________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
NOTE: THIS SPECIAL FINANCIAL REPORT FILED PURSUANT TO RULE 15d-2 UNDER THE
SECURITIES EXCHANGE ACT OF 1934 CONTAINS ONLY FINANCIAL STATEMENTS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995.
COMMISSION FILE NUMBER: 33-80731
------------------------
PHYSICIAN SUPPORT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3624081
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION CODE)
ROUTE 230 AND EBY-CHIQUES ROAD
MT. JOY, PENNSYLVANIA 17552
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (717) 653-5340
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___ No _X_
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of the close of business on April 15, 1996 was $91,700,000.
As of the close of business on April 15, 1996 there were 6,265,000 shares
of the registrant's Common Stock, par value $.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None
________________________________________________________________________________
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PHYSICIAN SUPPORT SYSTEMS, INC.
Mt. Joy, Pennsylvania
We have audited the accompanying consolidated balance sheets of Physician
Support Systems, Inc. and Subsidiary as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Physician Support Systems, Inc.
and Subsidiary as of December 31, 1994 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 12, 1996
New York, New York
2
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, PRO FORMA
--------------------------- DECEMBER 31,
1994 1995 1995
------------ ----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................... $ 878,350 $ 394,405 $ 20,200,069
Accounts receivable (net of allowances of $35,000 at
December 31, 1994 and $190,000 at December 31, 1995)...... 1,145,539 3,993,408 4,500,773
Accounts receivable -- unbilled............................. 3,207,364 3,847,616 5,251,057
Prepaid expenses............................................ 221,194 281,144 281,144
Deferred income taxes....................................... -- 388,293 --
Other current assets........................................ 328,018 138,777 156,135
------------ ----------- ------------
Total current assets................................... 5,780,465 9,043,643 30,389,178
Property and equipment -- net.................................... 2,982,757 2,414,882 2,759,438
Intangible assets -- net......................................... 14,242,663 11,965,026 22,950,106
Other assets..................................................... 30,521 68,147 74,716
------------ ----------- ------------
Total.................................................. $ 23,036,406 $23,491,698 $ 56,173,438
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable............................................ $ 316,683 $ 442,172 $ 570,789
Accrued expenses............................................ 2,435,724 4,856,346 5,550,933
Short-term borrowings....................................... -- 500,000 --
Current portion of long-term debt........................... 1,466,667 2,099,167 --
Current portion of other long-term liabilities.............. 1,037,115 603,782 603,782
Deferred purchase price..................................... -- -- 1,912,000
Deferred income taxes....................................... 742,733 -- 94,707
------------ ----------- ------------
Total current liabilities.............................. 5,998,922 8,501,467 8,732,211
------------ ----------- ------------
Long-term debt................................................... 15,197,430 13,830,763 5,500,000
------------ ----------- ------------
Other long-term liabilities...................................... 1,623,391 1,158,237 1,315,811
------------ ----------- ------------
Deferred income taxes............................................ 322,293 911,947 911,947
------------ ----------- ------------
Commitments and contingencies
Redeemable preferred stock:
Par value $.01 per share: authorized 10,000 shares; 10%
Preferred Stock, Series A and B, stated value $500 per
share, outstanding 2,120 and 2,932.032 shares of each
series at December 31, 1994 and 1995, respectively........ 2,120,000 2,932,032 --
------------ ----------- ------------
Stockholders' equity (deficiency):
Preferred stock, par value $.01 per share: authorized
10,000,000 shares; none outstanding
Common stock, par value $.001 per share:
authorized 100,000,000 shares; outstanding 2,240,000
shares at December 31, 1994 and 1995...................... 2,240 2,240 6,265
Additional paid-in capital.................................. 125,760 125,760 43,677,952
Accumulated deficit......................................... (2,353,630) (3,970,748) (3,970,748)
------------ ----------- ------------
(2,225,630) (3,842,748) 39,713,469
------------ ----------- ------------
Total.................................................. $ 23,036,406 $23,491,698 $ 56,173,438
------------ ----------- ------------
------------ ----------- ------------
See notes to consolidated financial statements.
