<PAGE>
As filed with the Securities and Exchange Commission on August 12, 1997
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PHYSICIAN SALES & SERVICE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Florida 5047 59-2280364
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of incorporation) Classification Code Number) Identification No.)
</TABLE>
4345 Southpoint Boulevard
Jacksonville, Florida 32216
(904) 332-3000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
PATRICK C. KELLY
Chairman of the Board and
Chief Executive Officer
PHYSICIAN SALES & SERVICE, INC.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
(904) 332-3000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
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<S> <C> <C>
J. VAUGHAN CURTIS, ESQ. FRED ELEFANT, ESQ. JEROME F. CONNELL, JR., ESQ.
KIMBERLY A. KNIGHT, ESQ. General Counsel Kilpatrick Stockton LLP
Alston & Bird Physician Sales & Service, Inc. 1100 Peachtree Street
One Atlantic Center 1650 Prudential Drive Suite 2800
1201 West Peachtree Street Suite 105 Atlanta Georgia 30309-4530
Atlanta, Georgia 30309-3424 Jacksonville, Florida 32207 (404) 815-6500
(404) 881-7000 (904) 398-2277
</TABLE>
Approximate date of commencement of proposed sale to the public: At the
effective time of the merger of S&W X-Ray, Inc. with and into a wholly-owned
subsidiary of the Registrant, as described in the Proxy Statement-Prospectus
included herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Title of each class Proposed maximum Proposed maximum Amount of
of securities Amount to be offering price aggregate offering registration
to be registered (1) registered (2) per share (3) price (3) fee (3)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,123,558 shares $19.25 $5,073,973 $1,538
================================================================================================================
</TABLE>
(1) This Registration Statement relates to the securities of the Registrant
issuable to holders of capital stock of S&W X-Ray, Inc., a New York
corporation ("S&W"), in the proposed merger of S&W with and into a wholly
owned subsidiary of the Registrant (the "Merger").
(2) The amount of common stock of the Registrant, par value $.01 per share
("PSS Common Stock") to be registered has been determined on the basis of
the maximum aggregate number of shares of PSS Common Stock that may be
issued in connection with the Merger.
(3) Pursuant to Rule 457(f)(2), the registration fee was computed on the
basis of the aggregate book value of the common stock of S&W, par value
$.04 per share ("S&W Common Stock") to be exchanged in the Merger.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
S&W X-RAY, INC.
Cornerstone Center
2300 Buffalo Road
Rochester, New York 14824
__________, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
("Special Meeting") of S&W X-Ray, Inc. ("S&W") to be held at S&W's executive
office, located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York
14824, at 10:00 a.m., Eastern Standard Time, on ________ __, 1997.
At this important meeting, you will be asked to consider and vote upon
the approval of the Agreement and Plan of Merger dated August 12, 1997 (the
"Merger Agreement"), which provides for the merger of S&W with and into
Diagnostic Imaging, Inc., a wholly owned subsidiary of Physician Sales &
Service, Inc. ("PSS") which operates the diagnostic and imaging division of PSS.
If the proposed merger (the "Merger") is consummated, each outstanding share of
common stock of S&W, $.04 par value per share ("S&W Common Stock") and each
share of S&W Common Stock to be issued pursuant to the S&W Supplemental
Executive Retirement Plan (other than shares held by stockholders who perfect
their dissenter's rights) will be converted into and exchanged for the right to
receive that number of shares of PSS Common Stock and the contingent right to
receive that number of shares of common stock of PSS, $.01 par value per share
("PSS Common Stock"), which combined are equal to (i) $26,000,000, subject to
adjustment as provided in the Merger Agreement, (ii) divided by the number of
shares of S&W Common Stock outstanding on a fully-diluted basis (the "Common
Stock Per Share Purchase Price"), (iii) divided by the Base Period Trading Price
(the "Common Stock Exchange Ratio"). Subject to an upper limit of $14.9644 and a
lower limit of $12.2436, the "Base Period Trading Price" is the average of the
daily closing prices for the shares of PSS Common Stock for the ten (10)
consecutive trading days on which such shares are actually traded as over-the-
counter securities and quoted on the Nasdaq National Market ending at the close
of trading on the second trading day immediately prior to the date the Merger
becomes effective.
As part of the same proposal, you will also be asked to consider and
vote upon the approval of an Escrow Agreement, and the appointment of
stockholder representatives pursuant to such Escrow Agreement.
The affirmative vote of the holders of a majority of the votes entitled
to be cast by the holders of record of S&W Common Stock is required for approval
of the Merger Agreement, the Escrow Agreement and the appointment of the
stockholder representatives. Holders of approximately 66% of the outstanding
votes represented by the S&W Common Stock have agreed to vote in favor of the
Merger Agreement, the Escrow Agreement and the appointment of the stockholder
representatives, and, therefore, approval of such matters is assured.
Enclosed are the (i) Notice of Special Meeting, (ii) Proxy Statement-
Prospectus, and (iii) Proxy for the Special Meeting. The Proxy Statement-
Prospectus describes in more detail the Merger Agreement and the proposed
Merger, including a description of the conditions to consummation of the Merger
and the effects of the Merger on the rights of S&W stockholders. It also
describes the Escrow Agreement, the appointment of the stockholder
representatives, and financial and other information pertaining to PSS and S&W.
Please give this information your careful attention.
The Board of Directors has unanimously approved and adopted the Merger
Agreement, the Escrow Agreement and consummation of the transactions
contemplated therein, including the appointment of the stockholder
representatives, and unanimously recommends that you vote FOR approval of the
Merger Agreement, the Escrow Agreement and consummation of the transactions
contemplated therein, including the appointment of the stockholder
representatives.
<PAGE>
In view of the importance of the action to be taken, we urge you to
complete, sign, and date the enclosed Proxy and to return it promptly in the
enclosed envelope, whether or not you plan to attend the Special Meeting (if you
attend the Special Meeting, you may vote in person, even if you previously
returned your Proxy).
We look forward to seeing you at the Special Meeting.
Sincerely,
Joseph E. Miller, Jr.
President
<PAGE>
S&W X-RAY, INC.
Cornerstone Center
Rochester, New York 14824
-------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held at 10:00 a.m. on ________ __, 1997
-------------------------------------------------
______ __, 1997
To the Stockholders of S&W X-Ray, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders ("Special
Meeting") of S&W X-Ray, Inc. ("S&W") will be held at S&W's executive office,
located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824,
on ______ __, 1997, at 10:00 a.m., Eastern Standard Time, for the following
purposes:
1. The Merger. To consider and vote upon a proposal to: (i) approve the
Agreement and Plan of Merger, dated as of August 12, 1997 (the "Merger
Agreement"), by and among S&W, Physician Sales & Service, Inc. ("PSS"),
and Diagnostic Imaging, Inc., a wholly owned subsidiary of PSS ("DI"),
pursuant to which, among other matters, (a) S&W will merge with and into
DI (the "Merger") and (b) the outstanding shares of common stock of S&W,
$.04 par value per share ("S&W Common Stock"), and shares of S&W Common
Stock to be issued pursuant to the S&W Supplemental Executive Retirement
Plan will be converted into the right to receive shares of common stock
of PSS, $.01 par value per share, and the contingent right to receive
shares of common stock of PSS all on the terms set forth in the Merger
Agreement; (ii) approve the form of Escrow Agreement (the "Escrow
Agreement") by and between PSS and the stockholder representatives set
forth therein; and (iii) appoint Joseph E. Miller, Jr., Bruce P. Ashby
and the S&W X-Ray, Inc. Employee Stock Ownership Plan and Trust as the
"Stockholder Representatives" in accordance with the Escrow Agreement,
all as more fully described in the accompanying Proxy Statement-
Prospectus. Copies of the Merger Agreement and the Escrow Agreement are
set forth in Annex A and Annex B, respectively, to the accompanying Proxy
Statement-Prospectus and are hereby incorporated by reference herein.
2. Other Business. To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements of the
Special Meeting.
Only stockholders of record at the close of business on August 10, 1997,
are entitled to receive notice of and to vote at the Special Meeting or any
adjournments or postponements thereof. Approval of the Merger Agreement, the
Escrow Agreement and the consummation of the transactions contemplated
thereby, including the appointment of Joseph E. Miller, Jr., Bruce P. Ashby
and the S&W X-Ray, Inc. Employee Stock Ownership Trust as the Stockholder
Representatives, requires the affirmative vote of the holders of a majority of
the shares of S&W Common Stock entitled to vote at the Special Meeting, voting
as a single class. Holders of approximately 66% of the outstanding votes
represented by shares of S&W Common Stock have agreed to vote in favor of the
Merger Agreement, the Escrow Agreement and the consummation of the
transactions contemplated thereby, including the appointment of the
Stockholder Representatives, and, therefore, approval of such matters is
assured.
THE BOARD OF DIRECTORS OF S&W UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT, THE ESCROW AGREEMENT AND
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
APPOINTMENT OF THE STOCKHOLDER REPRESENTATIVES.
<PAGE>
Each stockholder has the right to dissent from the Merger Agreement and
demand payment of the fair value of his shares if the Merger is consummated.
The right of any stockholder to receive such payment is contingent upon strict
compliance with the requirements of Sections 623 and 910 of the New York
Business Corporation Law. The full text of Sections 623 and 910 is set forth
in Annex C to the Proxy Statement-Prospectus and is incorporated herein by
reference. For a summary of the requirements of Sections 623 and 910, see "THE
MERGER--Dissenters' Rights" in the accompanying Proxy Statement-Prospectus.
BY ORDER OF THE BOARD OF DIRECTORS
Joseph E. Miller, Jr.
President
<PAGE>
Proxy Statement-Prospectus
PROXY STATEMENT
OF
S&W X-RAY, INC.
Special Meeting of Stockholders to be Held
on __________, 1997
------------------
PROSPECTUS
OF
PHYSICIAN SALES & SERVICE, INC.
Common Stock
Par Value $.01 Per Share
This Prospectus relates to up to 2,123,558 shares of the Common Stock,
par value $.01 per share (the "PSS Common Stock"), of Physician Sales &
Service, Inc. ("PSS" or the "Company") issuable to the stockholders of S&W X-
Ray, Inc. ("S&W") upon consummation of the Merger (as defined below). Such
number of shares represents the maximum number of shares that may be issued,
assuming that the Base Period Trading Price (as defined below) is equal to or
less than $12.2436. This Prospectus also serves as the Proxy Statement of S&W
for its special meeting of stockholders to be held on ________, 1997, and any
adjournments and postponements thereof (the "Special Meeting"). See "General
Information."
--------------------------
This Proxy Statement-Prospectus describes the terms of a proposed
business combination between PSS and S&W, pursuant to which PSS will acquire
S&W by means of the merger (the "Merger") of S&W with and into Diagnostic
Imaging, Inc., a wholly-owned subsidiary of PSS ("DI"), with DI being the
surviving corporation. After the Merger, the combined operations of DI and
S&W are expected to be conducted with DI as a wholly-owned subsidiary of PSS.
The Merger will be effective pursuant to the terms and conditions of the
Agreement and Plan of Merger dated August 12, 1997, among PSS, DI and S&W (the
"Merger Agreement"). The Merger Agreement is attached to this Proxy
Statement-Prospectus as Annex A and is incorporated herein by reference.
Upon consummation of the Merger, except as described herein, each
outstanding share of Common Stock of S&W, par value $.04 per share (the "S&W
Common Stock") and each share of S&W Common Stock to be issued pursuant to the
S&W Supplemental Executive Retirement Plan will be cancelled and the holders
of such S&W Common Stock will be entitled to receive a number of shares of PSS
Common Stock for each share of S&W Common Stock so held. The number of shares
of PSS Common Stock to be received by each such holder of S&W Common Stock
will be determined as set forth in the Merger Agreement. See "Merger
Agreement - Exchange Ratio."
This Proxy Statement-Prospectus and the form of Proxy are first being
mailed to stockholders of S&W on or about ______ __, 1997.
PSS Common Stock is traded in the over-the-counter market and is quoted
on the Nasdaq National Market System. On August 12, 1997, the last trading
day prior to public announcement that S&W and PSS had executed a merger
agreement, the last reported sale price per share of PSS Common Stock on the
Nasdaq National Market was $18.125. On __________, 1997, the last reported
sale price per share of PSS Common Stock on the Nasdaq National Market was
$_____.
<PAGE>
The PSS Common Stock offered hereby involves a high degree of risk. See
"Risk Factors," beginning on page 16.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
The date of this Proxy Statement-Prospectus is ______ ___, 1997
<PAGE>
AVAILABLE INFORMATION
This Proxy Statement-Prospectus does not contain all of the information
set forth in the Registration Statement on Form S-4, of which this Proxy
Statement-Prospectus is a part, and exhibits thereto (together with any
amendments thereto, the "Registration Statement"), which has been filed with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended, and the rules and regulations thereunder (the "Securities Act"),
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC and to which portions reference is hereby made for
further information. Statements contained in this Proxy Statement-Prospectus
concerning the provisions of certain documents filed as exhibits to the
Registration Statement are necessarily brief descriptions thereof, and are not
necessarily complete and each such statement is qualified in its entirety by
reference to the full text of such document.
PSS is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the SEC relating to its business, financial statements and other matters.
Copies of the Registration Statement, as well as such reports, proxy
statements and other information of PSS, may be inspected, without charge, at
the principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at Seven World Trade Center, New York, New York
10007, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material also may be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov. PSS' Common Stock is traded on the Nasdaq National Market
System and such reports, proxy statements and other information may also be
inspected at the office of the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
All information contained in this Proxy Statement-Prospectus with
respect to PSS was supplied by PSS, and all information contained in this Proxy
Statement-Prospectus with respect to S&W was supplied by S&W.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement-Prospectus
and, if given or made, such information or representation should not be relied
upon as having been authorized by PSS or S&W. Neither the delivery of this Proxy
Statement-Prospectus nor any distribution of the securities to which this Proxy
Statement-Prospectus relates shall, under any circumstances, create any
implication that there has been no change in the affairs of PSS, S&W, or any of
their respective subsidiaries since the date hereof or that the information
contained herein is correct as of any time subsequent to its date. This Proxy
Statement-Prospectus does not constitute an offer to sell, or a solicitation of
an offer to purchase, any securities other than the securities to which it
relates or an offer to sell or a solicitation of an offer to purchase the
securities offered by this Proxy Statement-Prospectus in any jurisdiction in
which such an offer or solicitation is not lawful.
SPECIAL CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
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 PSS's current business
strategy, PSS's projected sources and uses of cash, and PSS'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 PSS's business plans on terms satisfactory to it;
competitive factors; changes in labor, equipment and capital costs; changes in
regulations affecting PSS's business; future acquisitions or strategic
partnerships; general business and economic conditions; and other factors
described from time to time in PSS's reports filed with the SEC. PSS 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.
