<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 DECEMBER 31, 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 February 16, 1998 a total of 40,984,705 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
DECEMBER 31, 1997
INDEX
PAGE NUMBER
-----------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and March 28, 1997 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 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 10
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 19
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 28,
1997 1997
------------ ------------
(unaudited) *
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 35,077,417 $ 29,075,157
Short-term investments 88,795,505 --
Marketable securities -- 15,045,482
Accounts receivable, net 154,969,917 130,426,326
Inventories 91,934,707 75,185,728
Prepaid expenses and other 30,717,902 24,120,998
------------ ------------
Total current assets 401,495,448 273,853,691
Property and equipment, net 23,800,570 20,202,967
Other Assets:
Intangibles, net 48,244,737 22,083,560
Other 12,117,276 5,129,048
------------ ------------
Total assets $485,658,031 $321,269,266
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 68,015,239 $ 69,011,247
Accrued expenses 25,910,176 20,012,856
Current maturities of long-term debt
and capital lease obligations 4,251,146 8,099,064
Other 12,533,322 5,131,051
------------ ------------
Total current liabilities 110,709,883 102,254,218
Long-term debt and capital lease
obligations, net of current portion 129,089,572 3,825,333
Other 3,448,548 4,634,291
------------ ------------
Total liabilities 243,248,003 110,713,842
------------ ------------
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, 40,444,533 and 38,799,073 shares
Issued and outstanding at December 31, 1997 and
March 28, 1997, respectively 404,445 387,991
Additional paid-in capital 224,180,537 207,675,161
Retained earnings 17,565,536 3,767,240
Foreign currency translation 259,510 92,688
------------ ------------
242,410,028 211,923,080
Unearned ESOP shares of acquired company -- (1,367,656)
------------ ------------
Total shareholders' equity 242,410,028 210,555,424
------------ ------------
Total liabilities and shareholders' equity $485,658,031 $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 Nine Months Ended
---------------------------------- --------------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales $257,244,417 $198,444,488 $733,881,946 $558,017,859
Cost of goods sold 185,732,447 142,978,822 533,053,858 405,914,002
---------------- --------------- --------------- --------------
Gross profit 71,511,970 55,465,666 200,828,088 152,103,857
General and administrative expenses 36,145,642 30,096,748 106,541,413 84,587,067
Selling expenses 22,912,349 18,310,513 64,709,508 49,923,934
Merger costs and expenses 3,786,350 317,388 5,624,848 7,251,388
Non-recurring ESOP cost of acquired company 0 349,989 2,457,074 1,050,000
---------------- --------------- --------------- --------------
Income from operations 8,667,629 6,391,028 21,495,245 9,291,468
---------------- --------------- --------------- --------------
Other income (expense):
Interest income (expense) (1,135,854) 20,369 (1,234,452) 1,071,034
Other income 1,441,156 675,650 3,429,469 1,349,901
---------------- --------------- --------------- --------------
305,302 696,019 2,195,017 2,420,935
---------------- --------------- --------------- --------------
Income before provision for income taxes 8,972,931 7,087,047 23,690,262 11,712,403
Provision for income taxes 3,804,000 2,656,444 9,972,905 4,518,580
---------------- --------------- --------------- --------------
Net income $ 5,168,931 $ 4,430,603 $ 13,717,357 $ 7,193,823
================ =============== =============== ==============
Earnings per share:
Basic $0.13 $ 0.12 $0.35 $ 0.19
================ =============== =============== ==============
Diluted $0.13 $ 0.12 $0.34 $ 0.19
================ =============== =============== ==============
Pro forma tax adjustment on pooled
S-Corporation income (156,194) (356,505)
--------------- --------------
Pro forma net income $ 4,274,409 $ 6,837,318
=============== ==============
Pro forma tax adjustment per common and
Common equivalent share on pooled
S-Corporation income $ 0.01 $ 0.01
--------------- --------------
Pro forma diluted earnings per share $ 0.11 $ 0.18
=============== ==============
Weighted average shares outstanding:
