<PAGE> 1
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 DECEMBER 31, 1996
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23832
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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)
7800 Belfort Parkway, Suite 250
Jacksonville, Florida 32256
- ---------------------------------------- -------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number (904) 281-0011
-----------------------
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 February 13, 1997 a total of 36,904,069 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
<PAGE> 2
PHYSICIAN SALES & SERVICE, INC. & SUBSIDIARIES
DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Condensed Consolidated Balance Sheets -
December 31, 1996 and March 29, 1996 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 15
</TABLE>
2
<PAGE> 3
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 29,
1996 1996
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 64,205,318 $ 86,333,789
Accounts receivable, net 120,116,806 96,080,135
Inventories 76,133,964 55,755,869
Prepaid expenses and other 16,721,551 10,764,125
----------------- -----------------
Total current assets 277,177,639 248,933,918
Property and equipment, net 18,520,941 14,764,706
Other Assets:
Intangibles, net 18,473,812 13,884,322
Other 6,364,364 1,375,053
----------------- -----------------
Total assets $ 320,536,756 $ 278,957,999
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 82,613,236 $ 59,307,636
Accrued expenses 18,906,275 9,656,433
Other 8,297,137 6,196,692
----------------- -----------------
Total current liabilities 109,816,648 75,160,761
Long-Term Liabilities 3,746,453 4,247,075
----------------- -----------------
Total liabilities 113,563,101 79,407,836
----------------- -----------------
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,
36,879,696 and 35,122,472 shares issued and outstanding at
December 31, 1996 and March 29, 1996, respectively 368,797 351,225
Additional paid-in capital 206,246,973 200,193,475
Retained earnings (deficit) 329,390 (994,537)
Foreign currency translation 28,495 -
----------------- -----------------
Total shareholders' equity 206,973,655 199,550,163
----------------- -----------------
Total liabilities and shareholders' equity $ 320,536,756 $ 278,957,999
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE> 4
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $ 179,612,457 $ 137,600,259 $ 503,538,713 $ 385,722,103
Cost of Goods Sold 128,558,548 98,459,856 363,882,167 276,912,791
----------------- ----------------- ----------------- -----------------
Gross Profit 51,053,909 39,140,403 139,656,546 108,809,312
General and Administrative Expenses 27,819,398 21,417,857 77,485,348 61,333,559
Selling Expenses 17,009,688 12,742,837 46,373,075 35,521,522
Merger Costs and Expenses 317,388 3,483,744 7,251,388 15,578,560
----------------- ----------------- ----------------- -----------------
Income (Loss) From Operations 5,907,435 1,495,965 8,546,735 (3,624,329)
----------------- ----------------- ----------------- -----------------
Other Income (Expense):
Interest income (expense) 543,107 (230,499) 1,593,772 (2,196,821)
Other income 691,266 617,506 1,343,511 1,171,200
----------------- ----------------- ----------------- -----------------
1,234,373 387,007 2,937,283 (1,025,621)
----------------- ----------------- ----------------- -----------------
Income (Loss) Before (Provision)
Benefit for Income Taxes 7,141,808 1,882,972 11,484,018 (4,649,950)
Income Tax (Provision) Benefit (2,677,000) (565,000) (4,407,000) 104,450
----------------- ----------------- ----------------- -----------------
Net Income (Loss) $ 4,464,808 $ 1,317,972 $ 7,077,018 $ (4,545,500)
================= ================= ================= =================
Net Income (Loss) Per Common and
Common Equivalent Share $ 0.12 $ 0.04 $ 0.19 $ (0.17)
================= ================= ================= =================
Weighted average number of shares
outstanding 36,733,000 31,494,000 36,346,000 26,749,000
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE> 5
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 7,077,018 $ (4,545,500)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,509,565 2,918,361
Merger costs and expenses 6,469,506 5,795,750
Foreign currency translation 28,495 -
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Increase in accounts receivable (13,229,704) (23,173,139)
Increase in inventories (6,378,727) (22,847,565)
Decrease (increase) in prepaid expenses and other
