<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
-------------------
[ ] 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 0-23832
-------
PHYSICIAN SALES & SERVICE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2280364
- ---------------------------- ----------------------
(State or other jurisdiction (IRS employer
of incorporation) identification number)
4345 Southpoint Blvd.
Jacksonville, Florida 32216
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number (904) 332-3000
--------------
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 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.
[X] Yes [ ] No
As of November 14, 1997 a total of 40,226,531 shares of common stock, par
value $.01 per share, of the registrant were outstanding.
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1997
INDEX
Part I FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1997 and March 28, 1997 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 28,
1997 1997
------------- ------------
(UNAUDITED) *
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,273,065 $ 29,075,157
Marketable securities 841,874 15,045,482
Accounts receivable, net 150,995,248 130,426,326
Inventories 79,128,586 75,185,728
Prepaid expenses and other 32,437,335 24,120,998
------------ ------------
Total current assets 285,676,108 273,853,691
Property and equipment, net 22,599,097 20,202,967
Other Assets:
Intangibles, net 47,692,316 22,083,560
Other 6,957,752 5,129,048
------------ ------------
Total assets $362,925,273 $321,269,266
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 83,529,628 $ 69,011,247
Accrued expenses 23,937,398 20,012,856
Current maturities of long-term debt and
capital lease obligations 290,342 8,099,064
Other 15,267,440 5,131,051
------------ ------------
Total current liabilities 123,024,808 102,254,218
Long-term debt and capital lease obligations,
net of current portion 1,748,999 3,825,333
Other 4,150,590 4,634,291
------------ ------------
Total liabilities 128,924,397 110,713,842
------------ ------------
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value; 60,000,000 shares
authorized, 40,097,445 and 38,799,073 shares
issued and outstanding at September 30, 1997 and
March 28, 1997, respectively 400,975 387,991
Additional paid-in capital 221,075,112 207,675,161
Retained earnings 12,245,442 3,767,240
Foreign currency translation 279,347 92,688
------------ ------------
234,000,876 211,923,080
Unearned ESOP shares of acquired company - (1,367,656)
------------ ------------
Total shareholders' equity 234,000,876 210,555,424
------------ ------------
Total liabilities and shareholders' equity $362,925,273 $321,269,266
============ ============
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $253,064,044 $190,316,820 $476,637,529 $359,573,371
Cost of goods sold 183,784,122 139,207,779 347,353,707 262,935,180
------------ ------------ ------------ ------------
Gross profit 69,279,922 51,109,041 129,283,822 96,638,191
General and administrative expenses 38,481,853 28,724,484 72,731,472 54,490,319
Selling expenses 21,375,335 16,542,252 39,461,458 31,613,421
Merger costs and expenses 1,838,498 - 1,838,498 6,934,000
Non-recurring ESOP cost of acquired company 1,838,956 399,989 2,457,074 700,011
------------ ------------ ------------ ------------
Income from operations 5,745,280 5,442,316 12,795,320 2,900,440
------------ ------------ ------------ ------------
Other income (expense):
Interest income (expense) (165,743) 522,512 (98,598) 1,050,665
Other income 1,428,855 412,976 2,020,609 674,251
------------ ------------ ------------ ------------
1,263,112 935,488 1,922,011 1,724,916
------------ ------------ ------------ ------------
Income before provision for income taxes 7,008,392 6,377,804 14,717,331 4,625,356
Provision for income taxes 3,030,849 2,258,136 6,168,905 1,862,136
------------ ------------ ------------ ------------
Net income $ 3,977,543 $ 4,119,668 $ 8,548,426 $ 2,763,220
============ ============ ============ ============
Net income per common and common
equivalent share $ 0.10 $ 0.11 $ 0.21 $ 0.07
============ ============ ============ ============
Proforma tax adjustment on pooled
S-Corporation income (58,505) (202,505)
Proforma net income $ 4,061,163 $ 2,560,715
============ ============
Proforma tax adjustment per common and common
equivalent share on pooled S-Corporation
income $ 0.0 $ 0.0
============ ============
Proforma net income per common and common
equivalent share $ 0.11 $ 0.07
============ ============
Weighted average number of shares outstanding 40,295,000 38,081,000 39,832,000 38,006,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 8,548,486 $ 2,763,220
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 4,389,572 2,338,402