3
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
Revenue.............................................................. $13,080,015 $18,772,920 $19,583,657
----------- ----------- -----------
Operating expenses:
Salaries and wages.............................................. 5,898,379 8,866,498 9,660,587
General and administrative...................................... 4,291,026 6,722,621 6,845,697
Depreciation and amortization................................... 2,565,868 3,348,752 3,378,594
----------- ----------- -----------
Total operating expenses................................... 12,755,273 18,937,871 19,884,880
----------- ----------- -----------
Income (loss) from operations........................................ 324,742 (164,951) (301,223)
----------- ----------- -----------
Other expenses:
Interest expense................................................ 1,261,939 1,525,850 1,475,821
Other, net...................................................... 38,415 186,334 (3,683)
----------- ----------- -----------
Total other expenses....................................... 1,300,354 1,712,184 1,472,138
----------- ----------- -----------
Income (loss) before income taxes (benefit).......................... (975,612) (1,877,135) (1,773,361)
Income taxes (benefit)............................................... (303,130) (809,903) (499,550)
----------- ----------- -----------
Net income (loss).................................................... (672,482) (1,067,232) (1,273,811)
Preferred stock dividends............................................ (213,333) (230,800) (280,980)
----------- ----------- -----------
Net (loss) applicable to common stock................................ $ (885,815) $(1,298,032) $(1,554,791)
----------- ----------- -----------
----------- ----------- -----------
Net (loss) per share................................................. $ (0.40) $ (0.58) $ (0.69)
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding.................................. 2,240,000 2,240,000 2,240,000
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
4
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
--------- ------ ---------- ----------- -------------
Balance, January 1, 1993........................ 2,240,000 $2,240 $125,760 $ (187,916) $ (59,916)
Net loss................................... -- -- -- (672,482) (672,482)
Redeemable preferred stock distributions... -- -- -- (200,000) (200,000)
--------- ------ ---------- ----------- -------------
Balance, December 31, 1993...................... 2,240,000 2,240 125,760 (1,060,398) (932,398)
Net loss................................... -- -- -- (1,067,232) (1,067,232)
Preferred stock issued in lieu of cash
dividends................................ -- -- -- (120,000) (120,000)
Redeemable preferred stock distributions... -- -- -- (106,000) (106,000)
--------- ------ ---------- ----------- -------------
Balance, December 31, 1994...................... 2,240,000 2,240 125,760 (2,353,630) (2,225,630)
Net loss................................... -- -- -- (1,273,811) (1,273,811)
Preferred stock issued in lieu of cash
dividends................................ -- -- -- (262,032) (262,032)
Accrued preferred stock dividends.......... -- -- -- (81,275) (81,275)
--------- ------ ---------- ----------- -------------
Balance, December 31, 1995...................... 2,240,000 $2,240 $125,760 $(3,970,748) $(3,842,748)
--------- ------ ---------- ----------- -------------
--------- ------ ---------- ----------- -------------
See notes to consolidated financial statements.