current assets 5,919,913 (4,993,132)
Increase in other assets (8,200,198) (79,547)
Increase in accounts payable, accrued
expenses and other liabilities 9,216,313 28,124,074
---------------- ----------------
Net cash provided by (used in) operating
activities 4,412,181 (18,800,698)
---------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (3,297,745) (3,152,896)
Payment for purchases of net assets from business
acquisitions (5,083,487) (1,887,652)
Payments on noncompete agreements (1,178,932) (514,722)
---------------- ----------------
Net cash used in investing activities (9,560,164) (5,555,270)
---------------- ----------------
Cash Flows From Financing Activities:
Net repayments of long-term debt (17,829,744) (31,132,889)
Net proceeds from issuance of common stock 1,949,256 146,691,753
Distributions to former S-Corporation shareholders (1,100,000) (365,000)
---------------- ----------------
Net cash (used in) provided by financing
activities (16,980,488) 115,193,864
Net (decrease) increase in cash and cash equivalents (22,128,471) 90,837,896
Cash and cash equivalents, beginning of period 86,333,789 1,231,205
---------------- ----------------
Cash and cash equivalents, end of period $ 64,205,318 $ 92,069,101
================ ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE> 6
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 reflect a
three-for-one stock split effective September 22, 1995 and give effect to the
merger with Taylor Medical Incorporated ("Taylor") effective August 21, 1995
and to the merger with Treadway Enterprises, Inc. ("X-ray Georgia") effective
December 20,1996, 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 1996 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.
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
During the three months ended December 31, 1996, the Company merged
with three radiology and imaging distributors (the "X-ray Companies") in
stock-for-stock mergers accounted for under the pooling-of-interests method.
The accompanying consolidated financial statements have been restated for
periods prior to the pooling for the merger with X-ray Georgia. The
accompanying consolidated financial statements have not been restated for
periods prior to the poolings due to the immateriality of the mergers with
Diagnostic Imaging, Inc. ("DI") and Chesapeake X-ray Corporation
("Chesapeake"). Accordingly, the results of operations of DI and Chesapeake
have been reflected in the consolidated financial statements prospectively from
the acquisition dates in November and December of 1996 respectively. The X-ray
Companies distribute radiology and imaging equipment, chemicals and supplies,
and provide technical service to the acute and altenate site markets with
combined annual revenues of approximately $140 million. Merger costs and
expenses of $0.3 million associated with the mergers of PSS and three radiology
and imaging distributors were recorded during the three months ended December
31, 1996. 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.
On November 25, 1996, the Company acquired DI in a merger pursuant to
which the Company issued 662,330 shares of Common Stock to the former
shareholders of DI, of which 99,351 shares are currently being held in escrow
to indemnify the Company against certain potential losses related to the
operation of DI prior to the merger in exchange for all of the outstanding
shares of capital stock of DI valued at $12.8 million at the time of the
merger. The shares were issued in a private placement to 14 investors,
pursuant to the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended. On December 19, 1996, the Company acquired
Chesapeake in a merger pursuant to which the Company issued 377,790 shares of
Common Stock to the former shareholders of Chesapeake, of which 22,317 shares
are currently being held in escrow in exchange for all of the outstanding
shares of capital stock of Chesapeake valued at $7.0 million at the time of the
merger. The shares were issued in a private placement to two accredited
investors. On December 20, 1996, the Company acquired X-ray Georgia in a
merger pursuant to which the Company issued 593,672 shares of Common Stock to
the former shareholders of X-ray Georgia, of which 52,675 shares are currently
being held in escrow in exchange for all of the outstanding shares of capital
stock of X-ray Georgia valued at $11.0 million at the time of the merger. The
shares were issued in a private placement to two accredited investors. No
underwriters were engaged in connection with the foregoing sales of securities.