Basic 40,338,000 37,729,000 39,689,000 37,153,000
================ =============== =============== ==============
Diluted 40,851,000 38,262,000 40,120,000 37,845,000
================ =============== =============== ==============
</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>
Nine Months Ended
-------------------------------
December 31, December 31,
1997 1996
-------------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $13,717,357 $ 7,193,823
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 6,726,088 3,723,036
Provision for doubtful accounts 827,351 1,372,785
Merger costs and expenses 4,539,779 6,469,506
Foreign currency translation 166,822 28,495
Unrealized investment income from short-term investments (1,043,922) --
Nonrecurring ESOP cost of acquired company 2,457,074 1,416,533
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Increase in accounts receivable (16,272,244) (16,694,020)
Increase in inventories (6,070,371) (7,451,564)
(Increase) decrease in prepaid expenses and other current assets (3,063,689) 4,988,983
Increase in other assets (7,278,394) (8,131,876)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (3,181,623) 10,871,053
-------------- ------------
Net cash (used in) provided by operating activities (8,475,772) 3,786,754
-------------- ------------
Cash Flows From Investing Activities:
Purchases of short-term investments (87,751,583) --
Proceeds from sales of marketable securities 15,045,482 --
Capital expenditures (6,333,129) (3,769,995)
Purchases of net assets from business acquisitions (6,057,796) (5,083,487)
Payments on noncompete agreements (3,069,627) (1,178,932)
-------------- ------------
Net cash used in investing activities (88,166,653) (10,032,414)
-------------- ------------
Cash Flows From Financing Activities:
Proceeds from issuance of Notes 125,000,000 --
Net repayments of long-term debt of acquired companies (24,791,259) (16,693,527)
Net proceeds from issuance of common stock 2,435,944 1,949,256
Distributions to former S-Corporation shareholders -- (1,100,000)
-------------- ------------
Net cash provided by (used in) activities 102,644,685 (15,844,271)
-------------- ------------
Net increase (decrease)in cash and cash equivalents 6,002,260 (22,089,931)
Cash and cash equivalents, beginning of period 29,075,157 86,448,942
-------------- ------------
Cash and cash equivalents, end of period $ 35,077,417 $ 64,359,011
============== ============
</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 necessary to present fairly the financial position and results
of operations for the periods indicated. The adjustments include the
retroactive adjustments 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
On September 23, 1997, the Company acquired S&W, an imaging
supply and equipment distributor, in a stock-for-stock merger accounted for
under the pooling-of-interests method. The Company issued 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 milli on 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.
During the nine months ended December 31, 1997, the Company acquired
certain assets of two physician medical supply and equipment distributors, with
aggregate annual revenues of approximately $78.5 million, and certain assets of
two imaging supply and equipment distributors, with aggregate annual revenues of
approximately $5.3 million, in transactions accounted for as purchases. The
aggregate consideration of $16.5 million was comprised of approximately $3.7
million cash and 933,000 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 $19.3 million, in aggregate, has been recorded as
goodwill and will be amortized on a straight-line basis over thirty years.
During the nine months ended December 31, 1997, the Company merged with two
physician medical supply and equipment distributors, with aggregate annual
revenues of approximately $6.7 million, in mergers accounted for under the
pooling-of-interests method. The Company issued approximately 120,000 shares of
PSS common stock in connection with these poolings. The accompanying
consolidated financial statements have not been restated for periods prior to
the poolings due to immateriality. Accordingly, the results of operations have
been reflected in the consolidated financial statements prospectively from the
acquisition dates and retained earnings of approximately $0.1 million of the
acquired companies has been recorded as an adjustment to the retained earnings
of the Company.