5
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss).............................................. $ (672,482) $(1,067,232) $(1,273,811)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Pension liability provision............................... 18,360 6,920 6,298
Deferred rent............................................. -- 668,346 160,430
Depreciation and amortization............................. 2,565,868 3,348,752 3,378,594
Deferred income taxes..................................... (303,130) (809,903) (541,372)
Loss on disposal of property and equipment................ 3,795 202,798 6,695
Provision for doubtful accounts receivable................ 35,000 63,203 155,000
Accrued preferred stock dividends......................... -- -- (81,275)
Changes in operating assets and liabilities:
Accounts receivable.................................. 64,776 179,350 (3,002,869)
Accounts receivable -- unbilled...................... 208,446 (207,304) (640,252)
Prepaid expenses..................................... (59,347) 75,828 (59,950)
Other current assets................................. (156,208) (57,810) 189,241
Other assets......................................... 1,642 16,571 (37,626)
Accounts payable..................................... (117,839) 95,406 125,489
Accrued expenses..................................... 112,101 495,632 2,420,622
Operating improvement reserve........................ (15,738) (761,504) (834,867)
----------- ----------- -----------
Net cash provided by operating activities....... 1,685,244 2,249,053 (29,653)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of Spring, net of cash acquired.................... (2,720,854) -- --
Capital expenditures........................................... (130,369) (534,745) (539,777)
Proceeds from disposal of property and equipment............... 16,735 161,050 --
----------- ----------- -----------
Net cash used in investing activities........... (2,834,488) (373,695) (539,777)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings............................. 8,000,000 -- --
Proceeds from short-term borrowings............................ -- -- 500,000
Principal payments on long-term debt........................... (6,216,731) (1,266,666) (734,167)
Principal payments on capital lease obligations................ (141,919) (280,847) (230,348)
Issuance of redeemable preferred stock......................... -- -- 550,000
Redeemable preferred stock distributions....................... (200,000) (106,000) --
----------- ----------- -----------
Net cash (used in) provided by financing
activities.................................... 1,441,350 (1,653,513) 85,485
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................ 292,106 221,845 (483,945)
Cash and cash equivalents, beginning of period...................... 364,399 656,505 878,350
----------- ----------- -----------
Cash and cash equivalents, end of period............................ $ 656,505 $ 878,350 $ 394,405
----------- ----------- -----------
----------- ----------- -----------
Supplemental investing activity:
Fair value of Spring assets acquired........................... $12,657,486 $ -- $ --
Cash acquired.................................................. (312,146) -- --
Liabilities assumed............................................ (2,124,486) -- --
Subordinated note issued....................................... (5,500,000) -- --
Reserve for Spring office move and consolidation............... (2,000,000) -- --
----------- ----------- -----------
Net cash paid for acquisition................... $ 2,720,854 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest......................................... $ 1,086,525 $ 1,328,405 $ 1,118,216
----------- ----------- -----------
----------- ----------- -----------
Capital lease obligations incurred in acquisition of
equipment.................................................... $ 84,702 $ 294,534 $ --
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
6
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. BASIS OF PRESENTATION
a. Description of the Business -- Physician Support Systems, Inc. (a
Delaware corporation) and Subsidiary (the 'Company' or 'PSS') are engaged in the
business of providing business management services to primarily hospital-
affiliated physicians.
b. Business Combination -- On August 12, 1993 (effective August 1, 1993),
the Company acquired 100 percent of the outstanding common stock of Spring
Anesthesia Group, Inc. ('Spring') for approximately $8,533,000, including
approximately $3,033,000 in cash and a $5,500,000 subordinated note. This
acquisition was accounted for under the purchase method of accounting and,
accordingly, the net assets acquired were recorded at their fair values on the
effective date of acquisition. Results of operations for Spring from the
effective date of acquisition through December 31, 1993 are included in the
Company's consolidated statement of operations for the year ended December 31,
1993. The excess purchase price over fair value of net assets acquired of
approximately $5,756,000 is being amortized on the straight-line method over 20
years.
c. Pro Forma Balance Sheet -- The December 31, 1995 pro forma balance sheet
gives effect to the sale of shares of common stock in the Company's initial
public offering which was completed on February 12, 1996 and the simultaneous
acquisition of the Acquired Businesses, repayment of short and long-term debt
and redemption of preferred stock (see Note 12).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Spring. All
significant intercompany balances and transactions have been eliminated in
consolidation.
b. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
c. Revenue Recognition -- The Company estimates fees that will be invoiced
upon collection of physician accounts receivable and recognizes such revenues
when substantially all services to be performed by the Company have been
completed. Accounts receivable -- unbilled, represents amounts recognized for
services rendered but not yet invoiced and is based on the Company's estimate of
the fees that will be collected from clients when patient accounts are
collected. This estimate is calculated by applying the Company's management fee
percentage to an estimate of the clients' collections that will be achieved on
amounts billed to patients and their insurers. The Company revises its estimate
of its unbilled accounts receivable each month based on its clients' billing and
collection information for that month. The Company provides for additional costs
necessary to complete the collection process.