6
<PAGE> 7
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
X-ray Georgia was a Subchapter S Corporation for income tax purposes and,
therefore did not pay U.S. federal income taxes. X-ray Georgia will be
included in the Company's U.S. federal income tax return subsequent to the date
of acquisition. Separate net sales, net income (loss) and related per share
amounts of merged entities are presented in the following table. In addition,
the table includes unaudited pro forma net income (loss) and net income (loss)
per share amounts which reflect pro forma adjustments to present income taxes
of X-ray Georgia on the basis on which they will be reported in future
periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Sales
PSS $ 168,742,840 $ 126,310,856 $ 470,356,925 $ 351,293,124
X-ray Georgia 10,869,617 11,289,403 33,181,788 34,428,979
----------------- ----------------- ----------------- -----------------
Total $ 179,612,457 $ 137,600,259 $ 503,538,713 $ 385,722,103
Net Income (Loss)
PSS $ 4,053,770 $ 1,030,714 $ 6,138,847 $ (5,172,807)
X-ray Georgia 411,038 287,258 938,171 627,307
----------------- ----------------- ----------------- -----------------
Net Income (Loss) as Reported 4,464,808 1,317,972 7,077,018 (4,545,500)
Pro forma Tax Provision for X-ray Georgia 156,194 109,158 356,505 238,377
----------------- ----------------- ----------------- -----------------
Pro forma Net Income (Loss) $ 4,308,614 $ 1,208,814 $ 6,720,513 $ (4,783,877)
Net Income (Loss) Per Share
As Reported $ 0.12 $ 0.04 $ 0.19 $ (0.17)
Pro forma $ 0.12 $ 0.04 $ 0.19 $ (0.18)
</TABLE>
Additionally, during the three months ended December 31, 1996, the Company
acquired a medical supplies and equipment distributor based in Germany in a
cash-for-stock acquisition. Accordingly, the results of operations have been
reflected in the consolidated financial statements prospectively from the
acquisition date.
7
<PAGE> 8
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in 1983 in Jacksonville, Florida. Since its
inception, the Company has achieved significant growth in the number of service
center locations, geographic areas of operation, net sales, and profitability.
The number of Company service centers has grown from two located in Florida at
the end of fiscal 1984 to 61 service centers located throughout the United
States distributing to approximately 92,000 office sites in all 50 states and
service centers located in Belgium and Germany. During fiscal years 1992
through 1996, PSS's net sales grew at a compound annual rate of 40.5%,
excluding the effect of restatement due to material acquisitions accounted for
under the pooling-of-interests method. Giving retroactive effect of
restatement, the Company's net sales grew at a compound rate of 28.2% during
that same period.
WorldMed International, Inc., a wholly owned subsidiary of the Company,
was recently established by the Company to manage and develop the international
medical supply and equipment distribution, consolidation, and growth
opportunities. During the three months ended June 30, 1996, WorldMed
International acquired Deckers, a Belgian based medical equipment and supply
distributor to hospitals and physician offices in Belgium, Germany, and France
with approximate annual sales of U.S. $15.5 million. During the three months
ended September 30, 1996, the Company acquired the assets of another Belgian
based medical equipment and supply distributor with last 12 month's revenues
approximating U.S. $3.5 million. During the three months ended December 31,
1996, the Company acquired Franz Medical, a distributor of medical supplies and
equipment to the German health care market with annual revenues of
approximately U.S. $2.7 million. The Company's international market objective
is to pursue acquisition opportunities throughout the European medical
equipment and supply distribution market through its WorldMed International
subsidiary.
In November 1996, the Company completed its merger with DI of Jacksonville,
Florida. DI distributes radiology and imaging equipment, chemicals and
supplies, and provides technical service to the acute and alternate site
markets through 13 locations in 5 southeastern states. DI reported $58.0
million in revenues for the twelve month period ended June 30, 1996. In
December 1996, the Company completed mergers with X-ray Georgia, based in
Atlanta, GA and Chesapeake based in Roanoke, VA. Both companies distribute
radiology and imaging equipment, chemicals and supplies, and provide technical
service to the acute and alternate site markets. X-ray or Georgia and
Chesapeake had revenues of $45 million and $37 million for the latest
twelve month period, respectively. The Company's objective is to pursue
acquisition opportunities within the radiology and imaging distribution market
which will position the consolidated Company to gain market share within this
market and expand the product offerings to the physician office market
currently serviced by PSS.
