<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------- -----------
Commission File Number 33-80731
PHYSICIAN SUPPORT SYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3624081
- ---------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
ROUTE 230 AND EBY-CHIQUES ROAD
MT. JOY, PENNSYLVANIA 17552
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 653-5340
--------------
Registrant's telephone number, including area code
Indicated 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 the number of shares outstanding of each of issuer's classes of common
stock, as of the latest practicable date.
Common Stock, par value $.001 per share 8,665,614 Shares
- ------------------------------------------ ------------------
Class Outstanding at
November 10, 1996
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC.
<TABLE>
<CAPTION>
INDEX
Page No.
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 2
Condensed Consolidated Statements of
Operations - Three and Nine Months
Ended September 30, 1996 and 1995 3
Condensed Consolidated Statements of Cash
Flows - Nine Months Ended
September 30, 1996 and 1995 4
Notes to Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signature 15
Index of Exhibits
</TABLE>
1
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,996,960 $ 1,665,423
Accounts receivable..................................... 13,358,765 9,976,147
Accounts receivable -- unbilled......................... 11,203,452 6,580,002
Due from related parties................................ -- 2,396,114
Prepaid expenses and other current assets............... 1,899,774 1,228,694
---------- ----------
Total current assets................................ 31,458,950 21,846,380
Property and equipment....................................... 7,707,623 5,544,590
Intangible assets -- net..................................... 43,740,216 12,265,026
Due from related parties..................................... 571,771 1,983,450
Other assets................................................. 1,764,285 182,203
---------- ----------
Total............................................... $ 85,242,845 $ 41,821,649
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 2,251,593 $ 2,870,315
Accrued expenses........................................ 14,844,335 7,427,929
Short-term borrowings................................... -- 600,000
Current portion of long-term debt....................... 2,499,863 5,035,475
Current portion of other long-term liabilities.......... 901,443 760,188
Deferred income taxes................................... 2,634,335 389,517
---------- ----------
Total current liabilities............................ 23,131,569 17,083,424
---------- ----------
Long-term debt............................................... 8,133,828 15,887,771
---------- ----------
Other long-term liabilities.................................. 3,213,234 1,814,942
---------- ----------
Deferred income taxes........................................ 1,401,482 998,049
---------- ----------
Commitments and contingencies
Redeemable preferred stock:
Par value $.01 per share: authorized 10,000 shares: 10%
Preferred stock, Series A and B, stated value $500 per
share, outstanding 2,932,032 shares of each
series at December 31, 1995........................... -- 2,932,032
---------- ----------
Stockholders' equity:
Preferred stock, par value $.01 per share: authorized
10,000,000 shares: none outstanding
Common stock, par value $.001 per share:
authorized 100,000,000 shares: outstanding 8,665,614
and 4,343,000 shares at September 30, 1996 and
December 31, 1995 respectively...................... 8,666 4,343
Additional paid-in capital........................... 53,088,451 478,880
Retained earnings (accumulated deficit).............. (3,734,385) 2,622,208
---------- ----------
49,362,732 3,105,431
---------- ----------
Total.......................................... $ 85,242,845 $ 41,821,649
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $17,942,609 $14,432,361 $48,557,484 $40,811,589
----------- ----------- ----------- -----------
Operating expenses:
Salaries and wages.............. 8,954,831 7,703,954 25,084,787 22,334,984
General and administrative...... 5,859,599 4,529,947 17,821,938 13,043,307
Depreciation and amortization... 1,301,923 1,105,687 3,791,264 3,287,745
Interest income................. (146,173) (52,139) (610,172) (116,950)
Interest expense................ 216,049 422,902 741,072 1,377,261
Other (income) expense.......... -- -- 122,609 (19,993)
Merger costs.................... 1,200,000 -- 2,350,000 --
Restructuring charge............ -- -- 2,500,000 --
----------- ------------ ----------- -----------
Income (loss) before income taxes
(benefit)............................. 556,380 727,959 (3,244,014) 905,235
Income taxes (benefit).................. 2,902,258 7,890 2,246,258 (186,953)
----------- ------------ ----------- -----------
Net income (loss)....................... (2,345,878) 720,069 (5,490,272) 1,092,188
Pro forma income taxes.................. (1,939,599) 267,232 (2,251,353) 725,119
----------- ------------ ----------- -----------
Pro forma net income (loss)............. (406,279) 452,837 (3,238,919) 367,069
Preferred stock dividends............... -- 67,416 36,320 199,704
----------- ------------ ----------- -----------
Pro forma net income (loss) applicable
to common stock....................... $ (406,279) $ 385,421 (3,275,239) 167,365
=========== ============ =========== ===========
Pro forma net income (loss) per share... $ (0.05) $ 0.09 $ (0.42) $ 0.04
=========== ============ =========== ===========
Weighted average shares outstanding..... 8,509,577 4,343,000 7,817,986 4,343,000
=========== ============ =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1996 1995