6
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
On December 14, 1997, the Company entered into a definitive agreement to
acquire Gulf South Medical Supply, Inc. ("Gulf South") in a merger (the
"Merger") expected to be accounted for under the pooling-of-interests method by
issuing 1.75 shares of PSS common stock for each issued and outstanding share of
Gulf South common stock. Gulf South is the largest distributor of medical
supplies and related products to the long-term care industry, with revenues of
approximately $251.8 million for the twelve months ended September 30, 1997,
operating 23 regional distribution centers which serve 50 states. Consummation
of the Merger is subject to the approval of the shareholders of both the Company
and Gulf South and other customary conditions. PSS' and Gulf South's requests
for early termination of the waiting period under the Hart-Scott-Rhodino
Antitrust Improvements Act of 1979 were granted and such termination became
effective February 2, 1998.
Merger costs and expenses of $3.8 and $5.6 million were incurred during the
three and nine months ended December 31, 1997, respectively. 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 information systems and reducing personnel. At December 31, 1997,
accrued merger costs were approximately $4.5 million.
7
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
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 pro forma net income and net income per share amounts that
reflect pro forma 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>
Six Months Ended Three Months Ended Nine Months Ended
September 30, December 31, December 31,
1997 1996 1996
------------------ ------------------ -----------------
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C>
Net Sales
PSS $695,879 $168,743 $470,357
X-Ray GA -- 10,870 33,182
S&W 38,003 18,831 54,479
------------------ ------------------ -----------------
Total $733,882 $198,444 $558,018
================== ================== =================
Net Income (Loss)
PSS $ 15,812 $ 4,054 $ 6,139
X-Ray GA -- 411 938
S&W (1) (2,095) (34) 117
------------------ ------------------ -----------------
Net income as reported $ 13,717 $ 4,431 $ 7,194
==================
Pro forma tax Provision for X-Ray GA (156) (357)
------------------ -----------------
Pro forma net Income $ 4,275 $ 6,837
================== =================
Diluted earnings per share
As reported $ 0.34 $ 0.12 $ 0.19
================== ================== =================
Pro forma $ 0.11 $ 0.18
================== =================
</TABLE>
(1) Net loss includes $2.5 million in non-recurring compensation expense in
connection with a leveraged ESOP maintained by S&W. See Management's
Discussion and Analysis.
NOTE 3 - SENIOR SUBORDINATED NOTES
On October 7, 1997, the Company issued, in a private offering under Rule
144A of the Securities Act of 1933, as amended (the "Act"), an aggregate
principal amount of $125.0 million of its 8 1/2% senior subordinated notes due
in 2007 (the "Private Notes") with net proceeds to the Company of $120.8 million
after deduction for offering costs. Interest on the Private Notes accrues from
the date of original issuance and is payable semi-annually on April 1 and
October 1 of each year, commencing on April 1, 1998, at a rate of 8 1/2% per
annum. The Private Notes are unconditionally guaranteed on a senior subordinated
basis by all of the Company's domestic subsidiaries. On February 10, 1998, the
Company closed its offer to exchange the Private Notes (the "Exchange Offer")
for senior subordinated notes (the "Notes") of the Company with substantially
identical terms to the Private Notes (except that the Notes do not contain terms
with respect to transfer restrictions).
8
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
NOTE 4 - EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 128, "Earnings Per Share." This standard replaces the
presentation of primary earnings per share ("EPS") with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
All earnings per share amounts for the current and prior periods have been
presented in conformity with the provisions of SFAS 128. The following table
presents the reconciliation of the numerators and denominators of the basic and
diluted EPS calculations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -------------------
1997 1996 1997 1996
-------------------- -------------------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 5,168 $ 4,431 $13,717 $ 7,194
========= ======= ======= =======
Earnings per share:
Basic $ 0.13 $ 0.12 $ 0.35 $ 0.19
========= ======= ======= =======
Diluted $ 0.13 $ 0.12 $ 0.34 $ 0.19
========= ======= ======= =======
Weighted average shares outstanding:
Common shares outstanding 40,338 37,729 39,689 37,153
Assumed exercise of stock options 513 533 431 692
--------- ------- ------- -------
Diluted shares outstanding 40,851 38,262 40,120 37,845
========= ======= ======= =======
</TABLE>
NOTE 5 - SUBSEQUENT EVENTS
In January 1998, the Company completed the acquisition of a medical imaging
distributor located in Albuquerque, New Mexico, with annual revenues of
approximately $25.0 million, in a stock-for-stock merger accounted for as a
pooling-of-interests. The Company issued approximately 200,000 shares of PSS
common stock in exchange for all of the net assets of the acquired company.