While the Company's objectives have been expanded to include international
expansion into the European medical equipment and supply market and to pursue
multimarket medical distribution opportunities, such as radiology and imaging
distribution, within the United States, the Company's primary objective is to
be capable of servicing the medical equipment and supply needs of every
office-based physician in the United States. To achieve this objective and
expand profitability, PSS intends to (i) continue its efforts to acquire local
and regional medical supply distributors to office-based physicians in select
U.S. markets; (ii) increase sales of existing service centers by adding
additional sales representatives and providing superior service, competitive
pricing, and a broad product line which includes sophisticated diagnostic
equipment marketed by PSS on an exclusive and semi-exclusive basis; (iii)
continue expanding operating margins by increasing sales force productivity,
focusing on growth through acquisitions rather than start-ups which initially
entail significant losses, reducing product costs through volume purchase
arrangements, leveraging fixed distribution costs, and improving operational
efficiencies through system enhancements; and (iv) opening new service centers
in select markets where acquisition opportunities are not available.
This filing contains forward-looking information that is subject to
certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected.
8
<PAGE> 9
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the results of
operations for the three and nine months ended December 31, 1996 and 1995:
THREE AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales for the three months ended December 31, 1996 totaled
$179.6 million, an increase of $42.0 million or 30.5% over net sales of $137.6
million for the three months ended December 31, 1995. Net sales for the nine
months ended December 31, 1996 totaled $503.5 million, an increase of $117.8
million or 30.5% over net sales of $385.7 million for the nine months ended
December 31, 1995. In order of contribution to the increase, net sales
increased as the result of (i) internal sales growth of centers operating at
least two years, (ii) incremental sales generated in connection with the
Distribution Agreement with Abbott Laboratories ("Abbott Agreement") and (iii)
net sales of centers acquired during the first nine months of fiscal 1997.
The Company's service centers operating for at least 24 consecutive months
as of fiscal year ended 1997 generated same center sales growth of 20.0% for
the nine months ended December 31, 1996. 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 December 31, 1996
totaled $51.1 million, an increase of $11.9 million or 30.4% over the three
months ended December 31, 1995 total of $39.1 million. Gross profit for the
nine months ended December 31, 1996 totaled $139.7 million, an increase of
$30.8 million or 28.4% over the nine months ended December 31, 1995 total of
$108.8 million. Gross profit as a percentage of net sales decreased to 28.4%
and 27.7% for the three and nine months ended December 31, 1996 from 28.5% and
28.2% for the three and nine months ended December 31, 1995. The decrease in
gross profit percentage is attributable to lower margins on diagnostic products
distributed under the Abbott Agreement and lower margins of the X-ray Companies
recently acquired, which had an average gross profit of 20.3% for the
three months ended December 31, 1996. The Company is currently in the second
year of a five year exclusive distributorship agreement with Abbott
Laboratories. For the three and nine months ended December 31, 1996, the
Company sold approximately $30.6 million and $84.3 million of Abbott product
with a gross profit percentage of 22.8% and 21.6%,respectively. Margins under
the Abbott Agreement are scheduled to increase annually based on achievement
by the Company of certain performance goals as stipulated therein.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended December 31, 1996 totaled $27.8 million, an increase
of $6.4 million or 29.9% over the three months ended December 31, 1995 total of
$21.4 million. General and administrative expenses for the nine months ended
December 31, 1996 totaled $77.5 million, an increase of $16.2 million or 26.3%
over the nine months ended December 31, 1995 total of $61.3 million. As a
percentage of sales, general and administrative expenses decreased to 15.5% and
15.4% for the three and nine months ended December 31, 1996 from 15.6% and
15.9% for the three and nine months ended December 31, 1995. The decrease in
general and administrative expenses as a percentage of net sales was a result
of the improved leveraging by PSS of its existing service centers' fixed
general and administrative expenses through increased sales volume and through
the successful integration of its acquired service centers into existing
branches. The decrease in general and administrative expenses was accomplished
while making the following investments during the past three quarters. To
continue responding to a changing health care market, the Company has increased
its focus on sales of diagnostic equipment to office based physicians and on
penetration of the managed care market segment. Since inception, the Company
has maintained a comprehensive and consultative sales
9
<PAGE> 10
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
approach with an emphasis on diagnostic products, which includes sophisticated
diagnostic equipment and supplies related to the use of such equipment. At the
beginning of fiscal 1997, the Company created a diagnostic team to train and
educate newly hired or acquired sales representatives about the diagnostic
equipment sales process. As a result, the Company has expanded its diagnostic
products sales to 21.6% of total net sales for the three months ended December
31, 1996 as compared to 15.3% of total net sales for the three months ended
December 31, 1995. Sales of diagnostic equipment, while generally lower in
gross margin than supplies, require the reordering of diagnostic reagents which
generally yield higher margins. Also at the beginning of fiscal 1997, the
Company increased its emphasis on national customer accounts, including large
physician group practices, physician practice management companies,
physician-hospital organizations, physician management service organizations
and group purchasing organizations through the expansion of its national
accounts team.