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $(5,490,272) $ 1,092,188
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization............................ 3,791,264 3,287,745
Deferred income taxes.................................... 2,150,683 (245,820)
Loss on disposal of property and equipment............... 122,609 6,695
Other long-term liabilities.............................. (341,866) (567,248)
Changes in operating assets and liabilities:
Accounts receivable.............................. (455,105) (998,935)
Accounts receivable -- unbilled.................. (583,985) (1,043,471)
Prepaid expenses, other current assets
and other assets............................... (1,804,784) 580,314
Accounts payable................................. (1,173,004) 297,755
Accrued expenses................................. 395,401 (374,700)
------------ ------------
Net cash provided by (used in)
operating activities................... (3,389,059) 2,034,523
------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired............................... (17,935,326) --
Deferred purchase price.......................................... (1,166,667) --
Capital expenditures............................................. (1,403,211) (811,226)
------------ ------------
Net cash used in investing
activities............................. (20,505,204) (811,226)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock........................... 43,556,217 --
Proceeds from short-term borrowings.............................. 3,371,875 400,000
Repayment of short-term borrowings............................... (600,000) --
Principal payments on long-term debt............................. (14,267,809) (105,237)
Principal payments on capital lease obligations.................. (370,693) (213,265)
Due to/from related parties...................................... (665,439) (2,066,460)
Common stock dividends........................................... (830,000) (608,147)
Redemption of preferred stock.................................... (2,932,032) --
Redeemable preferred stock distributions......................... (36,319) --
------------ ------------
Net cash provided by (used in)
financing activities................... 27,225,800 (2,593,109)
------------ ------------
Net increase (decrease) in cash and cash equivalents..................... 3,331,537 (1,369,812)
Cash and cash equivalents, beginning of period........................... 1,665,423 2,464,899
------------ ------------
Cash and cash equivalents, end of period................................. $ 4,996,960 $ 1,095,087
------------ ------------
------------ ------------
Supplemental investing activity:
Fair value of assets acquired.................................... $31,589,439 $ --
Cash acquired.................................................... (490,231) --
Liabilities assumed.............................................. (10,901,882) --
Deferred purchase price.......................................... (2,262,000) --
------------ ------------
Net cash paid for acquisitions........... $17,935,326 $ --
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest........................................... $ 1,557,976 $ 1,301,159
------------ ------------
------------ ------------
Capital lease obligations incurred in acquisition of
equipment...................................................... $ 1,073,235 $ --
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission and consequently do not
include all of the disclosures normally required by generally accepted
accounting principles. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K.
The unaudited financial information contained herein reflects all
adjustments (consisting of only normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of the results of
operations for the three and nine month periods ended September 30, 1996 and
1995.
2. COMMON STOCK
a. Sale of common stock--On February 12, 1996, the Company authorized
the issuance of up to 10,000,000 shares of preferred stock, increased the number
of authorized shares of common stock from 5,000 to 100,000,000, changed the par
value of its common stock from $.01 to $.001 per share and effected a
1,400-for-one stock split. In addition, on February 12, 1996, the Company sold
4,025,000 shares of common stock for $12 per share in its initial public
offering of common stock. The net proceeds of such offering of approximately
$43,556,000 were used to repay all outstanding short and long-term debt except
for the Spring acquisition subordinated note, redeem all outstanding shares of
preferred stock and acquire three businesses (North Coast Health Care Management
Group (which consisted of three affiliated companies) ("NCHC Group"), Medical
Management Support, Inc. ("MMS") and Data Processing Systems, Inc. ("DPS")
(together, the "Acquired Businesses")) currently providing business management
services to physicians.
b. 1996 Stock Option Plan--On February 9, 1996, the Company adopted the
1996 Stock Option Plan (the "Original Plan"). On October 2, 1996, the Company
amended and restated the Plan by adopting the Amended and Restated 1996 Stock
Option Plan (the "Plan"). A total of 939,750 authorized but unissued shares of
common stock are reserved for issuance under the Plan. All options issued under
the Plan through September 30, 1996 have an exercise price of not less than 100%
of the fair market value of a share of the Company's common stock on the date of
the grant, vest over five years and must be exercised within ten years from the
date of the grant. Through September 30, 1996, the Company has issued 353,500
options under the Plan at exercise prices ranging from $12 to $22.