-2-
<PAGE>
TABLE OF CONTENTS
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AVAILABLE INFORMATION............................................................................................. 2
SPECIAL CAUTIONARY NOTICE About Forward-Looking Statements........................................................ 2
SUMMARY........................................................................................................... 6
Parties to the Merger....................................................................................... 6
The Special Meeting......................................................................................... 7
The Merger.................................................................................................. 11
Market and Market Price..................................................................................... 12
Dividends................................................................................................... 13
Comparative Per Share Information........................................................................... 15
Summary Unaudited Pro Forma Condensed Combined Financial Information of PSS and S&W......................... 16
RISK FACTORS...................................................................................................... 16
Integration of Operations................................................................................... 16
Anticipated Expansion and Management of Expanded Operations................................................. 16
Management of International Operations...................................................................... 16
Dependence on Manufacturers................................................................................. 17
Regulation of and Change in Practice of Medicine............................................................ 17
Dependence on Third-Party Reimbursement..................................................................... 17
Two-Tier Pricing............................................................................................ 17
Sales Representatives....................................................................................... 17
Key Management.............................................................................................. 18
Competition................................................................................................. 18
Liability Exposure.......................................................................................... 18
Reliance on Data Processing................................................................................. 18
Anti-Takeover Provisions; Possible Issuance of Preferred Stock.............................................. 18
GENERAL INFORMATION............................................................................................... 19
Special Meeting............................................................................................. 19
Record Date and Quorum...................................................................................... 19
Solicitation of Proxies..................................................................................... 19
Voting and Revocability of Proxies.......................................................................... 19
Vote Required............................................................................................... 20
THE MERGER........................................................................................................ 21
General..................................................................................................... 21
Background of the Merger.................................................................................... 21
Reasons for the Merger...................................................................................... 23
Exchange Ratio.............................................................................................. 23
Escrow Agreement............................................................................................ 24
Covenants Not to Compete.................................................................................... 25
Fractional Shares........................................................................................... 25
Effective Time.............................................................................................. 25
Distribution of PSS Certificates............................................................................ 25
Certain Federal Income Tax Consequences..................................................................... 26
Management and Operations After the Merger.................................................................. 27
Interests of Certain Persons in the Merger.................................................................. 28
Conditions to Consummation.................................................................................. 28
Amendment, Waiver and Termination........................................................................... 29
Conduct of Business Pending the Merger...................................................................... 29
Stockholders Agreements..................................................................................... 30
Expenses and Fees........................................................................................... 31
Accounting Treatment........................................................................................ 31
Resales of PSS Common Stock................................................................................. 31
</TABLE>
-3-
<PAGE>
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Dissenters' Rights.......................................................................................... 32
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....................................................... 34
SELECTED FINANCIAL DATA OF PSS.................................................................................... 40
PSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 41
Company Overview............................................................................................ 41
Company Growth.............................................................................................. 41
Sales Mix................................................................................................... 43
Exclusive Distribution Agreements........................................................................... 43
Other Marketing Programs.................................................................................... 44
Imaging Division............................................................................................ 44
International Division...................................................................................... 44
BUSINESS OF PSS................................................................................................... 52
General..................................................................................................... 52
Industry.................................................................................................... 52
Company Strategy............................................................................................ 52
Sales and Distribution...................................................................................... 53
Product and Sales Mix....................................................................................... 55
Recruitment and Development................................................................................. 56
Information Systems......................................................................................... 57
Purchasing and Vendor Relationships......................................................................... 58
Acquisitions................................................................................................ 59
Properties.................................................................................................. 60
Competition................................................................................................. 61
Regulatory Matters.......................................................................................... 62
Legal Proceedings........................................................................................... 62
Compensation Committee Interlocks and Insider Participation................................................. 66
Executive Compensation...................................................................................... 66
MANAGEMENT OF PSS................................................................................................. 63
Directors and Executive Officers............................................................................ 63
Option Grants in Fiscal 1997................................................................................ 68
Option Exercises and Holdings as of March 28, 1997.......................................................... 69
Employment Agreements....................................................................................... 70
PSS CERTAIN TRANSACTIONS.......................................................................................... 71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PSS............................................. 71
SELECTED FINANCIAL DATA OF S&W.................................................................................... 72
S&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 73
Results of Operations.......................................................................................
BUSINESS OF S&W................................................................................................... 76
General..................................................................................................... 76
Consumables/Accessories and Sales........................................................................... 76
Imaging Equipment........................................................................................... 77
Multi-Vendor Imaging Equipment Service...................................................................... 78
Competition................................................................................................. 78
Facilities.................................................................................................. 78
Employees................................................................................................... 79
Insurance................................................................................................... 79
Legal Proceedings........................................................................................... 79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF S&W............................................. 80
DESCRIPTION OF PSS CAPITAL STOCK.................................................................................. 81
PSS Common Stock............................................................................................ 81
</TABLE>
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PSS Preferred Stock......................................................................................... 81
Certain Articles of Incorporation and Bylaw Provisions of PSS............................................... 81
Transfer Agent and Registrar................................................................................ 84
CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND S&W STOCKHOLDERS..................................................... 84
Authorized Capital Stock.................................................................................... 84
Size and Classification of Board of Directors............................................................... 85
Amendment of Articles or Certificate of Incorporation and Bylaws............................................ 85
Special Meetings of Stockholders............................................................................ 85
Removal of Directors........................................................................................ 85
Director Liability.......................................................................................... 86
Indemnification............................................................................................. 86
Dissenters' Rights.......................................................................................... 87
Dividends and Other Distributions........................................................................... 87
Mergers and Consolidations.................................................................................. 88
Fair Price Provision........................................................................................ 88
Control Share Acquisition Statute........................................................................... 88
EXPERTS........................................................................................................... 89
LEGAL MATTERS..................................................................................................... 89
OTHER MATTERS..................................................................................................... 89
INDEX TO PSS CONSOLIDATED FINANCIAL STATEMENTS.................................................................... 90
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................................................ 91
INDEX TO S&W FINANCIAL STATEMENTS................................................................................. 116
INDEPENDENT AUDITORS' REPORT...................................................................................... 117
ANNEXES:
ANNEX A - Agreement and Plan of Merger
ANNEX B - Form of Escrow Agreement
ANNEX C - Sections 623 and 910 of the New York Business Corporation Law Relating to Appraisal Rights
</TABLE>
-5-
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement-Prospectus. This summary is not intended to be a complete
description of the matters covered in this Proxy Statement-Prospectus and is
subject to and qualified in its entirety by reference to the more detailed
information and consolidated financial statements contained elsewhere in this
Proxy Statement-Prospectus, including the Annexes hereto. Stockholders are urged
to read carefully the entire Proxy Statement-Prospectus, including the Annexes.
As used in this Proxy Statement-Prospectus, the terms "PSS" and "S&W" refer to
such corporations, respectively, and where the context requires, such
corporations and their respective subsidiaries. In addition, except where
otherwise indicated, all information in this Proxy Statement-Prospectus assumes
(i) no adjustment to the Aggregate Purchase Price (as defined below) and (ii)
the distribution of all shares of PSS Common Stock subject to the Escrow
Agreement.
Parties to the Merger
PSS. PSS is a leading distributor of medical supplies, equipment and
pharmaceuticals to primary care and other office-based physicians based on net
sales. PSS operates 61 physician office medical supply distribution service
centers distributing to approximately 103,000 office sites in all 50 states. The
primary market of PSS is the approximately 399,000 physicians who practice
medicine in the approximately 198,000 office sites throughout the United States.
PSS, through its subsidiary, Diagnostic Imaging, Inc. ("DI"), distributes
medical diagnostic imaging supplies, chemicals, equipment and service to the
acute and alternate care market. DI operates 20 imaging service centers in ten
states. PSS also distributes medical supplies and equipment in Belgium, France,
Germany and the Netherlands through its WorldMed International, Inc. subsidiary.
PSS currently has three European operations service centers distributing to the
acute and alternate care markets.
For the fiscal year ended March 28, 1997, PSS reported net revenues of
approximately $691.0 million and net income of approximately $4.4 million. As of
March 28, 1997, PSS had total assets of approximately $298.3 million.
PSS was incorporated under the laws of the State of Florida in April
1983. The principal executive offices of PSS are located at 4345 Southpoint
Boulevard, Jacksonville, Florida 32216, and its telephone number is (904) 332-
3000. For additional information regarding PSS and its business, see "Selected
Financial Data," "Risk Factors," "PSS Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business of PSS," "Management
of PSS," and "Financial Statements."
S&W. S&W was incorporated under the laws of the State of New York in
April 1973. S&W's principal executive offices are located at Cornerstone Center,
2300 Buffalo Road, Rochester, New York 14824, and its telephone number is (716)
429-5480. For additional information regarding S&W and its business, see
"Selected Financial Data," "S&W Management's Discussion and Analysis," "Business
of S&W," "Management of S&W" and "Financial Statements."
DI. DI is a wholly owned subsidiary of PSS which operates the diagnostic
imaging and x-ray equipment division of PSS. Pursuant to the Merger Agreement,
S&W will merge with and into DI, with DI remaining as the surviving corporation.
DI's principal executive offices are located at 4345 Southpoint Boulevard,
Jacksonville, Florida 32216, and its telephone number is (904) 332-3000. See
"The Merger."
The Special Meeting
The Special Meeting of S&W's stockholders to consider and vote on the
Merger Agreement (the "S&W Special Meeting") will be held at 10:00 a.m., Eastern
Standard Time, at S&W's principal executive office, located at Cornerstone
Center, 2300 Buffalo Road, Rochester, New York, 14824 on ______ __, 1997. At the
S&W Special Meeting, S&W's stockholders will consider and vote upon approval of
the Merger Agreement, the Escrow Agreement and the consummation of the
transactions contemplated therein, including the appointment of the Stockholder
Representatives. Only holders of record of S&W Common Stock at the close of
business on August 10,
-6-
<PAGE>
1997 (the "S&W Record Date"), will be entitled to notice of and to vote at the
S&W Special Meeting. As of such date, there were 259,574 shares of S&W Common
Stock issued and outstanding which were entitled to be voted at the S&W Special
Meeting and 4,009 shares of S&W Common Stock to be issued on the Closing Date
pursuant to the S&W Supplemental Executive Retirement Plan. Holders of
approximately 66% of the outstanding votes represented by the S&W Common Stock
have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and
the consummation of the transactions contemplated therein, including the
appointment of the Stockholder Representatives, and therefore approval of such
matters is assured. For additional information with respect to the Special
Meeting, including the S&W Record Date and votes required for approval, see
"General Information."
The Merger
General. The Merger Agreement provides that S&W shall be merged with and
into DI, a wholly owned subsidiary of PSS. DI shall be the surviving corporation
of the Merger and shall remain a wholly owned subsidiary of PSS and shall
continue to be governed by the laws of the State of Florida. At the time the
Merger becomes effective, each outstanding share of S&W Common Stock (excluding
shares held by stockholders who perfect their dissenters' rights) shall cease to
be outstanding and shall be converted into and exchanged for the right to
receive shares of PSS Common Stock and the contingent right to receive
additional shares of PSS Common Stock on the "Final Settlement Date," as
provided in the Escrow Agreement. If the Merger Agreement is approved at the
Special Meeting, all required consents and approvals are obtained, and all of
the other conditions to the obligations of the parties to consummate the Merger
are either satisfied or waived (as permitted), the Merger will be consummated. A
copy of the Merger Agreement is set forth in Annex A to this Proxy Statement-
Prospectus and a copy of the Escrow Agreement is set forth in Annex B. See "The
Merger."
Exchange Ratio. The Merger Agreement provides that at the effective time
of the Merger each outstanding share of S&W Common Stock and each share of S&W
Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement
Plan (excluding shares held by stockholders who perfect their dissenter's
rights) shall cease to be outstanding and shall be converted into and exchanged
for (i) the right to receive that number of shares of PSS Common Stock equal to
the Aggregate Purchase Price (as defined below) minus the Escrow Dollar Amount
(as defined below), and the contingent right to receive that number of shares
equal to the Escrow Dollar Amount; (ii) divided by the sum of all shares of S&W
Common Stock issued and outstanding or issuable upon the conversion of all
convertible securities or rights of any nature with respect to S&W Common Stock;
(iii) which amount is divided by the Base Period Trading Price (as defined
below) (the "Common Stock Exchange Ratio").
Pursuant to the Merger Agreement, the "Aggregate Purchase Price" is
defined to be $26,000,000, minus any legal, accounting, consulting and
investment advisory expenses in excess of $350,000 incurred by S&W or on S&W's
behalf in connection with the transactions contemplated under the Merger
Agreement; provided that such adjustment shall not exceed $200,000. In the event
that the foregoing adjustment would result in a decrease to the Aggregate
Purchase Price of more than $200,000 but for the foregoing provision, PSS shall
have the right to terminate the Merger Agreement. Pursuant to the Merger
Agreement, the "Escrow Dollar Amount" is defined to be $1,015,000 plus five
percent of the Aggregate Purchase Price.
The term "Base Period Trading Price" is defined in the Merger Agreement
as the average of the daily closing prices for the shares of PSS Common Stock
for the ten (10) consecutive trading days on which such shares are actually
traded as over-the-counter securities and quoted on the Nasdaq National Market
ending at the close of trading on the second trading day immediately prior to
the Closing Date, provided, however, that for purposes of such calculation, the
Base Period Trading Price shall be deemed to equal (i) $14.9644 in the event the
Base Period Trading Price is greater than $14.9644 or (ii) $12.2436 in the event
the Base Period Trading Price is less than $12.2436 (collectively, the "Base
Period Trading Price Limitations").
The following table shows the resulting exchange ratio for each share of
S&W Common Stock representing that number of shares of PSS Common Stock to be
received in respect of each share of S&W Common Stock (including shares to be
issued pursuant to the S&W Supplemental Executive Retirement Plan), (i) assuming
-7-
<PAGE>
that the Aggregate Purchase Price is equal to $26,000,000, and (ii) assuming
that all shares subject to the Escrow Agreement are distributed to the holders
of shares of S&W Common Stock:
<TABLE>
<CAPTION>
Base Period Trading Price(1) Common Stock Exchange Ratio
------------------------------ ---------------------------
<S> <C>
$11.00 8.0565
12.00 8.0565
13.00 7.5877
14.00 7.0458
15.00 6.5917
18.00 6.5917
20.00 6.5917
</TABLE>
- ---------------
(1) The Base Period Trading Price is the average of the daily closing
prices for the shares of PSS Common Stock for the ten (10) consecutive trading
days on which such shares are actually traded and quoted on the Nasdaq National
Market System ending at the close of trading on the second trading day
immediately prior to the Closing Date, subject to the Base Period Trading Price
Limitations. The per share purchase price for the shares of S&W Common Stock is
divided by the Base Period Trading Price to obtain the respective exchange
ratios.
The following table shows the exchange ratio for each share of S&W Common
Stock representing that number of shares of PSS Common Stock to be received in
respect of each share of S&W Common Stock (including shares to be issued
pursuant to the S&W Supplemental Executive Retirement Plan), (i) assuming that
the Aggregate Purchase Price is equal to $25,800,000 (reflecting the maximum
adjustment to the Aggregate Purchase Price of $200,000), and (ii) assuming that
no shares subject to the Escrow Agreement are distributed to the holders of
shares of S&W Common Stock:
<TABLE>
<CAPTION>
Base Period Trading Price(1) Common Stock Exchange Ratio
------------------------------ ---------------------------
<S> <C>
$11.00 7.2803
12.00 7.2803
13.00 6.8567
14.00 6.3669
15.00 5.9566
18.00 5.9566
20.00 5.9566
</TABLE>
- ---------------
(1) The Base Period Trading Price is the average of the daily closing
prices for the shares of PSS Common Stock for the ten (10) consecutive trading
days on which such shares are actually traded and quoted on the Nasdaq National
Market System ending at the close of trading on the second trading day
immediately prior to the Closing Date, subject to the Base Period Trading Price
Limitations. The per share purchase price for the shares of S&W Common Stock is
divided by the Base Period Trading Price to obtain the respective exchange
ratios.
See "The Merger -- Exchange Ratio" and "--Escrow Agreement."