SELLING EXPENSES. Selling expenses for the three months ended December
31, 1996 totaled $17.0 million, an increase of $4.3 million or 33.5% over the
three months ended December 31, 1995 total of $12.7 million. Selling expenses
for the nine months ended December 31, 1996 totaled $46.4 million, an increase
of $10.9 million or 30.6% over the nine months ended December 31, 1995 total of
$35.5 million. As a percentage of sales, selling expenses increased to 9.5% for
the three months ended December 31, 1996 from 9.3% for the three months ended
December 31, 1995. As a percentage of sales, selling expenses remained constant
at 9.2% for the nine months ended December 31, 1996 as compared to December
31, 1995.
MERGER COSTS AND EXPENSES. During the three months ended December 31,
1996, the Company recorded $0.3 million in non-recurring merger costs and
expenses related to the acquisition of the X-ray Companies. During the nine
months ended December 31, 1996, the Company recorded non-recurring merger
costs and expenses of approximately $7.3 million associated with the mergers of
PSS and three medical supply and equipment distributors and the X-ray
Companies. 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.
For the three and nine months ended December 31, 1995, the Company
recorded merger costs and expenses of approximately $3.5 million and $15.6
million, respectively, associated with acquisitions.
OPERATING INCOME (LOSS). The Company recorded operating income of $5.9
million for the three months ended December 31, 1996 as compared to $1.5
million for the three months ended December 31, 1995. The Company recorded
operating income of $8.5 million for the nine months ended December 31, 1996 as
compared to an operating loss of $3.6 million for the nine months ended
December 31, 1995. The operating results for the three and nine months ended
December 31, 1996 include non-recurring merger costs and expenses of
approximately $0.3 million and $7.3 million, respectively. The operating
results for the three and nine months ended December 31, 1995 include
non-recurring merger costs and expenses of approximately $3.5 million and $15.6
million, respectively. Excluding the effect of these non-recurring costs,
operating income would have increased $1.2 million or 25.0% to $6.2 million for
the three months ended December 31, 1996 from operating income of $5.0 million
for the three months ended December 31, 1995. Excluding the effect of these
non-recurring costs, operating income would have increased $3.8 million or
32.2% to $15.8 million for the nine months ended December 31, 1996 from
operating income of $12.0 million for the three months ended December 31, 1995.
INTEREST INCOME (EXPENSE). The Company recorded interest income of
approximately $0.5 million and $1.6 million during the three and nine months
ended December 31, 1996 from short term investments. At December 31, 1996 the
investments had a weighted average, taxable equivalent interest rate of
approximately 6.3%. There was no interest expense for the three or nine months
ended December 31, 1996, as compared to a net interest expense of $0.2 million
and $2.2 million for the three and nine months ended December 31, 1995. The
decrease in interest expense resulted from the use of a portion
10
<PAGE> 11
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
of the proceeds from a public equity offering during the three months ended
December 31, 1995 to repay all outstanding bank debt.
OTHER INCOME. The Company's other income totaled $0.7 million and $0.6
million, an increase of $0.1 million or 11.9%, for the three months ended
December 31, 1996 and 1995, respectively. The Company's other income for the
nine months ended December 31, 1996 totaled $1.4 million, an increase of $0.2
million or 14.7% over the nine months ended December 31, 1995 total of $1.2
million. Other income for the three and nine months ended December 31, 1996
and 1995 primarily represents finance charges on customer accounts.