In February 1998, the Company acquired certain assets of a medical imaging
distributor based in Chicago, Illinois, with annual revenues of approximately
$3.0 million, in a transaction accounted for as a purchase for aggregate
consideration of $0.3 million in cash.
On February 10, 1998, the Company closed its Exchange Offer with respect to
its $125.0 million senior subordinated notes (see Note 3--Senior Subordinated
Notes).
9
<PAGE>
ITEM 2. PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
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 office-based physicians in the United States. The Company
currently operates 61 physician office medical supply distribution service
centers ("Physician Supply Business") distributing to approximately 104,000
physician office sites in all 50 states. The Company's primary market is the
approximately 400,000 physicians who practice medicine in approximately 200,000
office sites throughout the United States.
The Company, through its wholly-owned subsidiary, Diagnostic Imaging ("DI"
or "Imaging Business"), distributes medical diagnostic imaging supplies,
chemicals, and 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 Business"). The Company currently has three
International Business 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 imaging supply and equipment 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 $34.0 billion market, of which $4.4
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 $5.5 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 local and regional
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 to 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
Business service centers, 25 Imaging Business services centers and three
International Business service centers. In order of significance, the Company's
growth has been accomplished through (i) acquiring local and regional physician
supply companies, (ii) acquiring local and regional imaging supply companies,
(iii) increasing sales from existing Physician Supply Business service centers,
and (iv) opening start-up Physician Supply Business service centers.
10
<PAGE>
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, 1997 and 1996:
THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net Sales. Net sales for the three months ended December 31, 1997 totaled
$257.2 million, an increase of $58.8 million or 29.6% over net sales of $198.4
million for the three months ended December 31, 1996. Net sales for the nine
months ended December 31, 1997 totaled $733.9 million, an increase of $175.9
million or 31.5% over net sales of $558.0 million for the nine months ended
December 31, 1996. In order of contribution to the increase, net sales
increased as the result of (i) net sales of the Imaging Business service centers
recently acquired, (ii) internal sales growth of the Physician Supply Business
service centers operating at least two years, and (iii) net sales of the
Physician Supply Business service centers recently acquired.
The Company's service centers operating for at least two years generated
same center sales growth of approximately 15% for the three months ended
December 31, 1997, excluding $13 million of low-profit business eliminated by
the Company. The sales growth resulted from the continued development of PSS'
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, 1997
totaled $71.5 million, an increase of $16.0 million or 28.8% over the three
months ended December 31, 1996 total of $55.5 million. Gross profit for the
nine months ended December 31, 1997 totaled $200.8 million, an increase of $48.7
million or 32.0% over the nine months ended December 31, 1996 total of $152.1
million. Gross profit as a percentage of net sales was 27.8% and 27.4% for the
three and nine months ended December 31, 1997 and 28.0% and 27.3% for the three
and nine months ended December 31, 1996. For the three and nine months ended
December 31, 1997, the gross profit percentage was impacted by higher gross
profit margins in the Physician Supply Business due to the elimination of low-
profit business during the nine months ended December 31, 1997 and focus on
sales of higher margin products. This increase was partially offset by the
Imaging Business which operates at a lower gross profit than the Physician
Supply Business.