3. BUSINESS COMBINATIONS
On February 15, 1996, the Company acquired 100 percent of the
outstanding common stock and substantially all of the assets and liabilities of
the companies that made up the NCHC Group for approximately $8,000,000 in cash
and deferred payments.
On February 15, 1996, the Company acquired substantially all of the
assets and liabilities of MMS for approximately $2,500,000 in cash.
On February 15, 1996, the Company acquired substantially all of the
assets and liabilities of DPS for approximately $1,150,000 in cash and deferred
payments. The payment of the deferred payments is subject to DPS' retention of
clients.
On May 8, 1996, the Company acquired substantially all of the assets and
liabilities of PBS Northwest, Inc. ("PBS") for approximately $3,000,000 in cash.
On May 21, 1996, the Company acquired substantially all of the assets
and liabilities of ALM, Inc. ("ALM") for approximately $1,600,000 in cash and
deferred payments plus 11,628 shares of common stock valued at approximately
$250,000.
On September 3, 1996, the Company acquired 100 percent of the
outstanding common stock and membership interests of Medical Intercept Systems
Group ("MIS") for approximately $3,697,500 in cash plus 285,998 shares of common
stock valued at approximately $6,184,700 plus the assumption of approximately
$3,521,000 in notes payable. In connection with this acquisition, the Company
accrued approximately $2,000,000 for the costs of exiting certain redundant
activities.
Each of the foregoing acquisitions has been accounted for under the
purchase method of accounting, and accordingly, the net assets acquired were
recorded at their fair values on the dates of acquisition and the results of
operations of each of these companies are included in the Company's consolidated
statement of operations from the respective dates of acquisition. Excess
purchase price over fair value of net assets acquired of approximately
$31,680,000 is being amortized on the straight-line method over 20 years.
-5-
<PAGE>
On June 28, 1996, the Company merged with Synergistic Systems, Inc.
("SSI") by exchanging 945,000 shares of common stock of the Company for all the
outstanding shares of common stock of SSI.
On August 31, 1996, the Company merged with EE&C Financial Services,
Inc. ("EE&C") by exchanging 1,026,852 shares of common stock of the Company for
all the outstanding shares of common stock of EE&C. In addition, the Company
also repaid outstanding indebtedness of EE&C in an aggregate amount of
$2,622,971 by issuing an additional 131,148 shares of common stock.
Each of the foregoing transactions has been accounted for as a pooling
of interests, and accordingly, all previously issued financial statements of the
Company have been restated to include SSI and EE&C. A reconciliation of
revenues, net income (loss) per share of the Company as previously reported, and
combined, is as follows:
<TABLE>
<CAPTION>
($000S)
---------------------------------------------
As Previously
Reported SSI EE & C Combined
-------- --- ------ --------
<S> <C> <C> <C> <C>
Q1 95
- -----
Revenues $ 4,560 $ 2,265 $ 6,558 $ 13,383
Pro forma net income (loss) (562) (18) 484 (96)
Preferred stock dividends 65 65
Pro forma earnings (loss) per share $ (0.28) $ (0.04)
======== ========
Weighted average shares 2,240 4,343
======== ========
Q2 95
- -----
Revenues $ 4,962 $ 2,463 $ 5,570 $ 12,995
Pro forma net income (loss) (229) 45 195 11
Preferred stock dividends 67 67
Pro forma earnings (loss) per share $ (0.13) $ (0.01)
======== ========
Weighted average shares 2,240 4,343
======== ========
Q3 95
- -----
Revenues $ 5,109 $ 2,740 $ 6,583 $ 14,432
Pro forma net income (loss) (150) 202 401 453
Preferred stock dividends 67 67
Pro forma earnings (loss) per share $ (0.10) $ 0.09
======== ========
Weighted average shares 2,240 4,343
======== ========
Q4 95
- -----
Revenues $ 4,953 $ 2,362 $ 4,909 $ 12,223
Pro forma net income (loss) (332) (204) (1,058) (1,582)
Preferred stock dividends 81 81
Pro forma earnings (loss) per share $ (0.18) $ (0.38)
======== ========
Weighted average shares 2,240 4,343
======== ========
Q1 96
- -----
Revenues $ 6,399 $ 2,652 $ 5,776 $ 14,827
Pro forma net income (loss) (59) 25 149 115
Preferred stock dividends 36 36
Pro forma earnings (loss) per share $ (0.02) $ 0.01
======== ========
Weighted average shares 4,398 6,501
======== ========
Q2 96
- -----
Revenues $ 10,337 (*) $ 5,450 $ 15,787
Pro forma net income (loss) (2,331) (616) (2,947)
Pro forma earnings (loss) per share $ (0.32) $ (0.35)
======== ========
Weighted average shares 7,262 8,420
======== ========
</TABLE>
(*) Included in "As Previously Reported".