(PROVISION) BENEFIT FOR INCOME TAXES. The income tax provision totaled
$2.7 million and $0.6 for the three months ended December 31, 1996 as compared
to the three months ended December 31, 1995. The income tax provision totaled
$4.4 million for the nine months ended December 31, 1996 as compared to a
benefit for income taxes of $0.1 million for the nine months ended December 31,
1995. The income tax (provision) benefit 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 (LOSS). Net income totaled $4.5 million for the three months
ended December 31, 1996 as compared to $1.3 million for the three months ended
December 31, 1995. Net income totaled $7.1 million for the nine months ended
December 31, 1996 as compared to a net loss of $4.5 million for the nine months
ended December 31, 1995. The net income (loss) for the nine months ended
December 31, 1996 and 1995 include non-recurring merger costs and expenses of
approximately $7.3 million and $15.6 million, respectively. The following
table shows net income (loss) and earnings (loss) per share for the nine months
ended December 31, 1996 as compared to the nine months ended December 31, 1995
as reported and the pro-forma effect on net income and earnings per share
excluding these non-recurring merger costs and expenses and the related tax
benefits.
<TABLE>
<CAPTION>
Pro-forma excluding
merger costs and expenses As reported
Nine Months Ended Nine Months Ended
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income (loss) (in thousands) $ 11,949 $ 6,708 $ 7,077 $ (4,546)
Net income (loss) per share $ 0.33 $ 0.24 $ 0.19 $ (0.17)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $167.4 million and $173.8 million as of
December 31, 1996 and March 29, 1996, respectively. The decrease in working
capital was primarily attributable to the acquisitions of medical supply and
equipment distributors during the first three quarters of fiscal 1997.
Net cash provided by operating activities was $4.4 million for the nine
months ended December 31, 1996 compared to net cash used in operating
activities of $18.8 million for the nine months ended December 31, 1995. For
the nine months ended December 31, 1996, a portion of the growth in accounts
receivable, inventories, and other assets was funded by stock through
pooling transactions and thus did not require the use of cash. For the nine
months ended December 31, 1995, these funds were utilized principally to fund
the growth in the Company's accounts receivable and inventories from new
service centers and continued growth in existing service centers and to
consolidate the closing of duplicate service center locations, realigning
regional and corporate functions, consolidating information systems and
reducing personnel in conjunction with mergers.
11
<PAGE> 12
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The net cash used in investing activities for the nine months ended December
31, 1996 consisted primarily of capital expenditures and the payment for
purchases of net assets from business acquisitions. The net cash used in
financing activities of $17.0 million for the nine months ended December 31,
1996 consisted primarily of debt repayment of $17.8 million assumed in
connection with business acquisitions offset by proceeds from the issuance of
common stock of $1.9 million and distribution to former S-Corportation
shareholders of $1.1 million. The net cash provided by financing activities of
$115.2 million for the nine months ended December 31, 1995 consisted primarily
of $126.7 million in net proceeds received from the Company's public offering
of common stock which was used to pay off debt in the amount of $31.1 million
and distribution to former S-Corporation shareholders of $0.4 million.
Accounts receivable (net of allowances) were $120.1 million and $96.1
million as of December 31, 1996 and March 29, 1996, respectively. The average
number of days sales in accounts receivable was approximately 56 days as of
December 31, 1996 and 58 days as of March 29, 1996. Inventories were $76.1
million and $55.8 million as of December 31, 1996 and March 29, 1996,
respectively. The Company had annual inventory turnover of 8.7 times for the
nine months ended December 31, 1996 and 8.0 times for the year ended March 29,
1996.
The Company has historically financed its liquidity needs for expansion
through lines of credit provided by banks and the private and public offering
of stock. The Company has no debt outstanding on its $60 million credit
facility. Inventory financing has historically been achieved through
negotiating extended payment terms from suppliers. The Company believes that
its current cash and cash equivalent balances combined with the expected cash
flows from operations, available credit facility, capital markets, and vendor
credit will be sufficient to fund its liquidity needs for its existing
operations and for service center expansion for at least the next two years.