Votes Required. Approval of the Merger Agreement, the Escrow Agreement
and consummation of the transactions contemplated therein, including the
appointment of the Stockholder Representatives, requires the affirmative vote of
the holders of a majority of the outstanding S&W Common Stock entitled to vote
at the Special Meeting. The S&W X-Ray, Inc. Employee Stock Ownership Plan and
Trust ("ESOP") owns 32.96% of the outstanding shares of S&W Common Stock. The
ESOP has retained Consulting Fiduciaries, Inc. for the purposes of (i)
determining what action the ESOP should take with respect to the Merger; (ii)
administering any pass-through voting process with respect to any such proposal
and receiving the directions of the participants and beneficiaries entitled to
vote under the ESOP; (iii) with respect to any shares of Company stock held in
the ESOP for which voting directions are not received from any participant or
beneficiary, determining how such shares
-8-
<PAGE>
should be voted; and (iv) taking whatever action it shall deem appropriate,
including directing the Trustee of the Trust regarding voting of shares of S&W
Common Stock.
As of the S&W Record Date, S&W directors and executive officers, and
their affiliates, held approximately 33% of the outstanding votes represented by
the S&W Common Stock entitled to vote at the Special Meeting. Holders of
approximately 66% of the outstanding votes represented by the S&W Common Stock
have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and
the consummation of the transactions contemplated therein, including the
appointment of the Stockholder Representatives, and therefore approval of such
matters is assured. As of the S&W Record Date, PSS's directors and executive
officers, and their affiliates, held no S&W Shares. See "General Information--
Votes Required," "The Merger--Stockholders Agreement" and "Ownership of Equity
Securities--S&W."
Recommendations of the Board of Directors. The Board of Directors of S&W
has approved the Merger Agreement and has recommended a vote FOR the Merger
Agreement. The Board of Directors believes the Merger Agreement is fair to and
in the best interest of the stockholders of S&W. In addition, the Board of
Directors of S&W has approved the Escrow Agreement and has recommended a vote
FOR approval of the Escrow Agreement and the consummation of the transactions
contemplated therein, including the appointment of the Stockholder
Representatives.
The Board of Directors of S&W believes that the Merger is in the best
interest of the S&W stockholders based on a number of factors, including: (i)
the value of the consideration to be received by the S&W stockholders, the fact
that as PSS stockholders, the S&W stockholders would have more liquidity, and
the fact that the Merger is expected to be treated as a tax-free reorganization;
(ii) the opportunity for the S&W stockholders to continue to share in the
potential for long-term gain in S&W through the ownership of PSS Common Stock
after the Merger; (iii) the business reputation and capabilities of PSS and its
management, the financial strength, prospects, market position and strategic
objectives of PSS; and (iv) the perceived strengths of the combined entity, the
belief that PSS and S&W are strategically complementary, and the belief that the
combined companies will be able to compete more effectively in the marketplace.
See "The Merger--Reasons for the Merger."
Effective Time. If the Merger is approved by the requisite vote of the
S&W stockholders, all required consents and approvals are obtained, and the
other conditions to the obligations of the parties to consummate the Merger are
either satisfied or waived (as permitted), the Merger will be consummated and
will become effective on the date and at the time that Articles of Merger,
reflecting the Merger, are filed with the Secretary of State of the State of
Florida and the Secretary of State of the State of New York (the "Effective
Time"). See "The Merger--Effective Time."
Delivery of PSS Certificates. Promptly after the Effective Time, each
record holder of S&W Common Stock outstanding at the Effective Time will be
mailed a transmittal letter (with instructions) to use in effecting the
surrender and cancellation of those certificates in exchange for PSS Common
Stock. PSS shall not be obligated to deliver the consideration to which any
former holder of S&W Common Stock is entitled until such holder surrenders such
holder's certificate or certificates representing such holder's shares for
exchange. The certificate or certificates so surrendered shall be duly endorsed
as PSS may require. See "The Merger--Distribution of PSS Certificates."
Certain Federal Income Tax Consequences. The Merger is intended to be a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Generally, no gain or loss should
be recognized for federal income tax purposes by S&W stockholders as a result of
the Merger, except that gain or loss will be recognized with respect to cash
received by dissenters, if any, or cash received in lieu of fractional shares.
See "The Merger--Certain Federal Income Tax Consequences."
-9-
<PAGE>
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH HOLDER
OF S&W COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER
(INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX
LAWS).
Interests of Certain Persons in the Merger. Joseph E. Miller, Jr. and
Bruce P. Ashby will receive aggregate cash payments of $1,900,000 and
$1,4000,000, respectively, as additional consideration for his Covenant Not to
Compete upon consummation of the Merger, payable in installments over the
fifteen-year term of such agreements. In addition, George Privitera and Ron
Cronin will receive aggregate payments of $700,000 each as additional
consideration for his Covenant Not to Compete upon consummation of the Merger,
payable in installments over the eight-year term of such agreements. See "The
Merger--Covenants Not to Compete" and "--Interests of Certain Persons in the
Merger."
Conditions to Consummation of the Merger. The obligation of PSS to
consummate the Merger is subject to, among others, the following conditions: (i)
the representations and warranties of S&W set forth in the Merger Agreement
shall be true and correct in all material respects as of the Effective Time;
(ii) S&W shall have performed all of its agreements and covenants prior to the
Effective Time as contemplated by the Merger Agreement; (iii) the S&W sales
force shall not have decreased in number to less than 18 full-time sales persons
and 70 full-time service technicians; (iv) there shall have been no material
adverse change in the business, assets or results of operations of S&W between
March 31, 1997 and the Closing Date; (v) the Escrow Agreement shall have been
executed and delivered by a national bank as the Escrow Agent, (vi) PSS shall
have received a letter from Arthur Andersen LLP to the effect that the Merger
will qualify for pooling-of-interests accounting treatment; (vii) PSS shall have
received the consent of its senior lender; (viii) PSS shall have received
evidence that all indebtedness owed by the S&W X-Ray, Inc. Employee Stock
Ownership Trust has been repaid or forgiven; and (ix) receipt by PSS of executed
investment agreements, employment agreements and non-compete agreements from
certain affiliates and employees of S&W.
The obligation of S&W to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of PSS
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) PSS shall have performed all of its
agreements and covenants prior to the Effective Time as contemplated by the
Merger Agreement; (iii) there shall have been no material adverse change in the
business, assets or results of operations of PSS between March 31, 1997 and the
Closing Date; and (iv) the Escrow Agreement shall have been executed and
delivered by a national bank as the Escrow Agent.
The obligation of each of PSS, DI and S&W to consummate the Merger is
subject to certain additional conditions, including the following: (i) the
shareholders of S&W shall have approved the Merger Agreement; (ii) all consents
and notifications to any regulatory authorities required for consummation of the
Merger shall have been obtained or made; (iii) no court or governmental
authority shall have enacted any law or order or taken any action which
prohibits the transactions contemplated by the Merger Agreement; (iv) the
Registration Statement shall have been declared effective under the Securities
Act of 1933 and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued; and (v) at Closing, PSS shall have repaid the
outstanding notes and bank and long-term debt of S&W.
Regulatory Approvals. The Hart Scott Rodino Antitrust Improvements Act of
1974, as amended (the "HSR Act") provides that certain business mergers
(including the Merger) may not be consummated until certain information has been
furnished to the Department of Justice (the "DOJ") and the Federal Trade
Commission (the "FTC") and certain waiting period requirements have been
satisfied. On July 18, 1997, PSS and S&W made their respective filings with the
DOJ and the FTC with respect to the Merger Agreement. On July 28, 1997, PSS
received notification from the FTC that early termination of the waiting period
required under the HSR Act had been granted.
-10-
<PAGE>
Conduct of Business Pending the Merger. Each of PSS and S&W has agreed in
the Merger Agreement to, among other things, operate their respective businesses
substantially as presently operated and only in the ordinary course, provided
that with respect to PSS, any business acquisition or incurrence of additional
debt or issuance or sale of equity securities is deemed to be in the ordinary
course.
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, notwithstanding approval of
the Merger Agreement by the stockholders of S&W: (i) by mutual consent of the
Boards of Directors of S&W and PSS, (ii) by either party in the event of certain
breaches by the other party of any representation or warranty; (iii) by either
party in the event that a consent or regulatory approval required by the Merger
Agreement has been denied by final nonappealable action; (iv) by either party if
the Merger is not consummated by October 31, 1997, if such failure is not caused
by any breach of the Merger Agreement by the party electing to terminate; (v) by
either party in the event that the Merger is not consummated by November 30,
1997; (vi) by either party, if any of the conditions precedent to the
obligations of such party to consummate the Merger cannot be satisfied or
fulfilled, if such failure is not caused by the party electing to terminate;
(vii) by either party if the Base Period Trading Price is less than $10.8832 or
greater than $16.3248 (in each case, calculated without regard to the Base
Period Trading Price Limitations); and (viii) by PSS if the sum of all proposed
adjustments to the Aggregate Purchase Price pursuant to the Merger Agreement
would result in a decrease of the Aggregate Purchase Price by more than
$200,000, but for the proviso that the adjustments may not exceed $200,000. See
"The Merger--Amendment, Waiver, and Termination."
Accounting Treatment. It is anticipated that the Merger will qualify as a
"pooling of interests" for financial reporting purposes. It is a condition to
the obligation of PSS to consummate the Merger that PSS shall have received from
Arthur Andersen LLP a letter dated the closing date to the effect that the
Merger may be accounted for as a pooling of interests by PSS for financial
reporting purposes. See "The Merger--Conditions to Consummation" and "--
Accounting Treatment."
Dissenters' Rights. In order for the Merger to qualify as a pooling-of-
interests, which is a condition to the consummation of the Merger, no more than
ten percent (10%) of the aggregate outstanding shares of S&W Common Stock shall
have exercised dissenters' rights. Each holder of S&W Common Stock who dissents
from the Merger is entitled to the rights and remedies of dissenting
stockholders set forth in Sections 623 and 910 of the New York Business
Corporation Law (the "NYBCL"), subject to compliance with the procedures set
forth therein. Among other things, a dissenting stockholder is entitled to
receive an amount in cash equal to the "fair value" of such holder's shares. A
copy of Sections 623 and 910 is set forth in Annex C to this Proxy Statement-
Prospectus, and a summary thereof is included under "The Merger--Dissenters'
Rights." To perfect dissenters' rights, a stockholder must comply with Sections
623 and 910 of the NYBCL which requires, among other things, that the
stockholder give S&W notice of such holder's intention to dissent from the
Merger Agreement prior to the vote of the stockholders of S&W at the Special
Meeting and that such stockholder not vote such holder's shares in favor of the
Merger Agreement. Any S&W stockholder who returns a signed proxy but fails to
provide instructions as to the manner in which such holder's shares are to be
voted will be deemed to have voted in favor of the Merger Agreement and thus
will not be entitled to assert dissenters' rights.
Nasdaq National Market Quotation. PSS Common Stock is traded in the over-
the-counter market and is quoted on the Nasdaq National Market. An application
will be filed with the NASD to include for quotation the shares of PSS Common
Stock to be issued to the holders of S&W Common Stock in the Merger. See "The
Merger--Nasdaq National Market Quotation."
Market and Market Price
PSS Common Stock is traded in the over-the-counter market and is quoted
on the Nasdaq National Market under the symbol PSSI. Set forth below are the
closing prices per share of PSS Common Stock on the Nasdaq National Market on
(i) August 12, 1997, the last business day preceding public announcement of the
Merger, and (ii) __________, 1997:
-11-
<PAGE>
<TABLE>
<CAPTION>
Closing Price Per Share
Date of PSS Common Stock
- ---- -----------------------
<S> <C>
August 12, 1997
__________, 1997 $18.125
</TABLE>
The following table sets forth the high and low closing prices per share
of PSS Common Stock on the Nasdaq National Market since it began trading in May
1994.
<TABLE>
<CAPTION>
Sales Price Per Share of PSS Common Stock(1)
--------------------------------------------
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
Fiscal 1995:
- ------------
June 30, 1994(2) $ 5.08 $ 4.42
September 30, 1994 6.00 5.08
December 31, 1994 6.08 5.04
March 30, 1995 10.67 5.58
Fiscal 1996:
- ------------
June 30, 1995 13.83 10.33
September 30, 1995 18.67 13.50
December 31, 1995 28.50 13.92
March 29, 1996 30.75 21.00
Fiscal 1997:
- ------------
June 30, 1996 33.00 22.75
September 30, 1996 25.63 15.00
December 31, 1996 26.88 13.75
March 28, 1997 19.75 13.00
Fiscal 1998:
- ------------
June 30, 1997 19.00 12.00
September 30, 1997(3)
</TABLE>
- ----------------
(1) Adjusted to give effect to a three-for-one stock split in fiscal year
1996.
(2) Represents trading from May 4, 1994, the date of the Company's initial
public offering, through June 30, 1994.
(3) Represents trading from July 1, 1997 through August 12, 1997.
Stockholders are advised to obtain current market quotations for PSS
Common Stock. No assurance can be given as to the market price of PSS Common
Stock at the Effective Time or at any other time. As of June 16, 1997, there
were approximately 1,065 record holders of PSS Common Stock.
There is no established public trading market for the shares of S&W
Common Stock. As of the S&W Record Date, there were approximately ___ record
holders of S&W Common Stock.
Dividends
It is the policy of both the Board of Directors of PSS and the Board of
Directors of S&W to retain earnings to support operations and to finance
continued growth of their respective businesses rather than to pay dividends.
Neither PSS nor S&W has ever paid dividends on its capital stock and neither
anticipates the payment of dividends in the near future. Any future payment of
cash dividends of PSS or S&W would be determined by the their respective Boards
of Directors in light of circumstances then existing, including the growth,
profitability, financial
-12-
<PAGE>
condition and results of operations of their respective companies, and such
other factors as each Board deems relevant. The ability of each of PSS and S&W
to declare and pay dividends is limited by certain restrictive covenants
contained in each of their long-term debt agreements.
Comparative Per Share Information
The following summary presents selected comparative per share information
on a historical basis for (i) PSS and S&W, (ii) on a pro forma combined basis
per share of PSS Common Stock giving effect to the Merger on a pooling-of-
interests basis assuming in one scenario the distribution to S&W stockholders of
all shares of PSS Common Stock subject to the Escrow Agreement and in another
scenario no distribution to S&W stockholders of the shares of PSS Common Stock
subject to the Escrow Agreement, (iii) on a pro forma combined basis per share
of S&W Common Stock giving effect to the Merger on a pooling-of-interests basis
assuming in one scenario the distribution to S&W stockholders of all shares of
PSS Common Stock subject to the Escrow Agreement and in another scenario no
distribution to S&W stockholders of the shares of PSS Common Stock subject to
the Escrow Agreement. Each calculation has also been made assuming that the
exchange ratios are calculated at a maximum Base Period Trading Price of
$14.9644 and that the exchange ratios are calculated at a minimum Base Period
Trading Price of $12.2436.
Neither PSS nor S&W has paid cash dividends on its respective common
stock since inception. It is anticipated that PSS will retain all earnings for
use in the expansion of the business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The payment of future dividends
will be at the discretion of the Board of Directors of PSS and will depend,
among other things, upon PSS' earnings, capital requirements and financial
condition.
The information shown below is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position. This information should be read
in conjunction with the historical consolidated financial statements of PSS and
S&W, including the respective notes thereto, and the pro forma financial
information appearing elsewhere in this Proxy Statement-Prospectus. See "Pro
Forma Condensed Combined Financial Data" and "Financial Statements."