-6-
<PAGE>
In connection with the SSI merger, the Company incurred approximately
$1,150,000 in transaction fees and other merger related costs which are
reflected in the Company's results of operations for the three months ended June
30, 1996.
In connection with the EE&C merger, the Company incurred approximately
$1,200,000 in transaction fees and other merger related costs which are
reflected in the Company's results of operations for the three months ended
September 30, 1996.
The unaudited consolidated results of operations of the Company on a pro
forma basis as if the Company had sold 4,025,000 shares of common stock for $12
per share, repaid all outstanding short and long-term debt (except for The
Spring Anesthesia Group, Inc. ("Spring") acquisition subordinated note),
redeemed all outstanding shares of preferred stock and consummated the
acquisitions of NCHC, MMS, DPS, PBS, ALM, MIS, SSI and EE&C on January 1, 1995
are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenue $ 58,052,723 $ 53,931,593
Net income (loss) (5,087,124) 428,795
Net income (loss) per share (0.59) 0.05
Weighted average shares 8,665,626 8,665,626
</TABLE>
4. LONG-TERM DEBT
On February 15, 1996, the Company repaid all outstanding short and
long-term debt except for the Spring acquisition subordinated note.
On October 28, 1996, the Company received a commitment from its bank for a
$35 million line of credit for acquisitions and working capital through
December 31, 1998.
5. RESTRUCTURING CHARGE
In June 1996, the Company recorded a restructuring charge of $2,500,000
related to the write-off of certain computer hardware and software and certain
non-recurring expenses associated with a limited restructuring of operations at
Spring, its subsidiary located in Stockton, California, and to the write-off of
certain computer hardware and software at SSI. The Company intends to replace
both the Spring and SSI operating software with its proprietary operating
software as soon as is practicable.
6. INCOME TAXES
On August 31, 1996, the Company merged with EE&C in a transaction accounted
for as a pooling of interests. In connection with this transaction, the Company
recorded a charge in the third quarter of approximately $1.5 million related to
EE&C's change in status from an "S" Corporation to a "C" Corporation. The
Company also recorded income tax expense of an additional $1.4 million related
to third quarter operations. The pretax amount on which such tax provision was
calculated included results of operations for EE&C only for the period
subsequent to August 31, 1996 and excluded items not deductible for income tax
purposes. Pro forma income taxes and pro forma net income are presented for all
periods prior to August 31, 1996 to show what income taxes and net income would
have been had EE&C been taxed as a "C" Corporation at those times.
-7-
<PAGE>
7. RELATED PARTY TRANSACTIONS
Amounts due to (from) related parties consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Loans receivable - stockholders $ 571,771 $ 1,983,450
============= ============
Due from affiliated companies $ - $ 2,396,114
============= ============
Notes payable - stockholders $ (946,705) $ (3,147,304)
Less: current portion (included
in current portion of
long-term debt) (130,019) (2,231,316)
------------- ------------
Long term portion (included
in long-term debt) $ (816,686) $ (915,988)
============= ============
</TABLE>
The amounts due from related parties primarily consists of notes receivables
from shareholders resulting from certain tax transactions of EE&C Financial
Services, Inc. which occured prior to the merger of that entity with the
Company. Notes payable - stockholders consists of amounts due to a stockholder
as a part of a common stock repurchase. Included in general and administrative
expense was $138,000 and $596,000 in the three months ended September 30, 1996
and 1995 and $1,105,000 and $1,653,000 in the nine months ended September 30,
1996 and 1995 which represents legal services provided by an affiliate relating
to collections on behalf of customers.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading provider of business management services to
hospital-affiliated physicians. In providing its clients with business
management services, the Company manages the billing process for its clients,
including preparation and follow-up on bills from physicians for medical
services provided by such physicians to their patients. The Company is generally
compensated with a management fee based upon net receipts of its clients.
On February 12, 1996, the Company sold 4,025,000 shares of common stock
for $12 per share in its initial public offering of common stock. The net
proceeds of such offering of approximately $43,556,000 were used to repay all
outstanding short and long-term debt except for the Spring acquisition
subordinated note, redeem all outstanding shares of preferred stock and acquire
three businesses (North Coast Health Care Management Group (which consisted of
three affiliated companies) ("NCHC Group"), Medical Management Support, Inc.
("MMS") and Data Processing Systems, Inc. ("DPS") (together, the "Acquired
Businesses")) currently providing business management services to physicians.