General and Administrative Expenses. General and administrative expenses
for the three months ended December 31, 1997 totaled $36.1 million, an increase
of $6.0 million or 19.9% over the three months ended December 31, 1996 total of
$30.1 million. General and administrative expenses for the nine months ended
December 31, 1997 totaled $106.5 million, an increase of $22.0 million or 26.0%
over the nine months ended December 31, 1996 total of $84.5 million. As a
percentage of net sales, general and administrative expenses decreased to 14.0%
and 14.5% for the three and nine months ended December 31, 1997 from 15.2% and
15.1% for the three and nine months ended December 31, 1996 despite operating
costs incurred associated with transitioning merged and acquired operations.
Selling Expenses. Selling expenses for the three months ended December 31,
1997 totaled $22.9 million, an increase of $4.6 million or 25.1% over the three
months ended December 31, 1996 total of $18.3 million. Selling expenses for the
nine months ended December 31, 1997 totaled $64.7 million, an increase of $14.8
million or 29.7% over the nine months ended December 31, 1996 total of $49.9
million. As a percentage of sales, selling expenses decreased to 8.9% and 8.8%
for the three and nine months ended December 31, 1997 from 9.2% and 8.9% for the
three and nine months ended December 31, 1996. The decrease in selling expenses
as a percentage of sales was primarily a result of the growing operations of the
new Imaging Business that incurs lower selling expenses as a percentage of net
sales than the Physician Supply Business.
11
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Merger Costs and Expenses. During the three months ended December 31,
1997, the Company recorded non-recurring merger costs and expenses of
approximately $3.8 million primarily associated with the merger with S&W during
September 1997. During the three months ended December 31, 1996, the Company
recorded non-recurring merger costs and expenses of approximately $0.3 million.
During the nine months ended December 31, 1997, the Company recorded non-
recurring merger costs and expenses of approximately $5.6 million associated
with the acquisition of an imaging distributor in July 1997 and S&W. 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
three medical supply and equipment distributors, and the acquisition of three
radiology and imaging distributors comprised of X-Ray GA, Diagnostic Imaging,
Inc., and Chesapeake X-Ray Corporation. The radiology and imaging distributors
merged operations to form the Imaging Business. 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 information systems and reducing personnel.
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 nine months ended December 31, 1997 and 1996 totaled $2.5 million and
$1.1 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 December 31,
1997 totaled $8.7 million, an increase of $2.3 million or 35.9%, compared to
operating income of $6.4 million for the three months ended December 31, 1996.
The Company recorded operating income of $21.5 million for the nine months ended
December 31, 1997, an increase of $12.2 million or 131.2%, compared to operating
income of $9.3 million for the nine months ended December 31, 1996. The
operating results for the three and nine months ended December 31, 1997 include
non-recurring merger costs and expenses and ESOP costs of an acquired company of
approximately $3.8 and $8.1 million, respectively. The operating results for
the three and nine months ended December 31, 1996 include non-recurring merger
costs and expenses and ESOP costs of an acquired company of approximately $0.7
and $8.4 million, respectively. Excluding the effect of these non-recurring
costs, operating income for the three and nine months ended December 31, 1997,
would have increased 76.1% and 67.2% to $12.5 million and $29.6 million,
respectively, from operating income of $7.1 million and $17.7 million for the
three and nine months ended December 31, 1996.
Interest Income (Expense). For the three and nine months ended December
31, 1997, included in net interest expense is interest income of $1.5 and $2.0
million from short term investments offset by interest expense of $2.6 million
and $3.2 million primarily related to interest incurred on the $125 million
Notes and debt of merged companies for which the financial statements have been
restated. Net interest income for the three and nine months ended December 31,
1996 totaled $0.0 million and $1.1 million, respectively. The increase in net
interest expense is primarily the result of interest incurred on the $125
million Notes partially offset by interest income generated from the investment
of the proceeds received from the issuance of the Notes.
Other Income. Other income for the three and nine months ended December
31, 1997 increased $0.7 and $2.1 million to $1.4 million and $3.4 million,
respectively. Other income consists of finance charges on customer accounts,
Imaging Business customer delivery charges and financing performance incentives.
The increase in other income results from the growth in the Company's
operations.