<TABLE>
<CAPTION>
Year Ended(1)
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) per common share:
PSS
Historical......................................... 0.12 0.04 (0.04)
Pro forma combined, assuming distribution of
all escrow shares(2)............................ 0.12 0.06 0.00
Pro forma combined, assuming distribution of
no escrow shares(2).............................. 0.12 0.06 0.00
S&W
Historical......................................... 0.23 3.65 4.43
Pro forma equivalent, assuming minimum exchange ratio and
distribution of no escrow shares(3).............. 0.70 0.38 0.02
Pro forma equivalent, assuming minimum exchange ratio and
distribution of all escrow shares(4)............. 0.77 0.42 0.02
Pro forma equivalent, assuming maximum exchange ratio and
distribution of no escrow shares(5).............. 0.85 0.46 0.02
Pro forma equivalent, assuming maximum exchange ratio and
distribution of all escrow shares(6)............. 0.94 0.51 0.02
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
At March 28, 1997
-----------------
<S> <C>
Shareholders' equity per common share:
PSS
Historical......................................... 5.63
Pro forma combined (7):............................ 5.49
S&W
Historical......................................... 21.11
Pro forma equivalent, assuming minimum exchange ratio and
distribution of no escrow shares(3)............... 33.01
Pro forma equivalent, assuming minimum exchange ratio and
distribution of all escrow shares(4).............. 36.39
Pro forma equivalent, assuming maximum exchange ratio and
distribution of no escrow shares(5)............... 40.02
Pro forma equivalent, assuming maximum exchange ratio and
distribution of all escrow shares(6).............. 44.08
</TABLE>
- --------------
(1) PSS' fiscal year ends on the Friday closest to March 31 of each year.
(2) Assumes no acquisition or restructuring costs or synergies associated with
the Merger.
(3) For comparative purposes, S&W pro forma equivalent per share data have
been calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 5.9566, which is the minimum exchange ratio, assuming the maximum
adjustment of $200,000 to the Aggregate Purchase Price and no distribution to
S&W shareholders of the shares of PSS Common Stock subject to the Escrow
Agreement. See Summary - The Merger--Exchange Ratio.
(4) For comparative purposes, S&W pro forma equivalent per share data have
been calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 6.5917, which is the minimum exchange ratio, assuming no adjustment to
the Aggregate Purchase Price and distribution to S&W shareholders of all shares
of PSS Common Stock subject to the Escrow Agreement. See Summary - The Merger--
Exchange Ratio.
(5) For comparative purposes, S&W pro forma equivalent per share data have
been calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 7.2803, which is the maximum exchange ratio, assuming the maximum
adjustment of $200,000 to the Aggregate Purchase Price and no distribution to
S&W shareholders of the shares of PSS Common Stock subject to the Escrow
Agreement. See Summary - The Merger--Exchange Ratio.
(6) For comparative purposes, S&W pro forma equivalent per share data have
been calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 8.0565, which is the maximum exchange ratio, assuming no adjustment to
the Aggregate Purchase Price and distribution to S&W shareholders of all shares
of PSS Common Stock subject to the Escrow Agreement. See Summary - The Merger--
Exchange Ratio.
(7) For comparative purposes, PSS pro forma combined per share data have been
calculated by multiplying the pro forma PSS amounts by an assumed exchange ratio
of 8.0565, which is the maximum exchange ratio, assuming distribution to S&W
shareholders of all shares of PSS Common Stock subject to the Escrow Agreement.
See Summary - The Merger--Exchange Ratio.
-14-
<PAGE>
Summary Unaudited Pro Forma Condensed Combined Financial Information
of PSS and S&W
The following table sets forth unaudited selected pro forma condensed
combined financial data of PSS and S&W assuming the Merger is consummated and
accounted for under the pooling-of-interests method reflecting the distribution
to S&W stockholders of all shares held pursuant to the Escrow Agreement. See
"The Merger--Accounting Treatment." The pro forma financial data is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the Merger
had been consummated on the dates indicated, nor is it necessarily indicative of
future operating results or financial position. The pro forma financial data has
been derived from and should be read in conjunction with the pro forma financial
data, including the notes thereto, appearing elsewhere in this Proxy Statement-
Prospectus. See "Pro Forma Condensed Combined Financial Data."
<TABLE>
<CAPTION>
For the Year Ended March
---------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(In thousands, except per share data)
Income Statement Information (unaudited):
Net sales................................................ $763,050 $589,120 $471,985
Gross profit............................................. 204,895 162,590 132,315
Income from operations................................... 3,874 4,848 5,686
Other income (expense)................................... 2,768 (794) (2,588)
Net income............................................... 4,463 2,086 67
Net income per common and common
equivalent share....................................... 0.12 0.06 0.00
Weighted average shares outstanding...................... 38,392 33,198 25,412
<CAPTION>
At March 28, 1997
-----------------
(In thousands)
<S> <C>
Balance Sheet Information (unaudited):
Working capital.......................................... $172,228
Intangible assets, net of accumulated amortization....... 22,084
Total assets............................................. 321,270
Total long-term debt..................................... 4,908
Total shareholders' equity............................... 210,055
</TABLE>
-15-
<PAGE>
RISK FACTORS
In addition to the other information in this Proxy Statement-Prospectus,
the following factors should be considered carefully in evaluating an investment
in the shares of PSS Common Stock offered by this Proxy Statement-Prospectus.
Integration of Operations
The success of the Merger will be determined by various factors, including
management's ability to integrate effectively the operations of PSS and S&W and
the financial performance of the companies' operations after the Merger. Factors
which will affect management's ability to integrate successfully the operations
of PSS and S&W include the ability to implement management systems that take
advantage of marketing and cost saving opportunities and to minimize the
financial impact or expenses associated with the integration of the centers.
That can be no assurance that the Merger will not adversely affect the future
operating results of PSS. See "The Merger," "Business of PSS," "S&W Management's
Discussion and Analysis" and "Business of S&W."
Anticipated Expansion and Management of Expanded Operations
The Company intends to acquire additional distributors in markets it
already services and expects to open additional service centers. The Company's
ability to expand its operations is dependent upon a number of factors,
including (i) the availability of suitable acquisition candidates on acceptable
terms, (ii) the Company's ability to continue to consolidate and integrate its
acquisitions with its existing operations, and (iii) the Company's ability to
attract, train, and retain skilled sales representatives and management.
Management anticipates that each start-up service center opened will generally
incur operating losses for 18 months. Accordingly, the Company's planned
expansion creates numerous risks, including the risk that the expansion may have
an adverse effect on working capital and earnings during the expansion period
and acquisition transition period, that substantial indebtedness may be incurred
in connection with the expansion and that significant losses could result in the
event of unsuccessful acquisitions or start-ups.
The Company recently has expanded into new product areas, including
radiology and imaging equipment, chemicals and supplies to the acute and
alternate site markets. The integration and operation of this new division may
place significant demands on the Company's management and other resources. There
can be no assurance that there will be any operating efficiencies between the
Company's businesses or that its diagnostic imaging division can be operated
profitably, which could have a material adverse effect on the Company's business
and future prospects. The Company plans to aggressively pursue additional
expansion opportunities in this market, however, there can be no assurance that
the Company will be successful in acquiring, operating or integrating additional
operations. In addition, the radiology and imaging equipment market is heavily
reliant on the hiring and retention of skilled service technicians to maintain
such equipment. There is a current shortage of these skilled technicians, which
may result in intense competition and increasing salaries. Any inability of the
Company to hire or retain such skilled technicians could limit the Company's
ability to expand and adversely affect its results of operations.
Management of International Operations
Through its WorldMed International subsidiary, the Company has recently
acquired medical supply distributors serving physicians in Belgium, France,
Germany and the Netherlands and plans to increase its presence in European
markets. As the Company expands internationally, it will need to hire, train and
retain qualified personnel in countries where language, cultural or regulatory
impediments may exist. The Company has encountered and expects to encounter
significant expense and delay in expanding its international operations because
of language and cultural differences, and staffing, communications and related
issues. There can be no assurance that the Company's services and business
practices will be accepted by vendors, physicians or other involved parties in
foreign markets.
-16-
<PAGE>
International revenues are subject to inherent risks, including political
and economic instability, difficulties in staffing and managing foreign
operations and in accounts receivable collection, fluctuating currency exchange
rates, costs associated with localizing service offerings in foreign countries,
unexpected changes in regulatory requirements, difficulties in the repatriation
of earnings and burdens of complying with a wide variety of foreign laws and
labor practices.
Dependence on Manufacturers
The Company distributes over 35,000 products manufactured by approximately
3,000 vendors and is dependent on these vendors for the manufacture and supply
of product. Additionally, the Company has entered into a significant contract
with Abbott, which may be terminated by Abbott if the Company does not meet
certain sales levels. The Company's ability to maintain good relations with
these vendors will affect the profitability of its business. Currently, the
Company relies on vendors to provide (i) field sales representatives' technical
and selling support, (ii) agreeable purchasing and delivery terms, (iii) sales
performance incentives, (iv) financial support of sales and marketing programs,
and (v) promotional materials. There can be no assurance that the Company will
maintain its good relations with its vendors.
Regulation of and Change in Practice of Medicine
The health care industry, including the practice of medicine by physicians,
is subject to extensive government regulation, licensure and operating
procedures. The Company cannot predict the impact that present or future
regulations may have on operations of the Company or on its plan to expand its
business activities. In addition, as consolidation among physician provider
groups continues and provider networks are created, purchasing decisions may
shift to individuals with whom the Company has not had prior selling
relationships. The Company is increasingly focusing on national accounts where
the purchasing decision may not be made by the Company's traditional physician
customers. There can be no assurance that the Company will be able to maintain
its customer relationships in such circumstances.
Dependence on Third-Party Reimbursement
The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare, Medicaid
and corporate health insurance plans. In recent years, government-imposed limits
on reimbursement of hospitals and other health care providers have significantly
impacted spending budgets in certain markets within the medical supply and
equipment industry. Private third-party reimbursement plans are also developing
increasingly sophisticated methods of controlling health care costs through
redesign of benefits and exploration of more cost-effective methods of
delivering health care. Accordingly, there can be no assurance that
reimbursement for purchase and use of medical equipment and supplies by
physicians' offices will not be limited or reduced and thereby adversely affect
future sales by the Company.
Two-Tier Pricing
As a result of the Non-Profit Act of 1944, the medical supplies and
equipment industry is subject to a two-tier pricing structure. Under this
structure, certain institutions, originally limited to non-profit hospitals, can
obtain more favorable prices for medical supplies and equipment than the
Company. The two-tiered pricing structure continues to expand as many large
integrated health care providers and others with significant purchasing power
demand more favorable pricing terms. Although the Company is seeking to obtain
similar terms from its manufacturers, there can be no assurance that such terms
can be obtained. Such a pricing structure, should it persist, may put the
Company at a competitive disadvantage.
Sales Representatives
The Company's sales growth has resulted to a significant degree from hiring
and developing new sales representatives and adding, through acquisitions,
established sales representatives whose existing customers
-17-
<PAGE>
generally have become customers of the Company. The Company's continued growth
will depend in part on its ability to continue to hire, train and retain sales
representatives who agree to the Company's compensation plans and to maintain
good relations with its existing sales representatives.
Key Management
The success of the Company is dependent upon the efforts and abilities of
its senior management, including the Company's Chairman and Chief Executive
Officer, Patrick C. Kelly, its President, John F. Sasen, Sr. and its Executive
Vice President and Chief Financial Officer, David A. Smith. The loss of any such
senior management may adversely affect the Company's business. The Company
maintains key man life insurance on Mr. Kelly.
Competition
The marketing of medical supplies and equipment to physicians' offices is
highly competitive. Some of the Company's competitors are larger and have
greater financial resources than the Company. Also, the Company could encounter
additional competition because many of the products it sells are readily
obtainable by others from various sources of supply and such competitors could
consolidate into regional or national networks. In addition, a competitor of the
Company could obtain exclusive rights to market a certain product to the
exclusion of the Company. There can be no assurance that the Company will not
face increased competition in the future.
Liability Exposure
Although the Company is not a manufacturer, the distribution of medical
supplies and equipment entails risks of product liability. Despite the fact that
the Company has not to date experienced any significant product liability claims
and currently maintains liability insurance coverage, such insurance is
expensive, difficult to obtain and may be unobtainable in the future on
acceptable terms, if at all. The Company operates approximately 700 trucks to
deliver medical supplies and equipment on a same-day delivery basis. The Company
has experienced various claims regarding motor vehicle accidents, all of which
have been covered by insurance. The Company believes that it maintains adequate
insurance coverage for such claims. Nevertheless, the amount and scope of any
coverage may be inadequate in the event that a product liability or motor
vehicle accident claim is successfully asserted against the Company.
Reliance on Data Processing
The Company's business is dependent upon its ongoing ability to obtain,
process, analyze and manage data, and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, the failure to upgrade data services, difficulties in
converting data and information systems after acquisitions, loss of stored data,
programming errors or other computer problems could have a material adverse
effect on the Company's business.
Anti-Takeover Provisions; Possible Issuance of Preferred Stock
The Company's Amended and Restated Articles of Incorporation and Bylaws
contain various provisions that may make it more difficult for a third party to
acquire, or may discourage acquisition bids for, the Company and could limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. In addition, the rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of any holders of
Preferred Stock that may be issued in the future and that may be senior to the
rights of the holders of Common Stock. Furthermore, the Company has not opted
out of certain provisions of the Florida Business Corporation Act, including the
provisions relating to control-share acquisitions, which could have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by its shareholders. See "Description of PSS Capital Stock."
-18-
<PAGE>
GENERAL INFORMATION
Special Meeting
This Proxy Statement-Prospectus is being furnished by S&W to its
stockholders in connection with the solicitation of proxies by the Board of
Directors of S&W from holders of the outstanding shares of S&W Common Stock for
use at the S&W Special Meeting and at any adjournments and postponements
thereof, to consider and vote upon a proposal to approve the Merger Agreement,
the Escrow Agreement and consummation of the transactions contemplated therein,
including appointment of the Stockholder Representatives, and to transact such
other business as may properly come before the S&W Special Meeting.
This Proxy Statement-Prospectus is also being furnished by PSS to holders
of S&W Common Stock as a Prospectus in connection with the issuance by PSS to
them of shares of PSS Common Stock upon consummation of the Merger.
The Merger Agreement provides for a transaction whereby S&W will merge with
and into DI, a wholly owned subsidiary of PSS. DI shall be the surviving
corporation of the Merger and shall remain a wholly owned subsidiary of PSS and
continue to be governed by the laws of the State of Florida. At the Effective
Time, each issued and outstanding share of S&W Common Stock shall cease to be
outstanding and shall be converted into and exchanged for the right to receive
shares of PSS Common Stock and a contingent right to receive additional PSS
Common Stock, as provided in the Escrow Agreement. See "The Merger--Exchange
Ratio."
If the Merger Agreement is approved at the Special Meeting, any required
regulatory approvals are obtained, and all of the other conditions to the
obligations of the parties to consummate the Merger are either satisfied or
waived (as permitted), the Merger will be consummated. See "The Merger--
Effective Time."
Record Date and Quorum
The S&W Board of Directors has fixed the close of business on August 10,
1997, as the record date for determining the S&W stockholders entitled to
receive notice of and to vote at the Special Meeting. The presence, in person or
by Proxy, of the holders of shares of S&W Common Stock entitled to cast a
majority of the votes entitled to be cast at the S&W Special Meeting will
constitute a quorum at the S&W Special Meeting.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees of
S&W, who will not be specifically compensated for such services, may solicit
proxies from the stockholders of S&W, personally or by telephone or telegram or
other forms of communication. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in doing
so.
Voting and Revocability of Proxies
Shares of S&W Common Stock represented by a properly executed proxy, if
such proxy is received in time and is not subsequently revoked, will be voted in
accordance with the instructions indicated on such proxy. If a proxy is properly
executed and returned without indicating any voting instructions, shares of S&W
Common Stock represented by such proxy will be voted FOR approval of the Merger
Agreement, the Escrow Agreement and consummation of the transactions
contemplated therein, including appointment of the Stockholder Representatives
as provided in the Escrow Agreement.