See "ACQUISITIONS."
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's latest
annual report on Form 10-K.
ACQUISITIONS
On February 15, 1996, the Company acquired 100 percent of the
outstanding common stock and substantially all the assets and liabilities of the
companies that made up the NCHC Group for approximately $8,000,000 in cash and
deferred payments.
On February 15, 1996, the Company acquired substantially all the assets
and liabilities of MMS for approximately $2,500,000 in cash.
On February 15, 1996, the Company acquired substantially all the assets
and liabilities DPS for approximately $1,150,000 in cash and deferred payments.
The payment of the deferred payments is subject to DPS' retention of clients.
On May 8, 1996, the Company acquired substantially all the assets and
liabilities of PBS Northwest, Inc. ("PBS") for approximately $3,000,000 in cash.
On May 21, 1996, the Company acquired substantially all the assets and
liabilities of ALM, Inc. ("ALM") for approximately $1,600,000 in cash and
deferred payments plus 11,628 shares of common stock valued at approximately
$250,000.
On September 3, 1996, the Company acquired 100 percent of the
outstanding common stock and membership interests of Medical Intercept Systems
Group ("MIS") for approximately $3,697,000 in cash plus 285,998 shares of common
stock valued at approximately $6,184,700 plus the assumption of approximately
$3,521,000 in notes payable. In connection with this acquisition, the Company
accrued approximately $2,000,000 for the costs of exiting certain redundant
activities.
Each of the foregoing acquisitions was accounted for under the purchase
method of accounting, and, accordingly, the net assets acquired were recorded at
their fair values on the date of acquisition and the results of operations at
each of these companies is included in the Company's consolidated statement of
operations from the respective dates of acquisition. Excess purchase price over
fair value of net assets acquired is being amortized on the straight-line method
over 20 years.
On June 28, 1996, the Company merged with Synergistic Systems, Inc.
("SSI") by exchanging 945,000 shares of common stock of the Company for all the
outstanding shares of common stock of SSI.
On August 31, 1996, the Company merged with EE&C Financial Services,
Inc. ("EE&C") by exchanging 1,026,852 shares of common stock of the Company for
all the outstanding shares of common stock of EE&C. In addition, the Company
also repaid outstanding indebtedness of EE&C in an aggregate amount of
$2,622,971 by issuing an additional of 131,148 shares of common stock.
Each of these transactions has been accounted for as pooling of
interests, and accordingly, all previously issued financial statements of the
Company have been restated to include SSI and EE&C.
-9-
<PAGE>
RESULT OF OPERATIONS
The following table sets forth, for the periods presented, the
percentages of net revenue represented by certain items reflected in the
Company's statement of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Salaries and Wages 49.9% 53.4% 51.7% 54.7%
General and Administrative 32.7% 31.4% 36.7% 32.0%
Depreciation and Amortization 7.3% 7.7% 7.8% 8.1%
Interest expense (income), net 0.4% 2.6% 0.3% 3.1%
Other expense (income), net 0.0% 0.0% 0.3% 0.0%
Merger costs 6.7% 0.0% 4.8% 0.0%
Restructuring charge 0.0% 0.0% 5.1% 0.0%
---- ---- ---- ----
Income (loss) before income taxes 3.1% 5.0% (6.7%) 2.2%
Income taxes 16.2% 0.1% 4.6% (0.5%)
----- ---- ---- -----
Net income (loss) (13.1%) 5.0% (11.3%) 2.7%
Pro forma income taxes (10.8%) 1.9% (4.6%) 1.8%
----- ---- ---- ----
Pro forma net income (loss) (2.3%) 3.1% (6.7%) 0.9%
=== === === ===
</TABLE>
-10-
<PAGE>
Revenues
Revenues increased approximately 24.3% from $14,432,000 for the three
months ended September 30, 1995 to $17,943,000 for the three months ended
September 30, 1996 and 19.0% from $40,812,000 for the nine months ended
September 30, 1995 to $48,557,000 for the nine months ended September 30, 1996.
Such increases resulted primarily from businesses acquired during the three and
nine months ended September 30, 1996, and increases in the volume of business
with clients served by the Company in the three and nine months ended September
30, 1996 compared to the three and nine months ended September 30, 1995. In
addition, the Company's revenues during the three and nine months ended
September 30, 1996 were adversely affected by operating inefficiencies in the
processing of physician charges at The Spring Anesthesia Group, Inc. ("Spring")
the Company's subsidiary located in Stockton, California. See "Restructuring
Charge and Merger Costs."