Accounts receivable primarily represents amounts invoiced to clients. The
Company provided $35,000, $63,203 and $155,000 for doubtful accounts in the
years ended December 31, 1993, 1994 and 1995, respectively, and wrote off $-0-,
$63,203 and $-0- against its allowance for doubtful accounts in the years ended
December 31, 1993, 1994 and 1995, respectively. Also included in accounts
receivable at December 31, 1995 are reimbursements for professional fees
incurred in connection with a proposed business transaction.
d. Cash and Cash Equivalents -- The Company considers its highly liquid
overnight investments to be cash equivalents.
7
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
e. Cash in Escrow -- The Company holds cash collected on behalf of its
physician customers in escrow and remits amounts due to physicians weekly.
Approximately $2,178,600 and $2,875,258 of cash in escrow was offset against
amounts due to physicians on the Company's balance sheet at December 31, 1994
and 1995, respectively.
f. Property and Equipment -- Depreciation and amortization are computed on
a straight-line basis over the shorter of estimated useful lives of the assets
or lease terms.
g. Intangible Assets -- Amortization is computed on a straight-line basis
over estimated useful lives of the assets. From time to time the Company
compares the carrying value of its goodwill to an estimate of the Company's fair
value in order to evaluate the reasonableness of the carrying value and
remaining amortization period of the goodwill. Fair value is computed using
projections of future cash flows. There was no effect on the Company's financial
position or results of operations from the adoption of Statement of Financial
Accounting Standards No. 121, 'Accounting for the Impairment of Long-Lived
Assets.'
h. Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for
Income Taxes,' which requires an asset and liability approach to accounting for
income taxes. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Income taxes/benefit is the
tax payable/receivable for the period plus or minus the change during the period
in deferred income tax assets and liabilities.
i. Net (Loss) Per Share -- Net (loss) per common share is calculated using
the weighted average number of common shares outstanding during each of the
periods retroactively restated to give effect to the 1,400-for-one stock split
(see Note 12).
j. Reclassifications -- Certain reclassifications have been made in the
1994 financial statements to conform to the 1995 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
ESTIMATED --------------------------
USEFUL LIFE 1994 1995
----------- ------------ ----------
Furniture and fixtures........................................ 7 $ 528,914 $ 650,284
Equipment..................................................... 5 1,535,445 1,715,086
Computer software............................................. 5 2,650,000 2,650,000
Vehicles...................................................... 5 16,768 27,768
Leasehold improvements........................................ 10 310,760 412,575
------------ ----------
5,041,887 5,455,713
------------ ----------
Less accumulated depreciation and amortization................ 2,059,130 3,040,831
------------ ----------
$2,982,757 $2,414,882
------------ ----------
------------ ----------
8
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
ESTIMATED -----------------------------
USEFUL LIFE 1994 1995
----------- ------------ -------------
Physician contracts......................................... 6 - 10 $ 9,883,290 $ 9,883,290
Noncompetition agreements................................... 5 3,727,042 3,727,042
Excess purchase price over fair value of net assets
acquired.................................................. 20 6,076,005 6,076,005
Other....................................................... 5 441,458 441,458
------------ -------------
20,127,795 20,127,795
Less accumulated amortization............................... 5,885,132 8,162,769
------------ -------------
$ 14,242,663 $11,965,026
------------ -------------
------------ -------------
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-----------------------------
1994 1995
------------ -------------
Estimated costs necessary to complete the collection process for unbilled
receivables............................................................ $ 853,411 $ 638,338
Accrued payroll, benefits and related liabilities........................ 483,275 461,361
Accrued interest......................................................... 588,795 953,146
Accrued refunds.......................................................... 303,305 468,428
Accrued professional fees................................................ -- 2,046,128
Other.................................................................... 206,938 288,945
------------ -------------
$2,435,724 $ 4,856,346
------------ -------------
------------ -------------
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------------
1994 1995
------------ -------------
Bank fixed note, 7.6% until August 11, 1996, national commercial rate
plus 1.5% from August 12, 1996 through August 1, 1998, payable monthly,
$133,333 through August 1, 1996, $150,000 through August 1, 1997,
$166,667 through August 1, 1998 and $250,000 on August 1, 1998......... $ 6,333,334 $ 5,166,667
Bank term note, national commercial rate plus 1%, payable on February 28,
1996................................................................... -- 300,000
Bank term note, national commercial rate plus 1 1/4%, payable monthly
$13,500 through September 1, 1996 and $11,000 on October 1, 1996....... -- 132,500
Subordinated notes, 13%, payable $1,500,000 on August 30, 1997 and
1998................................................................... 3,000,000 3,000,000
Subordinated notes, 9% on the first $1,350,000 due August 30, 1997, 0% on
the remainder, payable on August 30, 1998.............................. 1,830,763 1,830,763