12
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Provision For Income Taxes. The income tax provision totaled $3.8 million
for the three months ended December 31, 1997 as compared to a provision for
income taxes of $2.7 million for the three months ended December 31, 1996. The
income tax provision totaled $10.0 million for the nine months ended December
31, 1997 as compared to a provision for income taxes of $4.5 million for the
nine months ended December 31, 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 $5.2 million for the three months ended
December 31, 1997 as compared to a net income of $4.4 million for the three
months ended December 31, 1996. Net income totaled $13.7 million for the nine
months ended December 31, 1997 as compared to a net income of $7.2 million for
the nine months ended December 31, 1996. The net income for the nine months
ended December 31, 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 nine months ended December 31, 1997 and 1996, as reported, and the
pro-forma effect on net income and earnings per share excluding non-recurring
costs and expenses.
<TABLE>
<CAPTION>
Pro forma (a) As Reported
Three Months Ended Three Months Ended
---------------------------------------- --------------------------------------
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income (in millions) $ 7.6 $ 4.7 $ 5.2 $ 4.4
Diluted earnings per share $0.19 $0.12 $0.13 $0.12
<CAPTION>
Pro forma (a) As Reported
Nine Months Ended Nine Months Ended
---------------------------------------- --------------------------------------
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income (in millions) $19.5 $12.1 $13.7 $ 7.2
Diluted earnings per share $0.49 $0.32 $0.34 $0.19
</TABLE>
- - ---------------
(a) Excludes merger costs and expenses and nonrecurring ESOP cost 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,
proceeds from the Notes offering (see Note 3--Senior Subordinated Notes), and
any future public offerings.
Net cash used by operating activities was $(8.5) million for the nine
months ended December 31, 1997 compared to net cash provided by operating
activities of $3.8 million for the nine months ended December 31, 1996 due to
the use of cash related to the growth in assets required to support the
expansion of the Imaging Business. During the three months ended April 3, 1998,
the Company expects to change the timing of receiving manufacturer rebates
resulting in a projected, one-time, $20.0 million source of cash.
13
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Net cash used in investing activities of $(88.2) million for the nine
months ended December 31, 1997 consisted primarily of purchases of short-term
investments with proceeds of the Notes Issuance, by capital expenditures,
payment for purchases of net assets from business acquisitions, and payments on
noncompete agreements. Net cash used in investing activities during the nine
months ended December 31, 1997 of $(10.0) 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 provided by financing activities of $102.6 million for the nine
months ended December 31, 1997 primarily resulted from the $125.0 million
proceeds from the Notes issuance offset by repayments of outstanding debt of
companies acquired. Net cash used in financing activities $(15.8) million for
the nine months ended December 31, 1996 primarily consisted of repayments of
outstanding debt of companies acquired.
The Company had working capital of $164.4 million and $171.6 million as of
December 31, 1997 and March 28, 1997, respectively. Accounts receivable, net of
allowances, were $155.0 million and $130.4 million at December 31, 1997 and
March 28, 1997, respectively. The average number of days sales in accounts
receivable outstanding was approximately 53 days for the nine months ended
December 31, 1997 and 56 days for the year ended March 28, 1997, respectively.
Inventories were $91.9 million and $75.2 million as of December 31, 1997
and March 28, 1997, respectively. The Company had annualized inventory turnover
of 8.5 times for the nine months ended December 31, 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.
Earnings before interest expense, taxes, depreciation and amortization
("EBITDA") totaled approximately $17.7 million and $41.7 million for the three
and nine months ended December 31, 1997. EBITDA margin was approximately 6.9%
and 5.7% for the same periods.
The Company has historically been able to finance its liquidity needs for
expansion through lines of credit provided by banks and proceeds from the public
and private offering of stock.
On October 7, 1997, the Company issued, in a private offering under Rule
144A of the Securities Act of 1933, as amended, an aggregate principal amount of
$125.0 million of its 8 1/2% senior subordinated notes due in 2007 with net
proceeds to the Company of $120.8 million after deduction for offering costs.