Provision for doubtful accounts 825,332 872,916
Merger costs and expenses 595,737 6,469,506
Foreign currency translation 186,659 (3,714)
Nonrecurring ESOP cost of acquired company 2,457,074 700,011
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Increase in accounts receivable (13,840,520) (8,703,083)
Decrease in inventories 5,938,303 218,788
(Increase) decrease in prepaid expenses and other
current assets (4,785,189) 1,011,976
Increase in other assets (2,493,087) (4,160,987)
Increase in accounts payable, accrued
expenses and other liabilities 9,828,966 771,204
------------ ------------
Net cash provided by operating activities 11,651,333 2,278,239
------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of marketable securities 14,203,608 -
Capital expenditures (4,224,918) (3,021,837)
Purchases of net assets from business acquisitions (3,257,354) (5,083,487)
Payments on noncompete agreements (1,576,148) (744,472)
------------ ------------
Net cash provided by (used in) investing
activities 5,145,188 (8,849,796)
Cash Flows From Financing Activities:
Net repayments of long-term debt of acquired companies (24,444,031) (9,996,803)
Net proceeds from issuance of common stock 845,418 1,576,407
------------ ------------
Net cash used in financing activities (23,598,613) (8,420,396)
------------ ------------
Net decrease in cash and cash equivalents (6,802,092) (14,991,953)
Cash and cash equivalents, beginning of period 29,075,157 86,448,942
------------ ------------
Cash and cash equivalents, end of period $ 22,273,065 $ 71,456,989
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of Physician Sales &
Service, Inc. ("PSS"or the "Company") reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and results of operations for the periods
indicated. The adjustments include the retroactive adjustment to give effect to
the merger with X-Ray Corporation of Georgia ("X-Ray GA") effective December 20,
1996, and to the merger with S & W X-Ray, Inc. ("S & W") effective September 23,
1997, both accounted for under the pooling-of-interests method.
The accompanying condensed consolidated financial statements should be read
in conjunction with the financial statements and related notes in the Company's
1997 Annual Report to Shareholders. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations.
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at quarter-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.
The results of operations for the interim periods covered by this report
may not necessarily be indicative of operating results for the full fiscal year.
Certain items have been reclassified to conform to the current year
presentation.
NOTE 2 - BUSINESS ACQUISITIONS
Effective as of July 18, 1997, the Company acquired an Imaging Division
company comprised of three imaging and equipment distributors with annualized
revenues of approximately $76 million in a transaction accounted for as a
purchase. The aggregate consideration of approximately $13.8 million was
comprised of approximately $2.5 million in cash and 868,364 shares of
unregistered common stock. The excess of the purchase price paid over the fair
market value of the tangible net assets acquired of approximately $18.0 million
has been recorded as goodwill and will be amortized on a straight-line basis
over thirty years. The allocation of purchase price is based upon preliminary
estimates of fair value and costs to be incurred and subject to revision at a
later date.
On August 8, 1997, the Company merged with a medical supply and equipment
distributor with annualized sales of approximately $1.7 million in a stock for
assets merger accounted for under the pooling-of-interests method. The Company
issued approximately 35,000 shares of PSS common stock in exchange for all of
the net assets of the acquired company. The accompanying consolidated financial
statements have not been restated for periods prior to the pooling due to
immateriality. Accordingly, the results of operations have been reflected in
the consolidated financial statements prospectively from the acquisition date
and the deficit of approximately $0.1 million of the acquired company has been
recorded as an adjustment to retained earnings of the Company.
On September 23, 1997, the Company acquired S&W, a radiology and imaging
distributor, in a stock-for-stock merger accounted for under the pooling-of-
interest method by issuing 1,737,457 shares of common stock to the former
shareholders of S&W in exchange for all of the outstanding shares of capital
stock of S&W valued at $26.0 million at the time of the merger. S&W reported
$72.0 million in revenues for the 12 months prior to acquisition by the Company.
The accompanying consolidated financial statements have been restated for
periods prior to the pooling.