12
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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)
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 Intentionally Omitted
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)
</TABLE>
13
<PAGE> 14
PART II
OTHER INFORMATION
(CONTINUED)
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.18 Agreement and Plan of Merger by and among Physician Sales & Service, Inc., PSS Merger Corp.
and Treadway Enterprises, Inc. (8)
21.1 Subsidiaries of the registrant.
27 Financial Data Schedule (for SEC use only).
</TABLE>
---------------
(1) Incorporated by Reference to the Company's Registration Statement
on Form S-3, Registration No. 33-97524
(2) Incorporated by Reference to the Company's Registration Statement
on Form S-1 No. 33-76580.
(3) Incorporated by Reference to the Company's Registration Statement
on Form S-8, filed October 7, 1994.
(4) Incorporated by Reference to the Company's Report on Form 10-Q for
the quarterly period ended December 31, 1994.
(5) Incorporated by Reference to the Company's Report on Form 10-K for
the fiscal year ended March 30, 1995.
(6) Incorporated by Reference to the Company's Report on Form 10-K for
the fiscal year ended March 29, 1996.
(7) Incorporated by Reference to the Company's Report on Form 10-Q for
the quarterly period ended June 30, 1996.
(8) Incorporated by Reference to the Company's Current Report on Form
8-K, filed January 3, 1997.
(B) REPORTS ON FORM 8-K
The Company reported on December 9, 1996 (under Item 2,
Acquisition or Disposition of Assets) that the Company had
acquired Diagnostic Imaging, Inc. by a subsidiary merger.
14
<PAGE> 15
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 February 13, 1997.
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
----------------------------------
David A. Smith
Executive Vice President and Chief
Financial Officer
15
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Named under which such
Jurisdiction of Subsidiaries Conduct
Subsidiary Incorporation Business
---------- ------------- --------
<S> <C> <C>
PSS Rhode Island, Inc. Rhode Island
Pss Texas, Inc. Texas
PSS Delaware, Inc. Delaware
PSS Physician Services, Inc. Florida
Standard/Crescent City Surgical Supplies, Louisiana
Inc.
PSS Taylor Medical, Inc. Delaware PSS Taylor
*Taylor Medical Used Equipment, Inc. Delaware
*Desert Medical Supply, Inc. Delaware
*Taylor Medical of Louisiana, Inc. Louisiana
Brown's Medical Supply Company Nebraska PSS Brown's Medical
Medical Service Company, Inc. New Jersey
Y-Labortories & Supplies, Inc. Mississippi
WorldMed, Inc. Delaware
WorldMed International, Inc. Delaware
WorldMed, N.V. Belgium
Diagnostic Imaging, Inc. Florida
American Medical Diagnostic Imaging, Inc. Florida
Diagnostic Imaging of the Carolinas, Inc. North Carolina
Kings Diagnostic Imaging, Inc. Florida
United X-Ray Company, Inc. Alabama
Treadway Enterprises, Inc. Georgia X-Ray of Georgia
Chesapeake X-Ray Corporation Virginia
</TABLE>
All subsidiaries are 100% owned by Physician Sales & Service, Inc., except for
(i) those designated by an asterisk which are 100% owned by PSS Taylor Medical,
Inc. and (ii) WorldMed, N.V. which is owned by WorldMed, Inc. and WorldMed
International, Inc.
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 64,205,318
<SECURITIES> 0
<RECEIVABLES> 122,781,170
<ALLOWANCES> 2,664,364
<INVENTORY> 76,133,964
<CURRENT-ASSETS> 277,177,639
<PP&E> 33,519,368
<DEPRECIATION> 14,998,427
<TOTAL-ASSETS> 320,536,756
<CURRENT-LIABILITIES> 109,816,648
<BONDS> 0
0
0
<COMMON> 368,797
<OTHER-SE> 206,604,858
<TOTAL-LIABILITY-AND-EQUITY> 320,536,756
<SALES> 503,538,713
<TOTAL-REVENUES> 503,558,213
<CGS> 363,882,167
<TOTAL-COSTS> 363,882,167
<OTHER-EXPENSES> 129,817,646
<LOSS-PROVISION> 1,292,165
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,484,018
<INCOME-TAX> 4,407,000
<INCOME-CONTINUING> 7,077,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,077,018
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0
</TABLE>