Salaries and Wages
Salaries and wages increased approximately 16.2% from $7,704,000 for the
three months ended September 30, 1995 to $8,955,000 for the three months ended
September 30, 1996 and 12.3% from $22,335,000 for the nine months ended
September 30, 1995 to $25,085,000 for the nine months ended September 30, 1996.
Such increases resulted primarily from businesses acquired during the three and
nine months ended September 30, 1996, and increases in the number of clients
served by the Company. Overall, the Company incurred increased salary and
wage expenses during the nine months ended September 30, 1996 in an attempt to
increase the processing of physician charges at Spring. Salaries and wages at
Spring were lower in the three months ended September 30, 1996 than during the
three months ended June 30, 1996. See "Restructuring Charge and Merger Costs."
General and Administrative Expenses
General and administrative expenses increased approximately 29.4% from
$4,530,000 for the three months ended September 30, 1995 to $5,860,000 for the
three months ended September 30, 1996 and 36.6% from $13,043,000 for the nine
months ended September 30, 1995 to $17,822,000 for the nine months ended
September 30, 1996. Such increases resulted primarily from businesses acquired
during the three and nine months ended September 30, 1996 and increases in the
number of clients served by the Company. In addition, the Company incurred
increased general and administrative expenses during the nine months ended
September 30, 1996 in an attempt to increase the processing of physician charges
at Spring. See "Restructuring Charge and Merger Costs."
Depreciation and Amortization
Depreciation and amortization increased approximately 17.7% from $1,106,000
for the three months ended September 30, 1995 to $1,302,000 for the three months
ended September 30, 1996 and 15.3% from $3,288,000 for the nine months ended
September 30, 1995 to $3,791,000 for the nine months ended September 30, 1996.
Such increases resulted primarily from businesses acquired during the three and
nine months ended September 30, 1996.
Interest and Other Income
Interest and other income increased from $58,000 for the three months ended
September 30, 1995 to $146,000 for the three months ended September 30, 1996 and
from $137,000 for the nine months ended September 30, 1995 to $488,000 for the
nine months ended September 30, 1996 primarily as a result of interest earned on
excess cash proceeds from the Company's initial public offering of common stock.
Interest Expense
Interest expense decreased approximately 48.9% from $423,000 for the three
months ended September 30, 1995 to $216,000 for the three months ended September
30, 1996 and 46.2% from $1,378,000 for the nine months ended September 30, 1995
to $741,000 for the nine months ended September 30, 1996. Such decreases
resulted from decreased levels of short and long-term debt after repayment of
such borrowings out of proceeds from the Company's initial public offering of
common stock.
-11-
<PAGE>
Restructuring Charge and Merger Costs
In June 1996, the Company recorded a restructuring charge of $2,500,000
related to the write-off of certain computer hardware and software and certain
non-recurring expenses associated with a limited restructuring of operations at
Spring, and to the write-off of certain computer hardware and software at SSI.
Spring's results in the three months ended June 30, 1996 were adversely
affected by operating inefficiencies in the processing of physician charges
which resulted in lower revenues during the period. In addition, the Company
incurred increased salary and general and administrative expenses in an attempt
to increase production. To address these operating inefficiencies, among other
actions, the Company decided to replace certain computer hardware and software
at Spring with its proprietary operating software. The Company recorded a
restructuring charge in the three months ended June 30, 1996 of approximately
$1,600,000 related to the write-off of certain computer hardware and software,
and costs associated with the introduction of a new management team, some
limited severance activity and other transition items.
At the time of the SSI merger, the Company determined that it would replace
certain SSI computer hardware and software with its proprietary operating
software, and accordingly recorded a charge of approximately $900,000 in the
three months ended June 30, 1996. In addition, the Company incurred
approximately $1,150,000 in transaction fees and other merger related costs in
connection with the SSI merger which are reflected in the Company's results of
operations for the three months ended June 30, 1996.
The Company intends to replace both the Spring and SSI operating software
with its proprietary operating software as soon as is practicable.
The Company incurred approximately $1,200,000 in transaction fees and other
merger related costs in connection with the EE&C merger which are reflected in
the Company's results of operations for the three months ended September 30,
1996.
Income Taxes (Benefit)
The Company's historical effective rates for income taxes (benefit)
increased from 1.1% for the three months ended September 30, 1995 to 521.6% for
the three months ended September 30, 1996 and from 20.7% for the nine months
ended September 30, 1995 to 69.2% for the nine months ended September 30, 1996.
