician groups is reflected in the due to/from affiliated physician
groups components on the consolidated balance sheet.

The Company leases a portion of its medical office space and equipment, at
rates which the Company believes approximate fair market value, from entities
affiliated with certain of the stockholders of physician groups affiliated with
the Company. Payments under these leases were $2,296,000 in 1996, $1,854,000 in
1995 and $150,000 in 1994 and total future commitments are $12,641,000.

The subordinated notes are payable to the persons or entities which are
also stockholders or holders of rights to receive Common Stock at specified
future dates. Total interest expense to these parties was $3,885,000 in 1996,
$1,909,000 in 1995 and $227,000 in 1994.

A Director and a stockholder is a partner of a law firm utilized by the
Company. The Company incurred $651,000 in 1996, $904,000 in 1995 and $401,000
in 1994 for legal services provided by the firm.

Three of the Company's directors are practicing physicians with physician
groups affiliated with the Company. In 1996, the three physician groups
generated total medical service revenues of $37,725,000 of which $8,218,000 was
retained by the groups and $29,507,000 was included in the Company's revenue.
In 1995, the three physician groups generated total medical service revenues of
$31,782,000 of which $6,694,000 was retained by the groups and $25,088,000 was
included in the Company's revenue. In 1994, two physician groups generated total
medical service revenues of $17,205,000 of which $3,038,000 was retained by the
groups and $14,167,000 was included in the Company's revenue.

40

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 11 - QUARTERLY FINANCIAL DATA

The following table presents the Company's unaudited quarterly information
(in thousands, except per share amounts):

1996 Quarter Ended 1995 Quarter Ended
------------------------------------ --------------------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
------ ------ ------ ------ ------ ------ ------ ------

Revenue.............................. $63,635 $53,701 $47,374 $40,750 $34,433 $25,497 $24,644 $14,600
Income from operations............... 9,259 7,782 7,297 7,629 6,275 4,315 4,834 2,128
Net income........................... 4,840 4,303 4,060 4,447 3,913 4,654 2,068 982
Net income per share................. 0.10 0.09 0.09 0.09 0.09 0.10 0.06 0.03

NOTE 12 - SUBSEQUENT EVENTS

From January 1, 1997 through March 14, 1997, the Company has expanded
market share by amending long-term management agreements to affiliate with
oncology physician groups located in Tulsa, Oklahoma; Williamsburg, Virginia;
Las Vegas, Nevada and Norfolk, Virginia. Total consideration for these
transactions was $30,176,000 including 700,732 shares of Common Stock to be
issued with a value of $5,652,000.

From January 1, 1997 through March 14, 1997, the Company has purchased
657,000 shares of Treasury Stock at an average price of $9.77.

41

SIGNATURES

Pursuant to the requirements of Section 13 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.

AMERICAN ONCOLOGY RESOURCES, INC.

By: /s/ R. DALE ROSS
_________________________________
R. Dale Ross
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ R. DALE ROSS Chairman of the Board, Chief March 20, 1997
_____________________________ Executive Officer and Director
R. Dale Ross

/s/ LLOYD K. EVERSON, M.D. President and Director March 20, 1997
_____________________________
Lloyd K. Everson, M.D.

/s/ L. FRED POUNDS Vice President of Finance, Chief March 21, 1997
_____________________________ Financial Officer and Treasurer
L. Fred Pounds

/s/ RUSSELL L. CARSON Director March 19, 1997
_____________________________
Russell L. Carson

/s/ KYLE M. FINK, M.D. Director March 19, 1997
_____________________________
Kyle M. Fink, M.D.

/s/ RICHARD B. MAYOR Director March 21, 1997
_____________________________
Richard B. Mayor

/s/ MAGARAL S. MURALI, M.D. Director March 19, 1997
____________________________
Magaral S. Murali, M.D.

/s/ ROBERT A. ORTENZIO Director March 19, 1997
_____________________________
Robert A. Ortenzio

42

/s/ ANDREW M. PAUL Director March 17, 1997
________________________________
Andrew M. Paul

/s/ LEONARD M. RIGGS, JR., M.D. Director March 19, 1997
________________________________
Leonard M. Riggs, Jr., M.D.

/s/ EDWARD E. ROGOFF, M.D. Director March 19, 1997
________________________________
Edward E. Rogoff, M.D.

43