Merger costs and expenses of $1.8 million were incurred during the three
months ended September 30, 1997. Such costs included direct merger costs
primarily consisting of investment banking, legal, accounting, and filing fees.
Additional merger costs and expenses will be recorded next quarter related to
the consolidation of duplicate service center locations, realigning regional and
corporate functions, consolidating information systems and reducing personnel.
6
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following presents separate company data of PSS, X-Ray GA and S&W for
the periods prior to merger. X-Ray GA was an S Corporation for income tax
purposes, and therefore did not pay U.S. federal income taxes. The table
includes unaudited proforma net income and net income per share amounts which
reflect proforma adjustments to present income taxes of X-Ray GA on the basis on
which they will be reported in future periods. X-Ray GA results of operations
are combined with PSS for periods subsequent to the date of merger.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
(in thousands) (in thousands) (in thousands) (in thousands)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
PSS $235,084 $161,912 $438,635 $301,614
X-Ray GA - 10,447 - 22,312
S&W 17,980 17,958 38,003 35,647
-------- -------- -------- --------
Total $253,064 $190,317 $476,638 $359,573
Net Income (Loss)
PSS $ 6,284 $ 3,784 $ 10,643 $ 1,871
X-Ray GA - 360 - 742
S&W (2,306) (24) (2,095) 150
-------- -------- -------- --------
Net Income as Reported $ 3,978 $ 4,120 $ 8,548 $ 2,763
======== ========
Proforma tax Provision for X-Ray GA (59) (202)
-------- --------
Proforma Net Income $ 4,061 $ 2,561
======== ========
Proforma Net Income Per Share
As Reported $ 0.10 $ 0.11 $ 0.21 $ 0.07
Proforma $ 0.11 $ 0.07
</TABLE>
NOTE 3 RELATED-PARTY TRANSACTIONS
During September 1997, the Company loaned its Chairman of the Board and
Chief Executive Officer approximately $3.0 million to refinance debt incurred in
connection with previous purchases of common stock. The loans are unsecured,
and expected to be repaid over a 10-year period, and bear
interest at 6.55%.
NOTE 4 SUBSEQUENT EVENTS
In October 1997, the Company issued 8.5% senior subordinated notes due in
2007 (the "Notes") in the amount of $125.0 million with net proceeds to the
Company of $119.8 million after deduction for offering costs. Interest on the
Notes will accrue from their date of original issuance and will be payable semi-
annually on April 1 and October 1 of each year, commencing on April 1, 1998, at
a rate of 8.5% per annum.
In October 1997, the Company merged with a Physician Supply Division
medical supply and equipment distributor located in Los Angeles, California in a
stock-for-stock merger to be accounted for as a pooling-of-interests. The
acquired company reported $5.0 million in revenues for the latest twelve months.
In October 1997, the Company acquired certain assets of a Imaging Division
medical imaging distributor based in Tallahassee, Florida. The acquired company
reported revenues of approximately $5.0 million for the latest twelve months.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading distributor of medical supplies, equipment and
pharmaceuticals to primary care and other office-based physicians. The Company
currently operates 61 physician office medical supply distribution ("Physician
Supply Division") service centers distributing to approximately 103,000
physician office sites in all 50 states. The Company's primary market is the
approximately 399,000 physicians who practice medicine in approximately 198,000
office sites throughout the United States.
The Company, through its wholly-owned subsidiary, Diagnostic Imaging ("DI
or Imaging Division"), distributes medical diagnostic imaging supplies,
chemicals, equipment and provides service to the acute and alternate care
markets. DI currently operates 25 imaging service centers in ten states in the
Southeast, Northeast and Midwest.
The Company also distributes medical supplies and equipment in Belgium,
France, Germany, and the Netherlands through its WorldMed International, Inc.
subsidiary ("International Division"). The Company currently has three
International Division service centers distributing to the acute and alternate
care markets.