Any proxy given may be revoked by the person giving it at any time prior to
its exercise at the Special Meeting by (i) giving written notice of revocation
to the Secretary of S&W, (ii) properly submitting to S&W a duly executed proxy
bearing a later date, or (iii) voting in person at the Special Meeting. All
written notices of
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<PAGE>
revocation and other communications with respect to revocation of S&W proxies
should be addressed to S&W as follows: S&W X-Ray, Inc., Cornerstone Center, 2300
Buffalo Road, Rochester, New York 14824, Attention: George R. Privitera.
Vote Required
As of the S&W Record Date, there were 259,574 shares of S&W Common Stock
issued and outstanding and held by approximately ____ record holders and 4,009
shares of S&W Common Stock to be issued on the Closing Date pursuant to the S&W
Supplemental Executive Retirement Plan. Each share of S&W Common Stock is
entitled to one vote. Approval of the Merger Agreement, the Escrow Agreement and
consummation of the transactions contemplated therein, including the appointment
of the Stockholder Representatives, requires the affirmative vote of the holders
of a majority of the outstanding shares of S&W Common Stock entitled to vote
thereon at the Special Meeting. Accordingly, approval of the Merger Agreement
will require the affirmative vote of the holders of shares of PSS Common Stock
entitled to cast a minimum of 131,792 votes.
The S&W X-Ray, Inc. Employee Stock Ownership Plan and Trust ("ESOP") owns
32.96% of the outstanding shares of S&W Common Stock. The ESOP has retained
Consulting Fiduciaries, Inc. for the purposes of (i) determining what action the
ESOP should take with respect to the Merger; (ii) administering any pass-through
voting process with respect to any such proposal and receiving the directions of
the participants and beneficiaries entitled to vote under the ESOP; (iii) with
respect to any shares of S&W stock held in the ESOP for which voting directions
are not received from any participant or beneficiary, determining how such
shares should be voted; and (iv) taking whatever action it shall deem
appropriate, including directing the Trustee of the Trust regarding voting of
shares of S&W Common Stock.
As of the S&W Record Date, S&W directors and executive officers, and their
affiliates, held approximately 33% of the votes entitled to vote at the Special
Meeting. Holders of approximately 66% of the outstanding votes represented by
the S&W Common Stock have agreed to vote in favor of the Merger Agreement, the
Escrow Agreement and the consummation of the transactions contemplated therein,
including the appointment of the Stockholder Representatives, and, therefore,
approval of such matters is assured. As of the S&W Record Date, PSS directors
and executive officers, and their affiliates, held no S&W Shares.
-20-
<PAGE>
THE MERGER
The following information describes certain information pertaining to the
Merger. This description does not purport to be complete and is qualified in its
entirety by reference to the Annexes hereto, including the Merger Agreement and
the Escrow Agreement, copies of which are set forth in Annex A and Annex B,
respectively, to this Proxy Statement-Prospectus and are incorporated herein by
reference. All stockholders are urged to read each Annex in its entirety.
General
The Merger Agreement provides that S&W shall merge with and into DI, a
wholly owned subsidiary of PSS. DI shall be the surviving corporation of the
Merger and shall remain a wholly owned subsidiary of PSS and continue to be
governed by the laws of the State of Florida. At the time the Merger becomes
effective, each share of issued and outstanding S&W Common Stock and each share
of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive
Retirement Plan (excluding shares held by stockholders who perfect their
dissenters' rights) shall cease to be outstanding and shall be converted into
and exchanged for the right to receive shares of PSS Common Stock and a
contingent right to receive additional PSS Common Stock, as provided in the
Escrow Agreement. If the Merger Agreement is approved at the Special Meeting,
all required consents and approvals are obtained, and all other conditions to
the obligations of the parties to consummate the Merger are either satisfied or
waived (as permitted), the Merger will be consummated. A copy of the Merger
Agreement is set forth in Annex A of this Proxy Statement-Prospectus and a copy
of the Escrow Agreement is set forth in Annex B. See "Exchange Ratio."
Background of the Merger
On January 7 and 8, 1997, the Board of Directors of S&W held meetings to
discuss various strategic alternatives for S&W X-Ray, including the viability of
leading an industry consolidation effort or the possible sale of the business.
In its discussions, the Board noted that several of the companies it intended to
consolidate had recently been acquired or entered into agreements with a new
industry company named as a subsidiary of PSS. The general consensus was there a
sale of S&W would be in the best interest of the shareholders and employees. The
Board authorized the retention of Steve Cook as financial advisor to assist in
the potential sale of the business. The Board of Directors believed that they
could receive the best value for the Company from PSS or its subsidiary based on
such companies prior acquisition activity. Mr. Cook had represented other
companies in their respective sales to PSS.
In January 1997, S&W retained Steve Cook as financial advisor in connection
with the potential sale of the business. Based on the advice of Mr. Cook, it was
decided that S&W would develop a presentation of its past and future financial
performance.
On February 4 and 5, 1997, a representative of DI, Rutherrford Deas, Vice
President, visited the Syracuse location of S&W for the purpose of explaining
the DI strategy and goals. The meeting was held with S&W representatives Joe
Miller, George Privitera and Ron Cronin.
On February 25, 1997 a S&W Board of Directors meeting included discussions
of S&W's sale progress and presentations by the DI representative. The Board
authorized a visit to the DI corporate offices to make a presentation of S&W and
to learn more about DI.
On March 8 through 11, 1997, Joe Miller, Bruce Ashby, George Privitera, Ron
Cronin and Steve Cook visited and presented S&W to David Smith, Gene Dell,
Rutherford Deas, Glenn Green and Bruce Treadway of PSS and DI PSS and DI
representatives gave a presentation of the past performance and future
strategies of PSS and DI.
On March 17, 1997, Bruce Ashby at the direction of the S&W Board of
Directors contacted telephonically another national x-ray distributor regarding
their interest in purchasing S&W.
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<PAGE>
On April 10, 1997, S&W received an offer for the merger of S&W into with
and DI and the receipt of shares of PSS common stock. Also on April 10, 1997,
Joe Miller received a telephone call from the other national x-ray distributor
that was contacted by Bruce Ashby. The discussions did not result in an offer.
On April 15 and 16, 1997, the S&W Board of Directors met to discuss the
offer from PSS. The Board concluded that further conversations were necessary
before a decision was warranted. In addition, the Board authorized S&W to hire
David Heald and Fiduciary Consultants, Inc. based on discussions and
recommendations from S&W's benefits counsel, Menke and Associates.
In April 1997, David Heald and Fiduciary Consultants, Inc. were engaged to
consult with the Company regarding its ESOP.
On April 17, 1997, Joe Miller, Bruce Ashby, George Privitera and Ron Cronin
telephonically responded to David Smith at PSS regarding the merger offer. It
was agreed that new additional financial information of S&W would be sent to
PSS.
On April 20, 1997, David Smith and Gene Dell of PSS and DI met in Rochester
location of S&W with Joe Miller, George Privitera, Bruce Ashby, Ron Cronin and
Steve Cook for due diligence and merger discussions. On April 21, 1997, George
Privitera sent additional financial information to PSS.
On April 29, 1997, S&W received a second offer of merger from PSS. On
April 29, 1997, the executive committee of the PSS Board of Directors met
telephonically to discuss the S&W merger offer. The executive committee
authorized David Smith to extend the second offer of merger.
On May 1, 1997, the S&W Board of Directors met to discuss the PSS offer and
concluded that further discussions were necessary before a decision was
warranted.
In mid-May 1997, Joe Miller and Bruce Ashby telephonically responded to the
PSS offer. During this call Joe Miller suggested that David Smith and Patrick
Kelly should visit Rochester location of S&W for further discussions and due
diligence.
On May 23, 1997, Patrick Kelly, David Smith and Kathy Fehling visited the
Syracuse location of S&W for additional due diligence and merger discussions.
On May 29, 1997, PSS issued its final offer of merger.
On May 29, 1997, the S&W Board of Directors met to discuss the PSS offer
and decided after discussion that it was in the best interests of shareholders
and employees to accept this offer.
On May 29, 1997, the executive committee of the PSS Board of Directors met
telephonically to discuss the S&W merger offer. The executive committee
authorized David Smith to extend the final offer of merger.
On June 14, 1997, the PSS Board of Directors met to discuss the S&W
transactions, and on July 22, 1997, the PSS Board of Directors approved the
merger offer to S&W.
On July 29, 1997, the parties met telephonically to discuss due diligence
findings and adjusted the offer of merger to reflect the same. On July 30, 1997,
the S&W Board of Directors met and accepted the adjustments to the offer based
on these findings.
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<PAGE>
Reasons for the Merger
PSS. The PSS Board of Directors, after consideration of relevant business,
financial, legal and market factors, including the compatibility of the
operations and management of S&W and PSS, and the future prospects of S&W and
PSS, has concluded that the Merger is in the best interests of PSS. The PSS
Board believes that the Merger is desirable for the following reasons, among
others: (i) S&W has distribution centers in desirable locations and will expand
the distribution area for PSS' Diagnostic Imaging, Inc. medical diagnostic
imaging division; (ii) S&W's existing business relationships will be enhanced by
affiliation with the distribution networks of PSS and DI; and (iii) S&W has a
strong management team and sales and service force, which is knowledgeable and
experienced in the industry.
S&W. The S&W Board of Directors, after consideration of relevant business,
financial, legal and market factors, including the compatibility of the
operations and management of S&W and PSS, and the financial condition, results
of operations and future prospects of S&W and PSS, has concluded that the Merger
is in the best interests of S&W and its stockholders. In reaching its decision
to enter into the Merger Agreement and to recommend that the stockholders of S&W
vote for the approval and adoption of the Merger Agreement, the Board of
Directors considered a number of factors, including, without limitation and
without assigning relative weights thereto, the following:
(i) the terms and conditions of the proposed Merger, including the value
of the consideration to be received by the stockholders of S&W, the fact that as
PSS stockholders the S&W stockholders would have more liquidity, and the fact
that the Merger is expected to be treated as a tax-free reorganization;
(ii) the opportunity for holders of S&W shares to continue to share in the
potential for long-term gains in S&W through the ownership of PSS Common Stock
following the Merger;
(iii) the business reputation and capabilities of PSS and DI and their
management, and the financial strength, prospects, market position and strategic
objectives of PSS and DI; and
(iv) the perceived strengths of DI and S&W combined, the belief that DI
and S&W are strategically complementary and that the combined companies will be
able to compete more effectively in the marketplace.
THE BOARD OF DIRECTORS OF S&W UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER AGREEMENT, THE ESCROW AGREEMENT AND CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING THE APPOINTMENT OF THE STOCKHOLDER
REPRESENTATIVES.
Exchange Ratio
The Merger Agreement provides that at the effective time of the Merger,
each outstanding share of S&W Common Stock and each share of S&W Common Stock to
be issued pursuant to the S&W Supplemental Executive Retirement Plan (excluding
shares held by stockholders who perfect their dissenter's rights) shall cease to
be outstanding and shall be converted into and exchanged for (i) the right to
receive that number of shares of PSS Common Stock equal to the Aggregate
Purchase Price (as defined below) minus the Escrow Dollar Amount (as defined
below) and the contingent right to receive that number of shares equal to the
Escrow Dollar Amount; (ii) divided by the sum of all shares of S&W Common Stock
issued and outstanding or issuable upon the conversion of all convertible
securities or rights of any nature with respect to S&W Common Stock; (iii) which
amount is divided by the Base Period Trading Price (as defined below) (the
"Common Stock Exchange Ratio").
Pursuant to the Merger Agreement, the "Aggregate Purchase Price" is defined
to be $26,000,000, minus any legal, accounting, consulting and investment
advisory expenses in excess of $350,000 incurred by S&W or on S&W's behalf in
connection with the transactions contemplated under the Merger Agreement;
provided that such adjustment shall not exceed $200,000. In the event that the
foregoing adjustments would result in a decrease to the
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<PAGE>
Aggregate Purchase Price of more than $200,000 but for the foregoing proviso,
PSS shall have the right to terminate the Merger Agreement. Pursuant to the
Merger Agreement, the "Escrow Dollar Amount" is defined to be $1,015,000 plus
five percent of the Aggregate Purchase Price.
The term "Base Period Trading Price" is defined in the Merger Agreement as
the average of the daily closing prices for the shares of PSS Common Stock for
the ten (10) consecutive trading days on which such shares are actually traded
as over-the-counter securities and quoted on the Nasdaq National Market ending
at the close of trading on the second trading day immediately prior to the
Closing Date, provided, however, that for purposes of such calculation, the Base
Period Trading Price shall be deemed to equal (i) $14.9644 in the event the Base
Period Trading Price is greater than $14.9644 or (ii) $12.2436 in the event the
Base Period Trading Price is less than $12.2436 (collectively, the "Base Period
Trading Price Limitations").
In the event S&W or PSS changes the number of shares of S&W Common Stock or
PSS Common Stock, or other common stock equivalents, on a fully diluted basis,
issued and outstanding prior to the Effective Time, or declares any stock split,
stock dividend or similar recapitalization with respect to such stock and the
record date therefor shall be prior to the Effective Time, the Exchange Ratio
shall be proportionately adjusted; provided, however, that no such adjustment
shall occur as a result of the conversion at or prior to the Effective Time of
shares of PSS Series Preferred Stock into shares of PSS Common Stock or the
exercise of any presently outstanding options or warrants of PSS or S&W.
Escrow Agreement
The aggregate number of shares of PSS Common Stock issuable by PSS under
all contingent rights to receive PSS Common Stock (the "Escrow Shares") shall be
issued and held by The Bank of New York, as Escrow Agent following the Effective
Time pursuant to the terms of the Escrow Agreement. The aggregate number of
Escrow Shares shall equal $1,015,000 plus five percent of the Aggregate Purchase
Price, which amount is divided by the Base Period Trading Price. Subject to the
terms of the Escrow Agreement, the Escrow Shares shall be used, if necessary, to
indemnify PSS, DI and S&W (the "indemnitees") for (i) losses incurred by DI or
PSS by reason of the failure of DI to receive by the first anniversary of the
Closing Date the accounts receivable of S&W due to S&W as of the Closing Date in
excess of $180,000; (ii) expenses up to $10,000 incurred by PSS or DI on behalf
of the Representatives in connection with the performance of their obligations
thereunder; (iii) one-half of expenses incurred by PSS or DI on behalf of the
Escrow Agent in connection with the performance of its obligations thereunder in
an amount up to $5,000 (collectively (i), (ii) and (iii), the "specific
claims"); and (iv) losses incurred by DI or PSS as a result of a breach of any
of the representations and warranties or covenants and agreements of S&W (the
"general claims"). The time period for the general claims is until (i) the first
publication by PSS of audited consolidated financial statements covering an
accounting period after the Closing Date with respect to those items that would
be discoverable in an audit, and (ii) one year with respect to all other claims,
except to the extent that certain specific claims remain pending at the time the
Escrow Agreement would otherwise terminate. For the duration of the escrow, all
Escrow Shares may be used to satisfy a claim by the indemnitees, regardless of
whether the claim is based upon specific or general claims.