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 December 31, 1997, the
Company had no outstanding debt under its credit facility with a bank.
14
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 litigation 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
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On October 17, 1997, the Company issued an aggregate of 85,393 shares of
PSS common stock, including 15,118 shares which are being held in escrow
pending the resolution of potential identifiable claims, to the former
shareholders of Alexander Medical Supply Company, Inc. ("Alexander") in
exchange for all of the shares of Alexander common stock. The issuance
of securities was made in reliance on the exemption from registration
provided under Section 4(2) of the 1933 Act, as amended, 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 October 7, 1997, the Company issued an aggregate principal amount of
$125.0 million of its 8 1/2% senior subordinated notes due 2007 (the
"Private Notes") in a private offering under Rule 144A of the 1933 Act.
The initial purchasers of the Private Notes were BT Alex. Brown
Incorporated, Salomon Brothers Inc., and NationsBanc Montgomery
Securities, Inc. (the "Initial Purchasers"). The Initial Purchasers
resold the Private Notes in the United States to qualified institutional
buyers under Rule 144A under the 1933 Act and to a limited number of
other institutional "accredited investors" as defined in Rule 501 of the
1993 Act. Net proceeds to PSS from the sale of the Private Notes were
$120,831,250. On February 10, 1998, the Company closed its offer to
exchange the Private Notes for senior subordinated notes (the "Notes")
of the Company with substantially identical terms to the Private Notes
(except that the Notes do not contain terms with respect to transfer
restrictions). Interest on the Private Notes 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. The Private Notes
are unconditionally guaranteed on a senior subordinated basis by all of
PSS' domestic subsidiaries (the "Subsidiary Guarantors").
(d) Not applicable.
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)
4.1 Form of Indenture, dated as of October 7, 1997, by and among the
Company, the Subsidiary Guarantors named therein, and SunTrust
Bank, Central Florida, National Association, as Trustee.(2)
4.2 Registration Rights Agreement, dated as of October 7, 1997, by
and among the Company, the Subsidiary Guarantors named therein,
BT Alex. Brown Incorporated, Salamon Brothers Inc. and
NationsBanc Montgomery Securities, Inc.(2)
4.3 Form of 8 1/2 % Senior Subordinated Note due 2007, including Form
of Guarantee (Private Notes).(2)
4.4 Form of 8 1/2 % Senior Subordinated Note due 2007, including Form
of Guarantee (Exchange Notes).(2)
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.(3)
10.2 Registration Rights Agreement between the Company and Tullis-
Dickerson Capital Focus, L.P., Dated as of March 16, 1994.(3)
10.3 Employment Contract, as amended, for Patrick C. Kelly.(3)
10.4 Incentive Stock Option Plan dated May 14, 1986.(3)
10.5 Shareholders Agreement dated March 26, 1986, between the Company,
the Charthouse Co., Underwood, Santioni and Dunaway.(3)
16
<PAGE>
Exhibit No. Description
- - ----------- -----------
10.6 Shareholders Agreement dated April 10, 1986, between the Company
and Clyde Young.(3)
10.7 Shareholders Agreement between the Company and John D. Barrow.(3)
10.8 Amended and Restated Directors Stock Plan.(8)
10.9 Amended and Restated 1994 Long Term Incentive Plan.(8)
10.10 Amended and Restated 1994 Long Term Stock Plan.(8)
10.11 1994 Employee Stock Purchase Plan.(4)
10.12 1994 Amended Incentive Stock Option Plan.(3)
10.13 Amended and Restated Loan and Security Agreement between the
Company and NationsBank of Georgia, N.A. dated December 21,
1994.(5)
10.14 Distributorship Agreement between Abbott Laboratories and
Physician Sales & Service, Inc. (Portions omitted as
confidential--Separately filed with Commission).(6)
10.15 Stock Purchase Agreement between Abbott Laboratories and
Physician Sales & Service, Inc.(6)
10.16 Amendment to Employee Stock Ownership Plan.(8)
10.16a Amendment and Restatement of the Physician Sales and Service,
Inc. Employee Stock Ownership And Savings Plan.(8)
10.16b First Amendment to the Physician Sales and Service, Inc. Employee
Stock Ownership and Savings Plan.(8)
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).(7)
10.18 Agreement and Plan of Merger by and Among Physician Sales &
Service, Inc., PSS Merger Corp. And Treadway Enterprises, Inc.(9)
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.(10)
10.20 Agreement and Plan of Merger dated December 14, 1997 by and among
the Company, PSS Merger Corp. and Gulf South Medical Supply,
Inc.(11)
10.20a Stock Option Agreement dated December 14, 1997 by and between
Gulf South Medical Supply, Inc. and the Company.(12)
10.20b Stock Option Agreement dated December 14, 1997 by and between the
Company and Gulf South Medical Supply, Inc.(13)
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-4, Registration No. 333-39679.