The Company's primary objectives are to be capable of servicing the medical
equipment and supply needs of every office-based physician in the United States,
to create a national diagnostic imaging distribution company, and to expand its
presence in the European medical equipment and supply market. To achieve these
objectives and increase profitability, the Company intends to (i) continue to
acquire physician supply and equipment distributors, especially in existing
markets where it can leverage its distribution infrastructure and gain market
share, (ii) acquire diagnostic imaging distributors to expand its geographic
coverage and leverage its existing infrastructure, (iii) increase sales of
existing service centers by adding additional sales representatives and
providing superior service, competitive pricing and a broad product line,
including sophisticated diagnostic equipment, (iv) expand operating margins, (v)
open new service centers in selected markets where acquisition opportunities are
not available, and (vi) invest in sophisticated information systems that bring
efficiency to the Company and its subsidiaries.
INDUSTRY
According to industry estimates, the medical supply and equipment segment
of the health care industry represents a $30.2 billion market, of which $5.5
billion represents the primary care and other office-based physicians sector.
The medical supply and equipment industry is estimated to be growing at an
annual rate of 6% to 8%. The Company has historically grown faster than the
overall market. The Company estimates that approximately 300 companies supply
medical products to the office-based physician sector.
The diagnostic imaging industry represents a $5.0 billion market consisting
of the sale and service of diagnostic imaging equipment and supplies to the
acute care market, imaging centers and physician offices. Approximately $2.3
billion of the diagnostic imaging market is sold through independent
distributors and the remainder is sold directly by manufacturers. The diagnostic
imaging industry is highly fragmented with unconsolidated distributors
representing approximately 40% of the market.
COMPANY GROWTH
Since its inception in 1983, the Company has achieved significant growth in
the number of service center locations, geographic area of operation, net sales,
and profitability. During fiscal years 1992 through 1997, the Company and its
subsidiaries' net sales, excluding the retroactive effect of material mergers,
grew at a compound annual rate of approximately 49%, and giving retroactive
effect of material mergers, the Company's net sales grew at a compound annual
rate of approximately 27%. The number of company service centers has grown from
two at the end of fiscal 1984 to 89 currently, including 61 Physician Supply
Division service centers, 25 Imaging Division services centers and three
International Division service centers. In order of significance, the
Company's growth has been accomplished through (i) acquiring regional and
local physician supply companies (ii) acquiring local and regional imaging
companies service centers, (iii) increasing sales from existing Physician Supply
Division service centers, and (iv) opening start-up Physician Supply Division
service centers.
8
<PAGE>
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the results of
operations for the three and six months ended September 30, 1997 and 1996:
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET SALES. Net sales for the three months ended September 30, 1997 totaled
$253.1 million, an increase of $62.8 million or 33.0% over net sales of $190.3
million for the three months ended September 30, 1996. Net sales for the six
months ended September 30, 1997 totaled $476.6 million, an increase of $117.0
million or 32.6% over net sales of $359.6 million for the six months ended
September 30, 1996. In order of contribution to the increase, net sales
increased as the result of (i) net sales of the Imaging Division service centers
acquired during the last nine months of fiscal 1997, (ii) internal sales growth
of Physician Supply Division service centers operating at least two years, and
(iii) net sales of Physician Supply Division service centers recently acquired.
The Company's service centers operating for at least 24 consecutive months
generated same center sales growth of approximately 21% for the three months
ended September 30, 1997, excluding $18 million of low-profit business
eliminated by the Company. The sales growth resulted from the continued
development of PSS's sales force, further market penetration, increased emphasis
on diagnostic equipment and supplies, and expansion of existing territories
served by individual service centers.
GROSS PROFIT. Gross profit for the three months ended September 30, 1997
totaled $69.3 million, an increase of $18.2 million or 35.6% over the three
months ended September 30, 1996 total of $51.1 million. Gross profit for the six
months ended September 30, 1997 totaled $129.3 million, an increase of $32.7
million or 33.8% over the six months ended September 30, 1996 total of $96.6
million. Gross profit as a percentage of net sales increased to 27.4% and 27.1%
for the three and six months ended September 30, 1997 from 26.9% for the three
and six months ended September 30, 1996. The increase in gross profit
percentage is the result of higher gross profit margins in the Physician Supply
Division due to the elimination of low-profit business during the six months
ended September 30, 1997 and the increase in gross profit on sales of Abbott
products in connection with the exclusive distributorship agreement with Abbott
Laboratories.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended September 30, 1997 totaled $38.5 million, an increase
of $9.8 million or 34.0% over the three months ended September 30, 1996 total of
$28.7 million. General and administrative expenses for the six months ended
September 30, 1997 totaled $72.7 million, an increase of $18.2 million or 33.5%
over the six months ended September 30, 1996 total of $54.5 million. As a
percentage of net sales, general and administrative expenses were at 15.2% and
15.3% for the three and six months ended September 30, 1997 and at 15.1% and
15.2% for the three and six months ended September 30, 1996 despite operating
costs incurred associated with transitioning merged and acquired operations.