If a dispute about whether a particular loss is indemnifiable under the
Escrow Agreement is unable to be resolved by the Stockholder Representatives and
the indemnitee(s), such dispute is to be submitted to binding arbitration on an
informal basis as provided in the Escrow Agreement. All cash dividends or other
cash income with respect to the Escrow Shares shall also be held in escrow with
the Escrow Shares pursuant to the terms of the Escrow Agreement. Each
stockholder has the right to direct the voting of the Escrow Shares. In the
event of any stock split or stock dividend with respect to PSS Common Stock that
becomes effective during the term of the Escrow Agreement, the additional shares
issued with respect to the Escrow Shares shall be added to the Escrow Shares and
the terms of the Escrow Agreement will be adjusted accordingly to account for
such additional shares. The Stockholder Representatives will have full power and
authority to represent the S&W stockholders with respect to all matters arising
under the Escrow Agreement and all action taken by the Stockholder
Representatives under the Escrow Agreement shall be binding upon the S&W
stockholders. Joseph E. Miller, Jr., Bruce P. Ashby and the S&W X-Ray, Inc.
Employee Stock Ownership Trust are proposed to be the Stockholder
Representatives.
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Covenants Not to Compete
It is a condition to the obligation of PSS to close the Merger that Joseph
E. Miller, Jr. and Bruce P. Ashby shall enter into fifteen-year Covenants Not to
Compete and George Privitera and Ron Cronin shall enter into eight-year
Covenants Not to Compete pursuant to which, for the duration of such agreements,
such person covenants and agrees not to (i) own, operate or be associated with a
diagnostic imaging medical supply distribution company which competes with DI in
the states of New York, New Jersey, Pennsylvania and Connecticut (a "Prohibited
Business"), (ii) become financially interested in any person or entity engaged
in a Prohibited Business, or (iii) solicit or attempt to solicit any employee or
contractor away from PSS or DI. Each shareholder will also covenant (i) not to
solicit or attempt to solicit any customer of S&W as of the date of Closing or
any prospective customer to which a written or specific oral proposal was
submitted during the twelve (12) month period prior to Closing, and (ii) not to
copy, remove or disclose any confidential or proprietary information relating to
the businesses of S&W, PSS, DI or their affiliates. Remedies for violation of
any provision of the Covenant Not to Compete include injunctive relief and
monetary damages.
Joseph E. Miller, Jr. and Bruce P. Ashby will receive aggregate cash
payments of $1,900,000 and $1,4000,000, respectively, as additional
consideration for his Covenant Not to Compete upon consummation of the Merger,
payable in installments over the fifteen-year term of such agreements. In
addition, George Privitera and Ron Cronin will receive aggregate payments of
$700,000 each as additional consideration for his Covenant Not to Compete upon
consummation of the Merger, payable in installments over the eight-year term of
such agreements.
Fractional Shares
Pursuant to the terms of the Merger Agreement, each holder of shares of S&W
Common Stock and each holder of S&W Common Stock to be issued pursuant to the
S&W Supplemental Executive Retirement Plan exchanged pursuant to the Merger, who
would otherwise have been entitled to receive a fraction of a share of PSS
Common Stock shall receive, in lieu thereof, a cash payment equal to the
fractional amount due multiplied by the Base Period Trading Price, and each
holder of shares of S&W Common Stock exchanged pursuant to the Merger, who would
otherwise have been entitled to receive a contingent right to receive a fraction
of a share of PSS Common Stock on the Final Settlement Date shall receive, in
lieu thereof, a contingent right to receive one additional share of PSS Common
Stock on the Final Settlement Date if such fraction is 0.5 or more and nothing
if such fraction is less than 0.5.
Effective Time
If the Merger Agreement is approved by the requisite vote of the S&W
stockholders, and all other required consents and approvals are received, and if
the other conditions to the Merger are satisfied or waived (as permitted), the
Merger will be consummated and effected on the date and at the time the Articles
of Merger, reflecting the Merger, are filed with the Secretary of State of the
State of Florida and the Secretary of State of the State of New York (the
"Effective Time"). See "Conditions to Consummation."
Distribution of PSS Certificates
Promptly after the Effective Time, PSS shall distribute appropriate
transmittal materials to use in effecting the surrender and cancellation of
those certificates in exchange for PSS Common Stock (which shall contain an
affidavit for lost or stolen stock certificates and which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
theretofore representing shares of S&W Common Stock shall pass, only upon proper
delivery of such certificates of PSS by the former stockholders of S&W). After
the Effective Time, each holder of shares of S&W Common Stock issued and
outstanding and each holder of S&W Common Stock to be issued pursuant to the S&W
Supplemental Executive Retirement Plan at the Effective Time (other than shares
as to which dissenters' rights have been perfected) shall surrender the
certificate or certificates representing such shares to PSS, and the
certificates thus surrendered will be canceled. PSS shall not be obligated to
deliver the consideration to which any former holder of shares of S&W Common
Stock is entitled until such holder surrenders such holder's certificate or
certificates representing such holder's shares for exchange. The certificate or
certificates so
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surrendered shall be duly endorsed as PSS may require. No party shall be liable
to a holder of shares of S&W Common Stock for any property delivered in good
faith to a public official pursuant to any applicable abandoned property law.
After the Effective Time, holders of certificates will have no rights with
respect to the shares of S&W Common Stock represented thereby other than the
right to surrender such certificates and receive in exchange therefor the shares
of PSS Common Stock, if any, to which such holders are entitled, as described
above, or the right to perfect their dissenters' rights. In addition, no
dividend or other distribution payable to holders of record of PSS Common Stock
will be paid to the holder of any S&W certificates until such holder surrenders
such certificates for exchange as instructed. Subject to applicable law, upon
surrender of the certificates, such holder will receive the certificates
representing the shares of PSS Common Stock issuable upon the exchange or
conversion of such shares of S&W Common Stock, all withheld dividends or other
distributions (without interest), and any withheld cash payments (without
interest) to which such stockholder is entitled.
If any certificate for PSS Common Stock is to be issued in a name other
than that in which the S&W certificate surrendered for exchange is issued, the
S&W certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer, and the person requesting such exchange shall affix
any requisite stock transfer tax stamps to the certificates surrendered, shall
provide funds for their purchase, or shall establish to the exchange agent's
satisfaction that such taxes are not payable.
Certain Federal Income Tax Consequences
The following is a discussion of certain federal income tax consequences of
the Merger. This discussion is based on the provisions of the Code, the Treasury
Regulations thereunder and rulings and court decisions as of the date hereof,
all of which are subject to change, possibly retroactively. The discussion is
included for general information purposes only, applies only to S&W
stockholders, if any, who hold their stock as a capital asset, and may not apply
to S&W stockholders, if any, who received S&W stock upon the exercise of
employee stock options or otherwise as compensation. PSS, DI, and S&W have not
requested a ruling from the Internal Revenue Service (the "Service") or a tax
opinion from legal counsel in connection with the proposed transactions.
The Merger is intended to be a tax-free reorganization within the meaning
of Section 368(a) of the Code. Among other things, the following discussion is
based on S&W stockholders maintaining sufficient equity ownership interest in
PSS after the Merger. The Service takes the position for purposes of issuing an
advance ruling on reorganizations, that the stockholders of an acquired
corporation (i.e., S&W) must maintain a continuing equity ownership interest in
the corporation controlling the acquiring corporation (i.e., PSS) equal, in
terms of value, to at least 50 percent of their interest in such acquired
corporation. Pursuant to this requirement, the management of S&W it believes
that there is no plan or intention by any of the S&W stockholders who own one
percent or more of the outstanding S&W Common Stock and, to the best knowledge
of the management of S&W, the remaining S&W stockholders have no plan or
intention to sell, exchange or otherwise dispose of a number of the shares of
PSS Common Stock that they will receive in the Merger that would reduce on the
part of S&W stockholders such stockholders' ownership to a number of shares of
PSS Common Stock having an aggregate value as of the Effective Time of less than
50 percent of the aggregate value of all of the outstanding shares of S&W Common
Stock immediately prior to such time. For this purpose, shares of S&W Common
Stock exchanged for cash or other property, surrendered by dissenters or
exchanged for cash in lieu of fractional shares of PSS Common Stock will be
treated as outstanding S&W Common Stock at the Effective Time. Moreover, shares
of S&W Capital Stock and PSS Common Stock held by S&W stockholders and otherwise
sold, redeemed or disposed of prior or subsequent to such time are taken into
account. In addition, management of PSS has no plan or intention to cause PSS to
redeem or otherwise reacquire the shares of PSS Common Stock issued in the
Merger. Furthermore, management of S&W has advised PSS it believes that in the
Merger, the S&W stockholders will exchange an amount of stock representing
"control" of S&W (meaning the ownership of stock possessing at least 80 percent
of the total combined voting power of all classes of stock entitled to vote and
at least 80 percent of the total number of shares of all other classes of stock
of the corporation) solely for PSS Common Stock. In addition to the foregoing
requirements certain additional matters must be true with respect to the Merger.
PSS and S&W believe that these additional factual matters will be satisfied.
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Assuming the Merger is treated as a reorganization as defined in Section
368(a) of the Code, the following should be the material federal income tax
consequences to the S&W stockholders:
(i) Except for those shareholders who dissent to the proposed transaction
and those who receive cash instead of a fractional share of PSS Common Stock,
no gain or loss will be recognized for federal income tax purposes by S&W
stockholders upon the exchange of their shares of S&W Common Stock for shares
of PSS Common Stock.
(ii) The basis of the shares of PSS Common Stock to be received by S&W
stockholders will be the same as the basis of the shares of S&W Common Stock
surrendered in exchange therefor.
(iii) The holding period of the PSS Common Stock to be received by S&W
stockholders will include the period during which the shares of S&W Common
Stock surrendered in exchange therefor had been held, provided such shares
were held by such stockholders as a capital asset at the Effective Time.
(iv) Dissenting S&W stockholders who receive solely cash from S&W in
exchange for their stock will be treated as having received such payments as
distributions in redemption of their shares of such stock, subject to certain
limitations. After such distribution, if a former S&W stockholder neither owns
PSS capital stock nor is deemed to own PSS capital stock under constructive
ownership rules, the redemption will be a complete termination of interest and
will be treated as distribution in full payment in exchange for the shares of
S&W Common Stock. Accordingly, such stockholder will recognize gain or loss
measured by the difference between the amount of cash received and such
stockholder's adjusted basis in stock surrendered. S&W stockholders electing
to exercise dissenters' rights should consult their own tax advisers as to the
tax treatment in their particular circumstances.
(v) The payment of cash in lieu of fractional shares of PSS Common Stock
will be treated as if the fractional shares were issued as part of the
exchange and then redeemed by PSS. These cash payments will be treated as
having been received as distributions in full payment in exchange for the
fractional shares of PSS Common Stock redeemed as provided in Section 302(a)
of the Code. Generally, any gain or loss recognized upon such exchange will be
capital gain or loss, provided the fractional share would constitute a capital
asset in the hands of the exchanging stockholder.
Pursuant to the Merger Agreement, PSS has agreed to bear and pay reasonable
expenses of S&W in connection with the negotiation and consummation of the
transactions contemplated by the Merger Agreement, in an amount not to exceed
$350,000 in the aggregate. The above discussion is based on the belief of
management that all such expenses are properly expenses of S&W. If it is
determined that some of these expenses are actually expenses of S&W
stockholders, payment of such expenses could constitute constructive dividends
to such stockholders.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH HOLDER OF
S&W COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER (INCLUDING THE
APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS).
Management and Operations After the Merger
DI shall be the surviving corporation resulting from the Merger and shall
operate the business of S&W from and after the Closing Date as a wholly owned
subsidiary of PSS. DI shall continue to be governed by the laws of the State of
Florida, and shall operate in accordance with its Articles and Bylaws as in
effect on the date of the Merger Agreement until otherwise amended or repealed
after the Effective Time.
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Interests of Certain Persons in the Merger
Joseph E. Miller, Jr. and Bruce P. Ashby will receive aggregate cash
payments of $1,900,000 and $1,4000,000, respectively, as additional
consideration under a Covenant Not to Compete upon consummation of the Merger,
payable in installments over the fifteen-year term of such agreements. In
addition, George Privitera and Ron Cronin will receive aggregate payments of
$700,000 each as additional consideration under a Covenant Not to Compete upon
consummation of the Merger, payable in installments over the eight-year term of
such agreements.
As of the date hereof, no director or executive officer of PSS or S&W has
any substantial interest, direct or indirect, in the Merger, other than an
interest arising from the ownership of S&W Common Stock, in which case the
director or officer receives no extra or special benefit not shared on a pro
rata basis by all other holders of S&W Common Stock. For information as to the
ownership of S&W Common Stock by those directors and executive officers, see
"Ownership of Equity Securities--S&W."
Conditions to Consummation
The obligation of PSS to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of S&W
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) S&W shall have performed all of its
agreements and covenants prior to the Effective Time as contemplated by the
Merger Agreement; (iii) the S&W sales force shall not have decreased in number
to less than 18 full-time sales persons and 70 full-time service technicians;
(iv) there shall have been no material adverse change in the business, assets or
results of operations of S&W between March 31, 1997 and the Closing Date;
(v) the Escrow Agreement shall have been executed and delivered by a national
bank as the Escrow Agent, (vi) PSS shall have received a letter from Arthur
Andersen LLP to the effect that the Merger will qualify for pooling-of-interests
accounting treatment; (vii) PSS shall have received the consent of its senior
lender; (viii) PSS shall have received evidence that all indebtedness owed by
the S&W X-Ray, Inc. Employee Stock Ownership Trust has been repaid or forgiven;
and (ix) receipt by PSS of executed investment agreements, employment agreements
and non-compete agreements from certain affiliates and employees of S&W.
The obligation of S&W to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of PSS
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) PSS shall have performed all of its
agreements and covenants prior to the Effective Time as contemplated by the
Merger Agreement; (iii) there shall have been no material adverse change in the
business, assets or results of operations of PSS between March 31, 1997 and the
Closing Date; and (iv) the Escrow Agreement shall have been executed and
delivered by a national bank as the Escrow Agent.
The obligation of each of PSS, DI and S&W to consummate the Merger is
subject to certain additional conditions, including the following: (i) the
shareholders of S&W shall have approved the Merger Agreement; (ii) all consents
and notifications to any regulatory authorities required for consummation of the
Merger shall have been obtained or made; (iii) no court or governmental
authority shall have enacted any law or order or taken any action which
prohibits the transactions contemplated by the Merger Agreement; (iv) the
Registration Statement shall have been declared effective under the Securities
Act of 1933 and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued; and (v) at Closing, PSS shall have repaid the
outstanding notes and bank and long-term debt of S&W as provided in the Merger
Agreement.
No assurances can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the appropriate
party. As of the date of this Proxy Statement-Prospectus, the parties know of no
reason to believe that any of the conditions set forth above will not be
satisfied.
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The conditions to consummation of the Merger may be waived, in whole or
in part, to the extent permissible under applicable law, by the party for whose
benefit the condition has been imposed, without the approval of the PSS or S&W
stockholders. See "Amendment, Waiver and Termination."
Amendment, Waiver and Termination
To the extent permitted by law, S&W and PSS, with the approval of their
respective Boards of Directors, may amend the Merger Agreement by written
agreement at any time without the approval of the stockholders of S&W, provided
that after the approval of the Merger by S&W's stockholders, no amendment may
alter the amount or type of consideration into which the S&W Common Stock will
be exchanged without the requisite approval of S&W stockholders, and provided
further that no amendment may alter the provisions requiring regulatory approval
of the Merger.
Prior to or at the Effective Time, either S&W or PSS, acting through its
respective Board of Directors or its Chairman of the Board or President, may
waive any default in the performance of any term of the Merger Agreement by the
other party, may waive or extend the time for the fulfillment by the other party
of any of its obligations under the Merger Agreement, and may waive any of the
conditions precedent to the obligations of such party under the Merger
Agreement, except any condition that, if not satisfied, would result in the
violation of an applicable law or governmental regulation.