(3) Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration No. 33-76580.
(4) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration No. 33-80657.
(5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 1994.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended March 30, 1995.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended March 29, 1996.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
(9) Incorporated by reference from the Company's Current Report on Form 8-K,
filed January 3, 1997.
(10) Incorporated by reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-33453.
(11) Incorporated by reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-44323.
(12) Incorporated by reference from Annex B to the Company's Registration
Statement on Form , Registration No. 333-44323.
(13) Incorporated by reference from Annex C to the Company's Registration
Statement on Form , Registration No. 333-44323.
17
<PAGE>
(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:
<TABLE>
<CAPTION>
Entities for Which
Date of Report Item Reported Financial Statements Filed
- - -------------- ------------- --------------------------
<S> <C> <C>
November 6, 1997 Closing of Rule 144A offering of Senior None
Subordinated Notes
December 14, 1997 Execution of definitive agreement for None
acquisition of Gulf South Medical Supply,
Inc.
December 23, 1997 Restatement of the Company's Consolidated Physician Sales & Service, Inc.
Financial Statements and Management's
Discussion and Analysis of Financial
Condition and Results of Operations
December 23, 1997 Required consolidated financial Gulf South Medical Supply, Inc. and
statements of Gulf South Medical Supply, Physician Sales & Service, Inc.
Inc. and pro forma information
</TABLE>
18
<PAGE>
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 16, 1997.
Physician Sales & Service, Inc.
/s/ David A. Smith
---------------------------------------
David A. Smith
Executive Vice President and
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> APR-03-1998 APR-03-1998
<PERIOD-START> OCT-01-1997 MAR-29-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 0 35,077,417
<SECURITIES> 0 0
<RECEIVABLES> 0 154,969,917
<ALLOWANCES> 0 0
<INVENTORY> 0 91,934,707
<CURRENT-ASSETS> 0 401,495,448
<PP&E> 0 23,800,570
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 485,658,031
<CURRENT-LIABILITIES> 0 110,709,883
<BONDS> 0 125,000,000
0 0
0 0
<COMMON> 0 404,445
<OTHER-SE> 0 242,005,583
<TOTAL-LIABILITY-AND-EQUITY> 0 485,658,031
<SALES> 257,244,417 733,881,946
<TOTAL-REVENUES> 257,244,417 733,881,946
<CGS> 185,732,447 533,053,858
<TOTAL-COSTS> 185,732,447 533,053,858
<OTHER-EXPENSES> 62,844,341 179,332,843
<LOSS-PROVISION> (45,565) 827,351
<INTEREST-EXPENSE> 1,135,854 1,234,452
<INCOME-PRETAX> 8,972,931 23,690,262
<INCOME-TAX> 3,804,000 9,972,905
<INCOME-CONTINUING> 5,168,931 13,717,357
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,168,931 13,717,357
<EPS-PRIMARY> .13 .35
<EPS-DILUTED> .13 .34
</TABLE>