SELLING EXPENSES. Selling expenses for the three months ended September
30, 1997 totaled $21.4 million, an increase of $4.9 million or 29.2% over the
three months ended September 30, 1996 total of $16.5 million. Selling expenses
for the six months ended September 30, 1997 totaled $39.5 million, an increase
of $7.9 million or 24.8% over the six months ended September 30, 1996 total of
$31.6 million. As a percentage of sales, selling expenses decreased to 8.4% and
8.3% for the three and six months ended September 30, 1997 from 8.7% and 8.8%
for the three and six months ended September 30, 1996. The decrease in selling
expense as a percentage of sales was primarily a result of the operations of the
new Imaging Division which incurs significantly lower selling expense as a
percentage of net sales than the Physician Supply Division.
MERGER COSTS AND EXPENSES. During the six months ended September 30,
1997, the Company recorded $1.8 million in non-recurring merger costs and
expenses associated with the acquisition of an Imaging Division imaging
distributor. During the six months ended September 30, 1996, the Company
recorded non-recurring merger costs and expenses of approximately $6.9 million
associated with the mergers of Physician Supply Division and three medical
supply and equipment distributors. Such costs included direct merger costs
primarily consisting of investment banking, legal, accounting and filing fees as
well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, consolidating
9
<PAGE>
information systems and reducing personnel. The Company expects to incur
additional merger costs and expenses related to the merger of S&W consummated
September 23, 1997.
Nonrecurring ESOP Cost of Acquired Company. Prior to the acquisition of
S&W by the Company, S&W sponsored a leveraged ESOP plan. As S&W shares were
released from collateral, the Company reported compensation expense equal to the
current market price of the shares released. ESOP related compensation expense
for the six months ended September 30, 1997 and 1996 totaled $2.5 million and
$0.7 million, respectively. The increase in compensation expense is due to an
increase in the number of shares released and an increase in the market price of
the related stock. As of September 30, 1997 there were no remaining unallocated
S&W ESOP shares and there will be no related expense subsequent to September 30,
1997. It is Management's intention to terminate this plan.
OPERATING INCOME. Operating income for the three months ended September
30, 1997 totaled $5.7 million, an increase of $0.3 million or 5.6%, compared to
operating income of $5.4 million for the three months ended September 30, 1996.
The Company recorded operating income of $13.0 million for the six months ended
September 30, 1997, an increase of $10.1 million or 341.2%, compared to
operating income of $2.9 million for the six months ended September 30, 1996.
The operating results for the three and six months ended September 30, 1997
include non-recurring merger costs and expenses and ESOP costs of an acquired
company of approximately $3.7 and $4.3 million, respectively. The operating
results for the three and six months ended September 30, 1996 include non-
recurring merger costs and expenses and ESOP costs of an acquired company of
approximately $0.4 and $7.6 million, respectively. Excluding the effect of
these non-recurring costs, operating income for the three and six months ended
September 30, 1997, would have increased 61.3% and 62.2% to $9.4 million and
$17.1 million, respectively from operating income of $5.8 million and $10.5
million for the three and six months ended September 30, 1996.
INTEREST INCOME (EXPENSE). For the three and six months ended September
30, 1997 included in net interest expense is interest income of $0.2 and $0.5
million from short term investments offset by interest expense of $0.4 million
and $0.6 million related to debt of merged companies for which the financial
statements have been restated. Net interest income for the three and six months
ended September 30, 1996 totaled $0.5 million and $1.1 million. The decrease in
interest income is the result of the use of cash invested in short term
investments to acquire Physician Supply Business and Imaging Division Companies.