The Merger Agreement may be terminated, and the Merger abandoned, at any
time prior to the Effective Time, notwithstanding approval of the Merger
Agreement by the stockholders of S&W: (i) by mutual consent of the Boards of
Directors of S&W and PSS, (ii) by either party in the event of certain breaches
by the other party of any representation or warranty; (iii) by either party in
the event that a consent or regulatory approval required by the Merger Agreement
has been denied by final nonappealable action; (iv) by either party if the
Merger is not consummated by October 31, 1997, if such failure is not caused by
any breach of the Merger Agreement by the party electing to terminate; (v) by
either party in the event that the Merger is not consummated by November 30,
1997; (vi) by either party, if any of the conditions precedent to the
obligations of such party to consummate the Merger cannot be satisfied or
fulfilled, if such failure is not caused by the party electing to terminate;
(vii) by either party if the Base Period Trading Price is less than $10.8832 or
greater than $16.3248 (in each case, calculated without regard to the Base
Period Trading Price Limitations); and (viii) by PSS if the sum of all proposed
adjustments to the Aggregate Purchase Price pursuant to the Merger Agreement
would result in a decrease of the Aggregate Purchase Price by more than
$200,000, but for the proviso that the adjustments may not exceed $200,000.
If the Merger Agreement is terminated as described above, PSS shall
pay the costs and expenses incurred by it in connection with the Merger
Agreement and up to $350,000 of the reasonable costs and expenses incurred by
S&W in connection with the Merger Agreement. S&W expenses in excess of $350,000
shall be paid by the S&W stockholders. Other than as set forth above, no party
(or any of its officers, directors, employees, agents, representatives, or
stockholders) shall be liable to the other party or parties for any costs,
expenses, damages (direct or indirect) or loss of anticipated profits; provided,
however, that the foregoing shall not apply if the Merger Agreement is
terminated because one party has breached a representation or warranty, or a
covenant or agreement contained in the Merger Agreement. See "Expenses."
Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, prior to the Closing Date, S&W and PSS
have agreed that S&W shall restrict certain of its activities, except with the
prior written consent of PSS and except as necessary to effect the transactions
contemplated in the Merger Agreement. To this end, and without limitation, S&W
shall: (i) conduct its business in substantially the same manner as it is
presently being conducted and, except with respect to certain agreed matters,
refrain from entering into any transaction or contract other than in the
ordinary course of business and not make any material change in its methods of
management, marketing or operations; (ii) consult with PSS prior to undertaking
any material new business opportunity outside the ordinary course of business
and, except with respect to certain agreed matters, not undertake such new
business opportunity without the prior consent of
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PSS, which consent will not be unreasonably withheld; (iii) confer on a regular
basis with one or more designated representatives of PSS to report material
operational matters and to report the general status of ongoing business
operations; (iv) notify PSS of certain activities or events; (v) other than as
disclosed by S&W to PSS, not enter into any new employment contract or, except
in the ordinary course of business, any commitment to employees; (vi) not
increase the compensation (including fringe benefits) payable or to become
payable to any officer, director, employee, agent or independent contractor of
either such company except general hourly rate increases and normal merit
increases for employees other than officers made in the ordinary course of
business and consistent with past practice; (vii) except in the ordinary course
of business not create or incur any indebtedness, enter into or terminate any
lease of real estate or release or create any liens of any nature; (viii) except
in the ordinary course of business and except with respect to certain agreed
matters and, even if in the ordinary course of business, then not in an amount
to exceed $50,000 in the aggregate, make or commit to make any capital
expenditure, or enter into any lease of capital equipment as lessee or lessor;
(ix) not sell any material asset or make any material commitment relating to its
assets other than in the ordinary course of business; (x) not amend the
Certificate of Incorporation, Bylaws or other governing instruments of S&W; (xi)
not make any changes in its accounting methods or practices, except for changes
in its tax accounting methods or practices that may be necessitated by changes
in generally accepted accounting principles or applicable tax laws; (xii) except
for the Merger Agreement and 4,009 shares of S&W Common Stock to be issued
simultaneously with the Closing of the Merger pursuant to the S&W Supplemental
Executive Retirement Plan, issue, sell, pledge, encumber, authorize the issuance
of, or otherwise permit to become outstanding, any additional shares of S&W
capital stock or any other capital stock of its subsidiaries, or any stock
appreciation rights, or any option, warrant, conversion, or other right to
acquire any such stock, or any security convertible into any such stock, or pay
or declare or agree to pay or declare any dividend with respect to any S&W
capital stock; (xiii) other than in the ordinary course of business, not take
any action, or omit to take any action, which would cause its representations
and warranties under the Merger Agreement to be untrue or incorrect; (xiv) not
make any loan to any person or increase the aggregate amount of any loan
currently outstanding to any person, except for usual and customary advances to
employees made in the ordinary course of business; and (xv) not make any
agreement or commitment which will result in or cause to occur a violation of
any of the foregoing items.
Additionally, pursuant to the Merger Agreement, S&W and PSS have agreed
prior to the Closing Date that PSS shall restrict certain of its activities
except with the prior written consent of S&W. To this end, PSS has agreed (i) to
operate its business substantially as presently operated and only in the
ordinary course, except that any business acquisition by PSS or the incurrence
of additional debt or the issuance or sale of equity securities shall be deemed
to be in the ordinary course and (ii) except as previously disclosed in writing
by PSS to S&W, it will not, and will not permit DI to, amend its Articles of
Incorporation or Bylaws, and it will cause each of its subsidiaries to maintain
its corporate existence and corporate powers.
Stockholders Agreements
Simultaneous with the execution of the Merger Agreement, Joseph E.
Miller, Jr. and Bruce P. Ashby, each a stockholder of S&W, entered into
Stockholders Agreements with PSS (each a "Stockholders Agreement"). Each
Stockholders Agreement provides that each party thereto (a "Stockholder") will
vote such Stockholder's S&W Shares in favor of the Merger, the execution and
delivery by S&W of the Merger Agreement and the approval of the terms thereof
and each of the other transactions contemplated by the Merger Agreement,
including approval of the Escrow Agreement and appointment of the Stockholder
Representatives, provided that the terms of the Merger Agreement shall not have
been amended to reduce the consideration payable in the Merger to a lesser
amount of PSS Common Stock. Each Stockholders Agreement also provides that the
Stockholder will vote such Stockholder's S&W Shares against any of the following
(each a "Competing Transaction"): any merger agreement or merger (other than the
Merger Agreement and the Merger), consolidation, combination, sale of
substantially all of the assets, reorganization, recapitalization, dissolution,
liquidation or winding up of or by S&W or any amendment of S&W's Charter or
Bylaws or other proposal or transaction involving S&W or any of its subsidiaries
which amendment or other proposal or transaction would in any manner impede,
frustrate, prevent or nullify the Merger, the Merger Agreement or any of the
other transactions contemplated by the Merger Agreement. Each Stockholder has
granted an irrevocable proxy to PSS and Patrick C. Kelly, Chief Executive
Officer and Chairman of the Board of PSS, and David A. Smith, Executive Vice
President and Chief Financial Officer of PSS, in their respective
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capacities as officers of PSS, and any individual who shall succeed to any such
office of PSS, to vote such Stockholder's shares of S&W Common Stock consistent
with the foregoing agreements. Each Stockholder has also agreed not to, and not
to permit any of its representatives to, directly or indirectly, solicit,
initiate or encourage the submission of, any takeover proposal or participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any takeover proposal.
Each Stockholders Agreement will terminate upon the earlier of the
Effective Time or the date upon which the Merger Agreement is terminated in
accordance with its terms. Notwithstanding the foregoing, if an "Extension
Event" occurs as of or prior to the termination of the Merger Agreement, then
for a period of one year following such termination, (i) each Stockholder's
agreement to vote against any Competing Transaction, the irrevocable proxy
granted by each Stockholder to vote against any Competing Transaction, and each
Stockholder's agreement not to facilitate any takeover proposal will continue in
effect and (ii) no Stockholder will be permitted to transfer any of such
Stockholder's S&W Shares in connection with any Competing Transaction or
takeover proposal. "Extension Event" is defined to mean any of the following
events: (A) the meeting of S&W stockholders to approve the Merger Agreement
shall not have been held or the approval of the Merger at such meeting shall not
have been obtained; or (B) any person (other than PSS or any subsidiary of PSS)
shall have made, or disclosed an intention to make, a takeover proposal or
proposal for a Competing Transaction
See "General Information--Votes Required."
Expenses and Fees
The Merger Agreement provides that PSS shall be responsible for its own
costs and expenses incurred in connection with the negotiation and consummation
of the transactions contemplated by the Merger Agreement. PSS further agrees to
bear and pay reasonable costs and expenses incurred by S&W on S&W's behalf in
connection with the transactions contemplated by the Merger Agreement in an
amount not to exceed $350,000 in the aggregate. S&W expenses in excess of
$350,000 shall be paid by the S&W stockholders through an adjustment to the
Aggregate Purchase Price. See "Amendment, Waiver, and Termination."
Accounting Treatment
Consummation of the Merger is conditioned on the Merger being accounted
for on a pooling-of-interests accounting basis and the receipt by PSS of a
letter from Arthur Andersen LLP with respect thereto. See "Conditions to
Consummation." Under this method of accounting, as of the Effective Time, the
assets and liabilities of S&W would be added to those of PSS at their recorded
book values and the stockholders' equity accounts of PSS and S&W would be
combined on PSS's consolidated balance sheet. On a pooling-of-interests
accounting basis, income and other financial statements of PSS issued after
consummation of the Merger would be restated retroactively, if necessary, to
reflect the combined consolidated financial position and results of operations
of PSS and S&W as if the Merger had taken place prior to the periods covered by
such consolidated financial statements and to reflect the accounting policies of
PSS.
The unaudited pro forma financial information contained in this Proxy
Statement-Prospectus has been prepared using the pooling-of-interests accounting
basis to account for the Merger. See "Summary" and "Pro Forma Condensed Combined
Financial Data."
Resales of PSS Common Stock
The shares of PSS Common Stock issued in connection with the Merger will
be freely transferable under the Securities Act, except for shares issued to any
stockholder who may be deemed to be an "affiliate" (generally including, without
limitation, directors, certain executive officers and beneficial owners of 10%
or more of any class of capital stock) of S&W for purposes of Rule 145 under the
Securities Act as of the date of the Special Meeting or for purposes of
applicable interpretations regarding pooling-of-interests accounting treatment.
Such affiliates may not sell their shares of PSS Common Stock acquired in
connection with the Merger except pursuant
-31-
<PAGE>
to an effective registration statement under the Securities Act or other
applicable exemption from the registration requirements of the Securities Act
and until such time as financial results covering at least 30 days of combined
operations of PSS and S&W after the Merger have been published. PSS may place
restrictive legends on certificates representing PSS Common Stock issued to all
persons who are deemed to be "affiliates" of S&W under Rule 145. In addition,
S&W has agreed to use its reasonable efforts to cause each person or entity that
is an "affiliate" to enter into a written agreement in substantially the form
attached to the Merger Agreement relating to such restrictions on sale or other
transfer. This Proxy Statement-Prospectus does not cover resales of PSS Common
Stock received by any person who may be deemed to be an affiliate of S&W.
Dissenters' Rights
The proposed Merger is a transaction which entitles stockholders of S&W
who comply with the provisions of Sections 623 and 910 of the NYBCL (the
"Dissenters Statute") to dissent from the Merger and to receive payment of the
fair value of their shares of S&W Common Stock ("S&W Shares") as of the
Effective Time, excluding any appreciation or depreciation in anticipation of
the Merger. The Notice of the Special Meeting of S&W states that S&W
stockholders are entitled to assert dissenters' rights under the Dissenters
Statute and that the Dissenters Statute is set forth in Annex C to this Proxy
Statement-Prospectus. The following summary does not purport to be a complete
statement of dissenters' rights under Sections 623 and 910 of NYBCL.
Following consummation of the Merger, a stockholder of record on the
Record Date who has followed the procedures set forth under Sections 623 and 910
will be entitled to a proceeding in the supreme court in the judicial district
in which the office of the corporation is located to determine the rights of
dissenting stockholders and to fix the fair value of such stockholder's
securities. Persons who are beneficial owners of S&W Shares but whose securities
are held of record by another person, such as a broker, bank or nominee, should
timely instruct the record holder to follow the procedures outlined below if
such persons desire to seek appraisal with respect to any or all of their
securities. Failure to take any necessary step may result in the termination or
waiver of appraisal rights under Sections 623 and 910.
Holders of S&W Shares who do not vote for approval of the Merger
Agreement and who follow certain other procedures summarized below will have the
right to dissent from and obtain payment in cash of the fair value of their
shares in the event of the consummation of the Merger. The following is a
summary of the procedures which must be followed by any S&W stockholder who
wishes to dissent and demand payment for such holder's shares in the event of
consummation of the Merger. Holders receiving cash upon exercise of dissenters'
rights will recognize a gain or loss for federal income tax purposes. See
"Certain Federal Income Tax Consequences."
To exercise the right of dissent, a stockholder (i) must deliver to S&W,
before the vote is taken at the Special Meeting, a written notice of such
stockholder's objection to the action, including notice of his election to
dissent, his name and residence address, the number and classes of shares as to
which he dissents (which must be all shares he owns) and a demand for payment of
the fair value of his shares if the Merger is effectuated, and (ii) must not
vote such stockholder's shares (in person or by proxy) in favor of the Merger
Agreement. Neither a vote against the Merger Agreement nor a specification in a
proxy to vote against the Merger Agreement will in and of itself constitute the
necessary notice of intent to dissent to the Merger Agreement. Moreover, by
voting in favor of the Merger Agreement, or by returning the enclosed proxy
without instructing the proxyholders to vote against the Merger Agreement, a
stockholder waives the right to dissent under the Dissenters Statute.
Following the filing of a notice of election to dissent, the surviving
corporation shall make a written offer to such stockholder to pay for his shares
at a specified price which the corporation considers to be their fair value.
Once the corporation action has been consummated, the offer shall be accompanied
or followed by an advance payment in an amount equal to eighty percent of the
amount of such offer. If the corporation fails to make such written offer within
a specified time period or if the corporation and the stockholder fail to agree
within thirty days thereafter of the price to be paid for the shares, the
corporation shall institute the special proceeding to fix the fair value in the
supreme court of the appropriate judicial district.
-32-
<PAGE>
Dissenting stockholders of S&W should direct any communications regarding
their rights to S&W X-Ray, Inc., Cornerstone Center, 2300 Buffalo Road,
Rochester, New York 14824, Attention: Corporate Secretary. All such
communications should be signed by or on behalf of the dissenting stockholder in
the form in which such stockholder's shares are registered on the books of S&W,
except that a beneficial stockholder may assert dissenter's rights as to shares
held on such stockholder's behalf only if such beneficial holder submits to S&W
the record stockholder's written consent to the dissent by the time such
beneficial holder asserts his rights.
The foregoing summary of Sections 623 and 910 of the NYBCL is necessarily
incomplete and is qualified in its entirety by reference to those Sections as
set forth herein as Annex C. Because exercise of dissenters' rights requires
strict adherence to the statutory provisions referred to above, each stockholder
who may desire to exercise such rights should adhere to the provisions of such
laws and consult with such stockholder's legal and financial advisors.
-33-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
are presented assuming the Merger has been consummated and accounted for as a
pooling of interests. The unaudited pro forma condensed combined balance sheet
as of March 28, 1997 has been prepared as if the Merger took place on that date.