Spring acquisition subordinated note, 7.6%, payable on August 12, 2003... 5,500,000 5,500,000
------------ -------------
16,664,097 15,929,930
Less current portion..................................................... 1,466,667 2,099,167
------------ -------------
$ 15,197,430 $13,830,763
------------ -------------
------------ -------------
9
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
The loan agreement between the Company and the bank (the 'Bank Agreement')
and certain of the subordinated notes had covenants which restricted the payment
of dividends on common stock and provided that various financial limits and
ratios be maintained. In addition, the Bank Agreement required an annual
prepayment of the fixed rate note equal to 50 percent of the Company's cash flow
as defined.
The bank fixed rate note was secured by all assets of the Company. In
addition, the stockholders pledged their shares of common stock to the bank as
additional collateral.
The bank's national commercial rate was 8.5% at December 31, 1995.
On February 15, 1996, the Company repaid all amounts outstanding under the
bank fixed note, bank term notes and subordinated notes except for the Spring
acquisition subordinated note (see Note 12).
During the year ended December 31, 1993, the interest rate on the Spring
acquisition subordinated note was negotiated from 8% to 7.6%.
7. INCOME TAXES
The income tax benefit (expense) consists of the following:
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
Current:
Federal................................................................. $ -- $ -- $ --
State................................................................... -- -- --
-------- -------- --------
-- -- --
-------- -------- --------
Deferred:
Federal................................................................. 272,668 520,339 476,659
State................................................................... 30,462 289,564 22,891
-------- -------- --------
303,130 809,903 499,550
-------- -------- --------
$303,130 $809,903 $499,550
-------- -------- --------
-------- -------- --------
Deferred income tax assets and liabilities consist of the following:
DECEMBER 31,
-----------------------------
1994 1995
------------ -------------
Deferred income tax assets:
Net operating loss carryforwards.............................................. $ 689,212 $ 1,219,821
Valuation reserve for state net operating loss carryforwards.................. (69,374) (89,374)
Spring operating reserve...................................................... 459,791 145,858
Landlord allowances........................................................... 71,779 238,493
Other......................................................................... 137,200 303,559
------------ -------------
1,288,608 1,818,357
------------ -------------
Deferred income tax liabilites:
Physician contracts........................................................... (847,369) (667,625)
Unbilled receivables.......................................................... (947,005) (1,281,280)
Depreciation and amortization................................................. (554,877) (393,106)
Other......................................................................... (4,383) --
------------ -------------
(2,353,634) (2,342,011)
------------ -------------
Net deferred income tax liability.................................................. $(1,065,026) $ (523,654)
------------ -------------
------------ -------------
10
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
The net deferred income tax liability is classified in the consolidated
balance sheet as follows:
DECEMBER 31,
-----------------------------
1994 1995
------------ -------------
Net current asset.................................................................. $ -- $ 388,293
Net current liability.............................................................. (742,733) --
Net long-term liability............................................................ (322,293) (911,947)
------------ -------------
Net deferred income tax liability.................................................. $(1,065,026) $(523,654)
------------ -------------
------------ -------------
A reconciliation of the statutory Federal income tax rate and the effective
rate of the provision for income taxes consists of the following:
DECEMBER 31,
---------------------------
1993 1994 1995
----- ----- -----
Statutory Federal income tax rate................................................. (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal income tax benefits............................ (9.0) (4.3) (2.4)
Nondeductible items............................................................... 6.1 6.2 7.1
Disallowed state net operating loss deduction..................................... 13.5 -- --
Change in state tax laws allowing previously disallowed prior years state net
operating loss deduction........................................................ -- (8.7) --
State net operating loss carryforwards valuation allowance........................ -- 3.7 1.1
Effect of changes in state income tax rates on deferred income tax assets and
liabilities..................................................................... -- (6.0) --
Prior year items.................................................................. (7.7) -- --
----- ----- -----
Effective income tax rate......................................................... (31.5)% (43.1)% (28.2)%
----- ----- -----
----- ----- -----
In October 1995, the Internal Revenue Service examined the tax returns of
the Company for the years ended August 31, 1992 and 1993. As a result of the
examination, the estimated useful lives for income tax purposes of certain
physician contracts were adjusted to correspond to the estimated useful lives
for financial statement purposes of 10 years and the Company's net operating
loss carryforwards were reduced by approximately $1,995,000.
8. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
DECEMBER 31,
-----------------------------
1994 1995
------------ -------------
Reserve for Spring operations move, consolidation and improvement.................. $1,222,758 $ 387,891
Capitalized lease obligations...................................................... 744,122 513,774
Pension liability (Note 10)........................................................ 25,280 31,578
Deferred rent...................................................................... 668,346 828,776
------------ -------------
2,660,506 1,762,019
------------ -------------
Less current portion:
Reserve for Spring operations consolidation and improvement................... 806,246 387,891
Capitalized lease obligations................................................. 230,869 215,891
------------ -------------
1,037,115 603,782
------------ -------------
$1,623,391 $ 1,158,237
------------ -------------
------------ -------------
On August 1, 1993 (the effective date of the Company's acquisition of
Spring), the Company established a $2,000,000 reserve for the move,
consolidation and improvement of the Spring operations.
11
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Such reserve was an estimate of the costs of consolidating operations of the
Spring billing offices into one new location in a lower cost area and modifying
the operating approach to include elements of the PSS methodology. The Company
classifies the portion of this reserve expected to be disbursed within the next
twelve months as a current liability.
The following is a schedule of future minimum lease payments under capital
leases and the present value of the minimum lease payments as of December 31,
1995:
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ --------
1996........................................................................... $253,079
1997........................................................................... 201,955
1998........................................................................... 84,545
1999........................................................................... 36,168
2000........................................................................... --
--------
Total minimum lease payments...................................................... 575,748
Less amount representing interest................................................. 61,974
--------
Present value of minimum lease payments (of which $215,891 is due within one
year)........................................................................ $513,774
--------
--------
9. EMPLOYEE BENEFIT PLANS
Spring provides pension benefits to eligible employees under a
noncontributory defined benefit pension plan. Benefits are earned on the basis
of credited service and employees' highest five consecutive plan years' average
compensation. The Plan was frozen effective July 1, 1993. Accordingly, no
further benefits accrue to eligible employees after July 1, 1993, the
accumulated benefit obligation becomes equal to the projected benefit obligation
as of that date, and all benefits become vested as of that date. The Company
makes contributions to the plan as necessary to satisfy the minimum funding
requirements of ERISA.
The following table summarizes the significant assumptions used in
determining the pension obligations as of December 31, 1994 and 1995:
Discount rate -- pre-retirement............................................... 7.0%
Discount rate -- post-retirement.............................................. 5.0
Expected long-term rate of return on assets................................... 7.0
Assets of the plan consist primarily of investments in stocks and corporate
and government bonds.