The increase in the effective tax rates for the three and nine months ended
September 30, 1996 was primarily attributable to nondeductible merger costs
incurred in connection with the SSI and EE&C pooling of interest transactions
and a charge in the three months ended September 30, 1996 of approximately $1.5
million related to EE&C's change in status from an "S" Corporation to a "C"
Corporation. Such increases also resulted from differing levels in each year of
projected annual pretax income or loss and the effect on such projected levels
of items not deductible for federal income tax purposes.
Pro forma income taxes are presented for all periods prior to August 31,
1996 to show what income taxes would have been had EE&C been taxed as a "C"
Corporation at those times.
Pro Forma Net Income (Loss) and Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) and pro forma net income (loss) per share
result from the accumulation of the items described above and the increase in
the weighted average number of shares outstanding resulting from the Company's
initial public offering of common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital and cash and cash equivalents were
$8,327,381 and $4,996,960, respectively, at September 30, 1996 compared to
$4,762,956 and $1,665,423, respectively, at December 31, 1995. Such increases in
working capital and cash and cash equivalents result primarily from excess cash
proceeds from the Company's initial public offering of common stock. Such excess
proceeds are primarily invested in obligations of the U.S. Treasury or other
U.S. government agencies or other highly liquid short-term corporate securities.
The Company's total short and long-term debt was $10,633,691 at
September 30, 1996 compared to $20,923,246 at December 31, 1995.
On October 28, 1996, the Company received a commitment from its bank for
a $35 million line of credit for acquisitions and working capital through
December 31, 1998.
The Company believes anticipated cash flow from operations, cash and
cash equivalents on hand and borrowing capacity from its line of credit
commitment are adequate for its anticipated financing needs.
-12-
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Asset Purchase Agreement among PBS
Northwest Incorporated, the shareholders of
PBS Northwest, Incorporated and PSS PBS
Northwest, Inc. dated May 8, 1996
(incorporated herein by reference to the
Company's Current Report on Form 8-K dated
May 14, 1996, as amended by Amendment No. 1
thereto dated July 15, 1996).
2.2 Asset Purchase Agreement among ALM, Inc.,
the shareholders of ALM, Inc. and PSS ALM,
Inc. dated May 21, 1996 (incorporated
herein by reference to the Company's
Current Report on Form 8-K dated June 4,
1996, as amended by Amendment No. 1 thereto
dated August 2, 1996).
2.3 Agreement and Plan of Merger dated as of
June 28, 1996 among the Company, PSS
Synergistic Systems, Inc. and Synergistic
Systems, Inc. (incorporated herein by
reference to the Company's Current Report
on Form 8-K dated July 8, 1996, as amended
by Amendment No. 1 thereto dated
September 6, 1996).
2.4 Agreement and Plan of Merger dated as of
August 30, 1996 among the Company, PSS EE&C
Financial Services, Inc. and EE&C Financial
Services, Inc. (incorporated herein by
reference to the Company's Current Report
on Form 8-K dated September 13, 1996, as
amended by Amendment No. 1 thereto dated
November 12, 1996).
2.5 Agreement and Plan of Merger dated as of
August 30, 1996 among the Company, PSS EE&C
Health Services, Inc., PSS Med-Data
Interface Systems, Inc., PSS Medical
Intercept Systems, Inc., EE&C Health
Services, Inc., Med-Data Interface Systems,
LLC and Medical Intercept Systems, LLC
(incorporated herein by reference to the
Company's Current Report on Form 8-K dated
September 16, 1996, as amended by Amendment
No. 1 thereto dated November 15, 1996).
3.1 Amended and Restated Certificate of
Incorporation of the Company (incorporated
by reference to the Company's Registration
Statement on Form S-1 dated December 21,
1995 (Registration No. 33-80731), as
amended by Amendment No. 2 thereto dated
January 29, 1996).
3.2 ByLaws of the Company (incorporated by
reference to the Company's Registration
Statement on Form S-1 dated December 21,
1995 (Registration No. 33-80731)).
27 Financial Data Schedule
-13-
<PAGE>
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended September 30, 1996:
1. Current Report dated July 8, 1996, as amended by Amendment
No. 1 thereto dated September 6, 1996, reporting the Company's
acquisition on June 28, 1996 of the capital stock outstanding of
Synergistic Systems, Inc. ("SSI") Said report, as amended, includes (i)
the balance sheets of SSI as of December 31, 1994 and 1995 and the
related statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995 and as of
June 28, 1996 and for the six months ended June 30, 1995 and June 28,
1996 and (ii) the pro forma financial statements of the Company, giving
effect to the acquisition of SSI, for the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1996.