OTHER INCOME. Other income for the three and six months ended September
30, 1997 increased $1.0 and $1.3 million to $1.4 million and $2.0 million
respectively. Other income consists of finance charges on customer accounts,
Imaging Division customer delivery charges and financing performance incentives.
The increase in other income results from the growth in the Company's
operations.
PROVISION FOR INCOME TAXES. The income tax provision totaled $3.0 million
for the three months ended September 30, 1997 as compared to a provision for
income taxes of $2.3 million for the three months ended September 30, 1996. The
income tax provision totaled $6.2 million for the six months ended September 30,
1997 as compared to a provision for income taxes of $1.9 million for the six
months ended September 30, 1996. The income tax provision computation is
affected by the non-deductible nature of certain non-recurring merger costs and
expenses in the period in which they were incurred.
NET INCOME. Net income totaled $4.0 million for the three months ended
September 30, 1997 as compared to a net income of $4.1 million for the three
months ended September 30, 1996. Net income totaled $8.5 million for the six
months ended September 30, 1997 as compared to a net income of $2.8 million for
the six months ended September 30, 1996. The net income for the six months ended
September 30, 1997 and 1996 includes non-recurring merger costs and expenses and
non-recurring ESOP costs of an acquired company. The following table presents
net income and earnings per share for the three and six months ended September
30, 1997 and September 30, 1996 as reported and the pro-forma effect on net
income and earnings per share excluding these non-recurring costs and expenses.
10
<PAGE>
The following table includes net income and net income per share as reported
and proforma excluding nonrecurring costs for the three and six months ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Proforma (A) As Reported
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income (in thousands) $ 6,671 $4,134 $3,978 $4,120
Net income per share $ 0.17 $ 0.11 $ 0.10 $ 0.11
Proforma (A) As Reported
Six Months Ended Six Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
------------------ ------------------ ------------------ ------------------
Net income (in thousands) $11,413 $7,478 $8,548 $2,763
Net income per share $ 0.29 $ 0.20 $ 0.21 $ 0.07
</TABLE>
- ------------
(A) Excludes merger costs and expenses and nonrecurring ESOP costs of acquired
company.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital requirements
will also continue to increase as a result of the need to finance acquisitions
and anticipated growth of the Company's operations. This growth will be funded
through a combination of cash flow from operations, revolving credit borrowings
and proceeds from the Notes completed October 7, 1997 (see Note 3--Subsequent
Events), and any future public offerings.
Net cash provided by operating activities was $11.7 million for the six
months ended September 30, 1997 compared to net cash provided by operating
activities of $2.3 million for the six months ended September 30, 1996 due to
improved operating results of the Company.
Net cash provided by investing activities of $5.1 million for the six
months ended September 30, 1997 consisted primarily of the proceeds from sales
of marketable securities offset by capital expenditures, payment for purchases
of net asset from business acquisitions, and the payment of noncompete
agreements. Net cash used in investing activities of the six months ended
September 30, 1997 of $8.8 million was primarily utilized to finance the
acquisition of new service centers and capital expenditures including the use of
the net proceeds from sales and maturities of cash equivalents.
Net cash used in financing activities was $23.6 million and $8.4 million
for the six months ended September 30, 1997 and 1996 respectively, which
consisted primarily of repayments of outstanding debt of companies acquired.
The Company had working capital of $162.7 million and $171.6 million as of
September 30, 1997 and March 28, 1997, respectively. Accounts receivable, net
of allowances, were $151.0 million and $130.4 million at September 30, 1997 and
March 28, 1997, respectively. The average number of days sales in accounts
receivable outstanding was approximately 53 days for the six months ended
September 30, 1997 and 56 days for the year ended March 28, 1997, respectively.
Inventories were $79.1 million and $75.2 million as of September 30, 1997
and March 28, 1997, respectively. The Company had annualized inventory turnover
of 9.0 times for the six months ended September 30, 1997 and 8.2 times for the
year ended March 28, 1997. Inventory financing has historically been achieved
through negotiating extended payment terms from suppliers.
11
<PAGE>
Earnings before interest expense, taxes, depreciation and amortization
("EBITDA") totaled $24.0 million and $14.6 million for the six months ended
September 30, 1997 and 1996, respectively. EBITDA margin increased to 5.0% from
4.0% for the same periods.