Pension cost includes the following components:
1993 1994 1995
--------- ----------- -----------
Service cost -- benefits earned during the period............ $ -- $ -- $ --
Interest cost on projected benefit obligation................ (142,407) (142,660) (132,450)
Return on plan assets -- actual.............................. 46,331 69,574 236,165
Net amortization and deferral................................ 94,834 66,166 (115,681)
--------- ----------- -----------
Net pension cost................................... $ (1,242) $ (6,920) $ (11,966)
--------- ----------- -----------
--------- ----------- -----------
12
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
The funded status of the pension plan at December 31, 1994 and 1995 was as
follows:
1994 1995
----------- -----------
Projected benefit obligation (100% vested)................................ $(1,911,160) $(1,981,163)
Plan assets at fair value................................................. 1,740,219 1,938,358
----------- -----------
Projected benefit obligation in excess of plan assets..................... (170,941) (42,805)
Unrecognized net loss..................................................... 145,661 11,227
----------- -----------
Accrued pension cost................................................. $ (25,280) $ (31,578)
----------- -----------
----------- -----------
The Company established a 401(k) plan that covers substantially all PSS
employees age 21 or older with one year of service effective January 1, 1994.
The Company did not make any contribution to the plan for the years ended
December 31, 1994 or 1995.
10. COMMITMENTS
a. Operating Leases -- Future minimum annual rental commitments under
noncancelable operating leases are as follows:
YEAR ENDING
DECEMBER 31, TOTAL
- ------------ ----------
1996............................................................... $ 780,732
1997............................................................... 642,206
1998............................................................... 436,866
1999............................................................... 479,060
2000............................................................... 541,000
Thereafter......................................................... 1,090,710
----------
$3,970,574
----------
----------
Rent expense was approximately $810,000, $1,143,000, and $1,156,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
b. Letter of Credit -- The Company has a letter of credit from a bank in
the amount of approximately $120,000 at December 31, 1995 in connection with one
of its self-insured employee medical plans.
11. REDEEMABLE PREFERRED STOCK
On August 30, 1991, the Company sold 2,000 shares of 10% Preferred Stock,
Series A (the 'Series A Stock') and 2,000 shares of 10% Preferred Stock, Series
B (the 'Series B Stock') (together, the '10% Preferred Stock'), stated value
$500 per share, for $2,000,000. On February 28, 1994, February 28, 1995 and
August 31, 1995, the Company issued stock dividends of 120 shares, 127.2 shares
and 134.832 shares, respectively, of 10% Preferred Stock, Series A and 120
shares, 127.2 shares and 134.832 shares, respectively, of 10% Preferred Stock,
Series B in lieu of cash dividends. On December 21, 1995, the Company sold 1,100
shares of 10% Redeemable Preferred Stock, Series A, stated value $500 per share,
for $550,000.
The Series A Stock dividends were cumulative and payable semiannually. If
the Company were to merge into or consolidate with an entity such that at least
a majority of the common stock of the surviving entity was not held by the
common stockholders of record as of August 30, 1991, unpaid dividends would then
accrue at the rate of 12 percent per annum from the latest dividend date. If the
Company were to fail to pay dividends when due, the holders of Series A Stock
would receive in lieu of cash dividends additional shares of preferred stock
with a face amount equal to the amount of unpaid cash dividends, at the rate of
12 percent per annum, having identical terms to Series A Stock.
The Series A Stock had no voting rights except that the Company could not
change the powers, preferences or rights of the 10% Preferred Stock or issue
securities senior to the 10% Preferred Stock without the approval of a majority
of the holders of the 10% Preferred Stock.
13
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
The Company was required to redeem all outstanding shares of Series A Stock
on the earlier of August 31, 1998 or the date on which 60 percent of the
Company's common stock was first held by persons other than the common
stockholders of record as of August 30, 1991. The Series A Stock was to be
redeemed at its stated value plus an amount equal to all accrued and unpaid
dividends (whether or not declared) to the date of redemption. The Company was
able at any time prior to August 31, 1998 to redeem all, or any number less than
all, of the outstanding shares of Series A Stock at their stated value plus an
amount equal to all accrued and unpaid dividends (whether or not declared) to
the date of redemption.
Upon liquidation, dissolution or winding up of the Company, the holders of
Series A Stock were entitled to receive their pro rata share of any payment or
distribution before any such payment or distribution was made on any common
stock or on any other preferred stock issued but not approved by a majority of
the holders of 10% Preferred Stock.