2. Current Report dated September 13, 1996, as amended by
Amendment No. 1 thereto dated November 12, 1996 reporting the Company's
acquisition on August 31, 1996 of the capital stock outstanding of EE&C
Financial Services Inc. ("EEC"). Said report, as amended, includes (1)
the financial statements of EEC as of December 31, 1994 and 1995 and for
the three years ended December 31, 1995 and as of June 30, 1996 and for
the six months ended June 30, 1995 and June 30, 1996 and (ii) the pro
forma financial statements of the Company, giving effect to the
acquisition of EEC, as of June 30, 1996 and for the years ended December
31, 1993, 1994 and 1995 and the six months ended June 30, 1996.
3. Current Report dated September 16, 1996, as amended by
Amendment No. 1 thereto dated November 15, 1996 reporting the Company's
acquisition on September 3, 1996 of the respective capital stock and
membership interests outstanding of EE&C Health Services Inc., Med-Data
Interface Systems, LLC and Medical Intercept Systems, LLC (the "MIS
Group"). Said report, as amended, includes (1) the financial statements
of the MIS Group as of December 31, 1994 and 1995 and for the three
years ended December 31, 1995 and as of June 30, 1996 and for the six
months ended June 30, 1995 and June 30, 1996 and (ii) the pro forma
financial statements of the Company, giving effect to the acquisition of
the MIS Group as of June 30, 1996 and for the year ended December 31,
1995 and the six months ended June 30, 1996.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on November 19, 1996.
PHYSICIAN SUPPORT SYSTEMS, INC.
By: /s/ DAVID S. GELLER
...............................
DAVID S. GELLER
SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(Duly Authorized Officer and
Principal Financial Officer)
-15-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Asset Purchase Agreement among PBS
Northwest Incorporated, the shareholders of
PBS Northwest, Incorporated and PSS PBS
Northwest, Inc. dated May 8, 1996
(incorporated herein by reference to the
Company's Current Report on Form 8-K dated
May 14, 1996, as amended by Amendment No. 1
thereto dated July 15, 1996).
2.2 Asset Purchase Agreement among ALM, Inc.,
the Shareholders of ALM, Inc. and PSS ALM,
Inc. dated May 21, 1996 (incorporated
herein by reference to the Company's
Current Report on Form 8-K dated June 4,
1996, as amended by Amendment No. 1 thereto
dated August 2, 1996)
2.3 Agreement and Plan of Merger dated as of
June 28, 1996 among the Company, PSS
Synergistic Systems, Inc. and Synergistic
Systems, Inc. (incorporated herein by
reference to the Company's Current Report
on Form 8-K dated July 8, 1996, as amended
by amendment No. 1 thereto dated
September 6, 1996).
2.4 Agreement and Plan of Merger dated as of
August 30, 1996 among the Company, PSS EE&C
Financial Services, Inc. and EE&C Financial
Services, Inc. (incorporated herein by
reference to the Company's Current Report
on Form 8-K dated September 13, 1996, as
amended by Amendment No. 1 thereto dated
November 12, 1996).
2.5 Agreement and Plan of Merger dated as of
August 30, 1996 among the Company, PSS EE&C
Health Services, Inc., PSS Med-Data
Interface Systems, Inc., PSS Medical
Intercept Systems, Inc., EE&C Health
Services, Inc., Med-Data Interface Systems,
LLC and Medical Intercept Systems, LLC
(incorporated herein by reference to the
Company's Current Report on Form 8-K dated
September 16, 1996, as amended by Amendment
No. 1 thereto dated November 15, 1996).
3.1 Amended and Restated Certificate of
Incorporation of the Company (incorporated
by reference to the Company's Registration
Statement on Form S-1 dated December 21,
1995 (Registration No. 33-80731), as
amended by Amendment No. 2 thereto dated
January 29, 1996).
3.2 ByLaws of the Company (incorporated by
reference to the Company's Registration
Statement on Form S-1 dated December 21,
1995 (Registration No. 33-80731)).
27 Financial Data Schedule
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,996,960
<SECURITIES> 0
<RECEIVABLES> 24,562,217
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,458,950
<PP&E> 7,707,623
<DEPRECIATION> 0
<TOTAL-ASSETS> 85,242,845
<CURRENT-LIABILITIES> 23,131,569
<BONDS> 0
0
0
<COMMON> 8,666
<OTHER-SE> 49,354,066
<TOTAL-LIABILITY-AND-EQUITY> 85,242,845
<SALES> 0
<TOTAL-REVENUES> 48,557,484
<CGS> 0
<TOTAL-COSTS> 46,820,598
<OTHER-EXPENSES> 4,850,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130,900
<INCOME-PRETAX> (3,244,014)
<INCOME-TAX> (5,095)
<INCOME-CONTINUING> (3,238,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,238,919)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
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