The Company has historically been able to finance its liquidity needs for
the expansion through lines of credit provided by banks and proceeds from the
public and private offering of stock. In May 1994, the Company completed an
initial public offering of Common Stock resulting in proceeds, after deducting
issuance costs, of approximately $15.8 million. The Company used all of the net
proceeds to reduce outstanding debt. Also, in the third quarter of fiscal year
1995, the Company amended and restated its Credit Facility, thereby increasing
the maximum availability under the Credit Facility to $60.0 million with the
option, on the part of the Company, to increase such availability to $75.0
million.
In November 1995, the Company completed a secondary offering of 11.5
million shares of common stock at $17.00 per share, 8.8 million of which were
offered by the Company. The Company used approximately $58.2 million and $26.9
million of the total net proceeds of $142.9 million to repay Company debt and
debt assumed through acquisitions in fiscal years 1996 and 1997, respectively.
Management used approximately $50.0 million in connection with acquisitions for
the Imaging Business, Physician Supply Business and International Business, and
general corporate purposes, including capital expenditures during fiscal year
1997. During the six months ended September 30, 1997, management used the
remaining net proceeds for acquisitions, capital expenditures and general
corporate purposes.
The Company believes that the expected cash flows from operations, bank
borrowings, the net proceeds of the recent debt offering, capital markets, and
vendor credit should be adequate to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled payments of
interest on its debts for the foreseeable future. As of September 30, 1997, the
Company had no outstanding debt under its Credit Facility.
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company: competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
12
<PAGE>
PART II
OTHER INFORMATION
Rider 1
-------
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) On July 21, 1997, the Company issued an aggregate of 868,364
shares of common stock, $.01 par value per share (the "Common
Stock"), including 112,658 shares which are being held in escrow
pending the resolution of potential indemnifiable claims, to the
former shareholders of General X-Ray, Inc., General Med Ventures,
Inc. and General MedVentues International, Inc. (collectively,
"General X-Ray") in exchange for all the shares of General X-Ray
common stock. The issuance of the securities was made in reliance
on the exemption from registration provided under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), as
a transaction by an issuer not involving a public offering. All of
the securities were acquired by the recipients for investment and
with no view toward the public resale or distribution thereof
without registration. The recipients qualified as accredited
investors, the offers and sales were made without any public
solicitation, and the stock certificates bear restrictive legends.
On August 8, 1997, the Company issued an aggregate of 35,360
shares of Common Stock, including 5,853 shares which are being
held in escrow pending the resolution of potential indemnifiable
claims, to the former shareholders of Med Systems, Inc. ("Med
Systems") in exchange for all of the shares of Med System common
stock. The issuance of the securities was made in reliance on the
exemption from registration provided under Section 4(2) of the
Securities Act, as a transaction by an issuer not involving a
public offering. All of the securities were acquired by the
recipients for investments and with no view toward the public
resale or distribution thereof without registration. The
recipients qualified as accredited investors, the offers and sales
were made without any public solicitation, and the stock
certificates bear restrictive legends.
(d) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on July 22,
1997. The following persons nominated were elected to serve as Class I
directors for a three-year term and received the number of votes set opposite
their names:
Name For Withheld
---- --- --------
T. O'Neal Douglas 26,091,985 200,028
Patrick C. Kelly 26,088,442 203,571
James L.L. Tullis 26,091,985 200,028
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Amended and Restated Articles of Incorporation dated
March 15, 1994.(1)
3.2 Amended and Restated Bylaws dated March 15, 1994.(1)
10.1 Financing and Security Agreement between the Company
and NationsBank of Georgia, N.A., (as successor to
NCNB National Bank of Florida), dated as of September
26, 1991, as amended.(2)
10.2 Registration Rights Agreement between the Company and
Tullis-Dickerson Capital Focus, L.P., dated as of
March 16, 1994.(2)
13
<PAGE>
10.3 Employment Contract, as amended, for Patrick C.
Kelly.(2)
10.4 Incentive Stock Option Plan dated May 14, 1986.(2)
10.5 Shareholders Agreement dated March 26, 1986, between
the Company, the Charthouse Co., Underwood, Santioni
and Dunaway.(2)
10.6 Shareholders Agreement dated April 10, 1986, between
the Company and Clyde Young.(2)
10.7 Shareholders Agreement between the Company and John
D. Barrow.(2)
10.8 Amended and Restated Directors Stock Plan.(7)
10.9 Amended and Restated 1994 Long Term Incentive
Plan.(7)
10.10 Amended and Restated 1994 Long Term Stock Plan.(7)
10.11 1994 Employee Stock Purchase Plan.(3)
10.12 1994 Amended Incentive Stock Option Plan.(2)
10.13 Amended and Restated Loan and Security Agreement
between the Company and NationsBank of Georgia, N.A.