The Series B Stock was identical to the Series A Stock except that the
Series B Stock was exchangeable in whole or in part, at the option of the
Company, into 10% Senior Subordinated Notes on any dividend date subsequent to
December 31, 1994, provided the Company had paid all dividends accrued to the
date of such exchange.
On February 15, 1996, the Company redeemed all outstanding shares of
preferred stock (see Note 12).
12. SUBSEQUENT EVENTS
a. Stock Split -- On February 12, 1996, the Company authorized the issuance
of up to 10,000,000 shares of preferred stock, increased the number of
authorized shares of common stock from 5,000 to 100,000,000, changed the par
value of the common stock from $.01 to $.001 per share and effected a
1,400-for-one stock split. All numbers of common shares and per share data in
the accompanying financial statements have been retroactively adjusted to effect
the stock split.
b. Sale of Common Shares -- On February 12, 1996, the Company sold
4,025,000 shares of common stock for $12 per share in its initial public
offering. The net proceeds of such offering, of approximately $43,684,000 were
used to repay all outstanding short and long-term debt except for the Spring
acquisition subordinated note, redeem all outstanding shares of preferred stock
and acquire three businesses (North Coast Health Care Management Group (which
consisted of three affiliated companies, 'NCHC Group'), Medical Management
Support Inc. ('MMS') and Data Processing Systems, Inc., ('DPS') (together, the
'Acquired Businesses')) currently providing business management services to
physicians.
c. Business Combinations -- On February 15, 1996, the Company acquired 100
percent of the outstanding common stock and substantially all of the assets and
liabilities of the Companies that made up the NCHC Group and substantially all
the assets and liabilities of MMS and DPS for an aggregate of approximately
$12,255,000 in cash deferred payments and related transaction expenses. All of
these acquisitions were accounted for under the purchase method of accounting,
and, accordingly, the net assets acquired were recorded at their fair values on
the date of acquisition. Excess purchase price over fair value of net assets
acquired of approximately $9,217,000 will be amortized on the straight-line
method over 20 years. The unaudited consolidated results of operations on a
pro forma basis as if the Company had sold 4,025,000 shares of common stock for
$12 per share, repaid short and long-term debt (except for the Spring
acquisition subordinated note), redeemed all outstanding shares of preferred
stock and purchased the Acquired Businesses on January 1, 1994 are as follows:
1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue........................................................ $26,897,000 $28,288,000
----------- -----------
----------- -----------
Net income..................................................... $ 977,000 $ 1,022,000
----------- -----------
----------- -----------
Net income per share........................................... $0.16 $0.16
----------- -----------
----------- -----------
Weighted average shares outstanding............................ 6,265,000 6,265,000
----------- -----------
----------- -----------
14
PHYSICIAN SUPPORT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
d. 1996 Stock Option Plan -- On February 9, 1996, the Company adopted the
1996 Stock Option Plan (the 'Plan'). A total of 939,750 authorized but unissued
shares of common stock are reserved for issuance under the Plan. All options
issued under the Plan have an exercise price of not less than 100% of the fair
market value of a share of the Company's common stock on the date of the grant,
vest over five years and must be exercised within ten years from the date of the
grant. Through February 15, 1996, the Company has issued 120,000 options under
the Plan at exercise prices ranging from $12 to $15 per share. The Company
expects to adopt only the disclosure provisions of Statement of Financial
Accounting Standards No. 123, 'Accounting for Stock-Based Compensation.'
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on April
24, 1996.
PHYSICIAN SUPPORT SYSTEMS, INC.
By: /s/ HAMILTON F. POTTER III
...................................
HAMILTON F. POTTER III
EXECUTIVE VICE PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on April 24, 1996.
SIGNATURE TITLE
- ------------------------------------------ ---------------------------------------------------------------------
/S/ PETER W. GILSON President, Chief Executive Officer and Director (principal executive
......................................... officer)
PETER W. GILSON
/S/ HAMILTON F. POTTER III Executive Vice President, Chief Operating and Financial Officer and
......................................... Director (principal accounting and financial officer)
HAMILTON F. POTTER III
/S/ MORTIMER BERKOWITZ III Director
.........................................
MORTIMER BERKOWITZ III
16