dated December 21, 1994.(4)
10.14 Distributorship Agreement between Abbott Laboratories
and Physician Sales & Service, Inc. (Portions omitted
as confidential -Separately filed with
Commission).(5)
10.15 Stock Purchase Agreement between Abbott Laboratories
and Physician Sales & Service, Inc.(5)
10.16 Amendment to Employee Stock Ownership Plan.(7)
10.16a Amendment and Restatement of the Physician Sales and
Service, Inc. Employee Stock Ownership and Savings
Plan.(7)
10.16b First Amendment to the Physician Sales and Service,
Inc. Employee Stock Ownership and Savings Plan.(7)
10.17 Third Amended and Restated Agreement and Plan of
Merger By and Among Taylor Medical, Inc. and
Physician Sales & Service, Inc. (including exhibits
thereto).(6)
10.18 Agreement and Plan of Merger by and Among Physician
Sales & Service, Inc., PSS Merger Corp. and Treadway
Enterprises, Inc.(8)
10.19 Amended and Restated Agreement and Plan of Merger,
dated as of August 22, 1997, among the Company,
Diagnostic Imaging, Inc., PSS Merger Corp. and S&W
X-Ray, Inc.(9)
27 Financial Data Schedule (for SEC use only)
- ---------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-3, Registration No. 33-97524
(2) Incorporated by reference from the Company's Registration Statement on Form
S-1, Registration No. 33-76580.
14
<PAGE>
(3) Incorporated by reference from the Company's Registration Statement on Form
S-8, Registration No. 33-80657.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended December 31,
1994.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended March 30, 1995.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended March 29, 1996.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
(8) Incorporated by reference from the Company's Current Report on Form 8-K,
filed January 3, 1997.
(9) Incorporated by reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-33453.
Current Report on Form 8-K,
filed January 3, 1997.
(b) Reports on Form 8-K
The following current report on Form 8-K was filed during the quarter
for which this report is filed:
Entities for Which
Date of Report Item Reported Financial Statements Filed
- -------------- ------------- --------------------------
August 22, 1997 Rule 135c announcement of None
offering of senior
subordinated notes
15
<PAGE>
OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 14, 1997.
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
---------------------------------
David A. Smith
Executive Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-27-1998 MAR-28-1997
<PERIOD-START> JUL-01-1997 MAR-28-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 0 22,273,065
<SECURITIES> 0 841,874
<RECEIVABLES> 0 150,995,248
<ALLOWANCES> 0 0
<INVENTORY> 0 79,128,586
<CURRENT-ASSETS> 0 285,676,108
<PP&E> 0 22,599,097
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 362,925,273
<CURRENT-LIABILITIES> 0 123,024,808
<BONDS> 0 0
0 0
0 0
<COMMON> 0 400,975
<OTHER-SE> 0 233,599,901
<TOTAL-LIABILITY-AND-EQUITY> 0 362,925,273
<SALES> 253,064,044 476,637,529
<TOTAL-REVENUES> 253,064,044 476,637,529
<CGS> 183,784,122 347,353,707
<TOTAL-COSTS> 183,784,122 347,353,707
<OTHER-EXPENSES> 63,534,642 116,488,502
<LOSS-PROVISION> 380,138 872,916
<INTEREST-EXPENSE> (165,743) (98,598)
<INCOME-PRETAX> 7,008,392 14,717,331
<INCOME-TAX> 3,030,849 6,168,905
<INCOME-CONTINUING> 3,977,543 8,548,426
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 3,977,543 8,548,426
<EPS-PRIMARY> .10 .21
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</TABLE>