The unaudited pro forma condensed combined statements of operations for the
three years ended March 28, 1997 have been prepared as if the Merger and other
transactions requiring pro forma adjustments had occurred on April 1, 1994. The
unaudited pro forma condensed combined financial statements are based on the
separate historical condensed financial statements of PSS and S&W giving effect
to the transactions under the assumptions and adjustments outlined in the
accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements. The unaudited pro forma condensed combined financial statements are
provided for comparative purposes only and are not necessarily indicative of the
actual results that would have been obtained had the Merger occurred on the
dates indicated or that may be achieved in the future.
For all applicable periods presented in the unaudited pro forma condensed
combined statements of operations, shares used in the computation of net income
per common and common equivalent share give effect to the maximum exchange ratio
for the S&W Common Stock, assuming distribution to S&W shareholders of all
shares of PSS Common Stock subject to the Escrow Agreement and no adjustment to
the Aggregate Purchase Price.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the separate audited consolidated financial statements,
including the notes thereto, of PSS and S&W, appearing elsewhere in this Proxy
Statement-Prospectus. See "Pss Consolidated Financial Statements" and "S&W
Financial Statements."
-34-
<PAGE>
Pro Forma Condensed Combined Balance Sheet
March 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- ---------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands)
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents................... $ 28,740 $ 335 $ 29,075
Marketable securities....................... 15,045 -- 15,045
Accounts receivable, net.................... 119,293 11,133 130,426
Inventories................................. 67,895 7,291 75,186
Prepaid expenses and other.................. 21,972 2,149 24,121
-------- ------- --------
Total current assets.................... 252,945 20,908 273,853
Property and equipment, net................... 18,812 1,391 20,203
Intangibles, net.............................. 21,617 467 22,084
Other assets.................................. 4,912 218 5,130
-------- ------- --------
Total Assets............................ $298,286 $22,984 $321,270
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................ $ 64,064 $ 4,948 $ 69,012
Accrued expenses............................ 18,263 1,750 $ 500(5) 20,513
Notes payable to bank, Notes payable to
related parties, and current maturities
of long-term debt......................... -- 6,297 6,297
Other....................................... 5,165 638 5,803
-------- ------- ----- --------
Total current liabilities................ 87,492 13,633 $ 500 101,625
Long term debt and capital lease obligations,
net of current maturities................... 560 4,396 4,956
Other liabilities............................. 4,634 -- 4,634
-------- ------- ----- --------
Total liabilities........................ 92,686 18,029 500 111,215
-------- ------- ----- --------
Shareholders' Equity:
Common stock................................ 370 10 12(4) 392
Additional paid-in capital.................. 207,509 173 (12)(4) 207,670
(Accumulated Deficit) Retained Earnings..... (2,372) 6,140 (500)(5) 3,268
Cumulative foreign currency
translation adjustment..................... 93 -- 93
-------- ------- ----- --------
205,600 6,323 (500) 211,423
Loan to employee stock ownership plan....... -- (1,368) -- (1,368)
-------- ------- ----- --------
Total shareholders' equity.............. 205,600 4,955 (500) 210,055
-------- ------- ----- --------
Total liabilities and shareholders'
equity............................... $298,286 $22,984 -- $321,270
======== ======= ===== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
-35-
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Year Ended March 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------- -------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales..................................... $691,020 $72,034 $763,054
Cost of goods sold............................ 502,904 55,260 558,164
------- ------ -------
Gross profit................................ 188,116 16,774 204,890
Selling, general and administrative
expenses.................................... 173,114 15,774 188,888
Merger costs and expenses................... 12,128 -- 12,128
------- ------ -------
Income from operations..................... 2,874 1,000 3,874
------- ------ -------
Other income (expense):
Interest expense............................ (324) (865) (1,189)
Interest and investment income.............. 2,406 14 2,420
Other income................................ 1,537 -- 1,537
------- ------ -------
3,619 (851) 2,768
------- ------ -------
Income before income taxes................ 6,493 149 6,642
Provision for income taxes.................... (2,120) (96) $ 37(3) (2,179)
------- ------ --- -------
Net income.................................... $ 4,373 $ 53 $ 37 $ 4,463
======= ====== === =======
Net income per common and
common equivalent share..................... $ 0.12 $ 0.23 $ 0.12
======= ====== =======
Pro forma tax adjustment on pooled S-
corporation income.......................... 357 357
------- --------
Pro forma net income.......................... $ 4,016 $ 4,106
======= ========
Pro forma tax adjustment per
common and common equivalent share on
pooled S-corporation income................. $ (0.01) $ (0.01)
------- --------
Pro forma net income per
common and common equivalent
share....................................... $ 0.11 $ 0.11
======= ========
Weighted average shares....................... 36,501 235 1,656(4) 38,392
======= ====== ===== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
-36-
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Year Ended March 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------- -------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales..................................... $529,024 $60,096 $589,120
Cost of goods sold............................ 379,360 47,170 426,530
------- ------ -------
Gross profit................................ 149,664 12,926 162,590
Selling, general and administrative
expenses.................................... 130,966 11,044 142,010
Merger costs and expenses................... 15,732 -- 15,732
------- ------ -------
Income from operations..................... 2,966 1,882 4,848
------- ------ -------
Other income (expense):
Interest expense............................ (3,068) (500) (3,568)
Interest and investment income.............. 1,180 8 1,188
Other income................................ 1,585 1 1,586
------- ------ -------
(303) (491) (794)
------- ------ -------
Income before income taxes................ 2,663 1,391 4,054
Provision for income taxes.................... (1,324) (601) $ (43)(3) (1,968)
------- ------ ----- -------
Net income.................................... $ 1,339 $ 790 $ (43) $ 2,086
====== ===== ===== =======
Net income per common and
common equivalent share..................... $ 0.04 $ 3.65 $ 0.06
====== ===== =======
Pro forma tax adjustment on
pooled S-corporation income................. 438 438
------ -------
Pro forma net income.......................... $ 901 $ 1,648
====== =======
Pro forma tax adjustment per common
and common equivalent share on
pooled S-corporation income................. $ (0.01) $ (0.01)
------ -------
Pro forma net income per
common and common equivalent
share....................................... $ 0.03 $ 0.05
====== =======
Weighted average shares....................... 31,454 216 1,528(4) 33,198
====== ===== ====== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
-37-
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Year Ended March 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------- -------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales.................................... $413,301 $58,684 $471,985
Cost of goods sold........................... 293,688 45,982 339,670
------- ------ -------
Gross profit............................... 119,613 12,702 132,315
Selling, general and administrative
expenses................................... 111,493 10,748 122,241
Restructuring charge....................... 4,388 -- 4,388
------- ------ -------
Income from operations................... 3,732 1,954 5,686
------- ------ -------
Other income (expense):
Interest expense........................... (4,064) (441) (4,505)
Interest and investment income............. -- 5 5
Other income............................... 1,906 6 1,912
------- ------ -------
(2,158) (430) (2,588)
------- ------ -------
Income before income taxes............... 1,574 1,524 3,098
Provision for income taxes................... (2,421) (617) $ 7(3) (3,031)
------- ------ ----- -------
Net income (loss)............................ $ (847) $ 907 $ 7 $ 67
======= ====== ===== =======
Net income (loss) per common and
common equivalent share.................... $ (0.04) $ (4.43) $ --
======= ====== =======
Pro forma tax adjustment on pooled S-
corporation income......................... 23 23
------- -------
Pro forma net income (loss).................. $ (870) $ 44
======= =======
Pro forma tax adjustment per common
and common equivalent share on
pooled S-corporation income................ -- --
======= =======
Pro forma net income (loss) per
common and common equivalent share......... $ (0.04) $ --
======= -------
Weighted average shares...................... 23,762 205 1,445(4) 25,412
======= ====== ===== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
-38-
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
(In Thousands)
The unaudited pro forma condensed combined financial statements have
been prepared by combining the historical balances of PSS and the historical
balances of S&W as recast to a conforming March year end. The following notes
describe the pro forma adjustments and other items relevant to such statements.
(1) Purchase Business Combinations
PSS completed certain immaterial acquisitions during fiscal years 1997,
1996, and 1995. The aggregate terms of these acquisitions have been disclosed in
the PSS consolidated financial statements included elsewhere in this Proxy
Statement-Prospectus. Pro forma information for the acquisitions is not
presented in the pro forma financial statements because the impact on PSS'
results of operations would not be material.
S&W completed one immaterial acquisition in fiscal year 1996 which was
accounted for as a purchase.
(2) Merger Costs and Expenses and Anticipated Cost Savings
Expenses are expected to be incurred in connection with the
consolidation and restructuring of PSS and S&W. Such activities will include
restructuring regional and corporate functions, consolidating information
systems and reducing personnel. The expenses associated with these activities
cannot be currently estimated with a reasonable degree of accuracy, but
preliminary estimates indicate that these expenses may range between $8,000 and
$10,000. Income tax benefits at the statutory rate resulting from these charges
range between $2,700 and $3,400. The estimated costs associated with the
restructuring activities will be expensed in the period in which the companies
complete the restructuring plan.
Efficiencies and net cost savings are expected to result from the
consolidation and restructuring. The unaudited pro forma condensed combined
financial statements do not reflect such savings.
(3) Income Taxes
The tax effects of the combined statements of operations have been
reflected as pro forma adjustments assuming the statutory tax rate of PSS for
each applicable year.
(4) Shareholders' Equity and Earnings Per Share
The weighted average common share amounts represent the aggregate
weighted average shares of PSS after the pooling, adjusted to reflect the
maximum exchange ratio of 8.0565 for the S&W Common Stock, which includes all
shares to be held in escrow.
(5) Transaction Fees
Under the pooling of interests accounting method, direct transaction
costs are expensed in the period in which the transaction is consummated. Such
costs are not currently estimable with a reasonable degree of accuracy, but
preliminary estimates indicate that these expenses may range between $400 to
$500 and include investment banking, legal, accounting, printing, solicitation,
filing fees and similar expenses. The March 28, 1997 unaudited pro forma
condensed combined balance sheet reflects $500 of such expenses. These expenses
have not been reflected in the unaudited pro forma condensed combined income
statements.
-39-
<PAGE>
SELECTED FINANCIAL DATA OF PSS
The following selected financial data of PSS for fiscal years 1994
through 1997 has been derived from PSS' audited consolidated financial
statements incorporated herein by reference which give retroactive effect to the
mergers with Taylor Medical, Inc. ("Taylor") and X-ray of Georgia ("X-ray GA").
The selected financial data of PSS for fiscal year 1993 has been derived from
the Company's unaudited consolidated financial statements incorporated herein by
reference which give retroactive effect to the merger with Taylor and X-ray GA.
See "Business of PSS - General," "PSS Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "PSS Consolidated Financial
Statements."
<TABLE>
<CAPTION>
Fiscal Year Ended
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Income Statement Data:
Net sales................................................... $691,020 $529,024 $413,301 $351,203 $268,473
Gross profit................................................ 188,116 149,664 119,613 105,968 83,294
Selling, general and administrative expenses................ 173,113 130,966 111,492 99,147 78,961
Restructuring charges(1).................................... -- -- 4,389 308 303
Merger costs and expenses(2)................................ 12,128 15,732 -- -- --
Net income (loss) before extraordinary item................. 4,373 1,339 (847) 1,487 692
Extraordinary loss, net of tax(3)........................... -- -- -- 327 --
Net income (loss)........................................... $ 4,373 $ 1,339 $ (847) $ 1,160 $ 692
Net income (loss) before extraordinary item per share....... $ 0.12 $ 0.04 $ (0.04) $ 0.08 $ 0.04
Extraordinary loss per share, net of tax.................... -- -- -- $ (0.02) --
Net income (loss) per share................................. $ 0.12 $ 0.04 $ (0.04) $ 0.06 $ 0.04
Unaudited pro forma net income including pro forma tax
adjustment on pooled S-corporation income and excluding
merger costs and expenses, restructuring charges, and 1997
other operating charges(1)(2)(5).......................... $ 15,078 $ 12,307 $ 2,018 $ 1,276 $ 878
Unaudited pro form net income per share including pro
forma tax adjustment on pooled S-corporation income and
excluding merger costs and expenses, restructuring charges,
and 1997 other operating charges(1)(2)(5)................. $ 0.41 $ 0.39 $ 0.08 $ 0.07 $ 0.05
Weighted average shares outstanding(4)...................... 36,501 31,454 23,762 17,772 16,731
Balance Sheet Data:
Working capital........................................... $165,454 $172,696 $ 53,626 $ 46,148 $ 37,777
Total assets.............................................. 298,286 278,958 134,426 125,545 93,962
Long-term liabilities..................................... 5,194 4,132 33,869 55,026 42,901
Total shareholders' equity................................ 205,600 199,550 46,326 23,588 18,897
Service centers (6)....................................... 77 65 55 46 41
- ---------------------
</TABLE>
(1) The fiscal 1995 restructuring charge of $4,389 reflects Taylor management's
assessment of the under-realization of future benefits related to certain
intangible assets. The fiscal 1994 restructuring charge of $308 resulted
from Taylor's consolidation of an acquisition. The fiscal 1993
restructuring charge of $303 resulted from Taylor management's writedown of
capitalized software costs.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as poolings-of-interests.
(3) The extraordinary item in fiscal 1994 resulted from early extinguishment of
debt by Taylor.
(4) Adjusted to give effect to a three-for-one stock split in fiscal year 1996.
(5) Fiscal 1997 other operating charges represent write-offs of inventory of
$4,090 and accounts receivable of $500 at branches involved in mergers.
(6) Fiscal years 1993 through 1995 exclude Taylor service centers and the
imaging division.
-40-
<PAGE>
PSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of PSS' consolidated financial
condition and results of operations should be read in conjunction with the more
detailed information and the PSS Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Proxy Statement-Prospectus.
Company Overview
PSS is a leading distributor of medical supplies, equipment and
pharmaceuticals to primary care and other office-based physicians. PSS currently
operates 61 physician office medical supply distribution ("Physician Supply
Division") service centers distributing to approximately 103,000 physician
office sites in all 50 states. The Company's primary market is the approximately
399,000 physicians who practice medicine in approximately 198,000 office sites
throughout the United States.
In addition, the Company distributes medical diagnostic imaging
supplies, chemicals, equipment and service to the acute care and alternate care
market in ten states. The Company currently operates 20 imaging service centers
through its wholly-owned subsidiary, DI. The Company is in the process of
developing a separate information system for DI which will include the current
ICON/SM/ and CustomerLink systems. A primary company objective is to pursue
acquisition opportunities within the radiology and imaging distribution market
in order to gain market share and expand the product offerings to the physician
office market currently serviced by PSS and the acute care market currently
serviced by DI.
The Company also distributes medical supplies and equipment in Belgium,
France, Germany, and the Netherlands through its WorldMed International, Inc.
subsidiary. The Company currently has three European Operations service centers
distributing to the acute and alternate care markets.
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 the fiscal years 1992 through 1997, the
Company and its subsidiaries' net sales, excluding the pre-acquisition revenues
of Taylor and X-ray GA, grew at a compound annual rate of approximately 49%, and
including pre-acquisition revenues of Taylor and X-ray GA, the Company's net
sales grew at a compound annual rate of approximately 27%. The number of company
service centers has grown from 2 at the end of fiscal 1984 to 80 currently,
including Physician Supply Division service centers, 16 Imaging Division
services centers and 3 European Operation service centers. In order of priority,
the Company's growth has been accomplished through (i) acquiring regional and
local Physician Supply Division medical supply and equipment distributors, (ii)
acquiring local and regional diagnostic imaging equipment and supply
distributors, (iii) increasing sales from existing service centers, and (iv)
opening start-up Physician Supply Division service centers.
-41-
<PAGE>
The following table depicts the number of Physician Supply Division
service centers opened and acquired by the Company for the period indicated. The
table excludes the three European service centers acquired during fiscal year
1997, two of which were merged and one European service center acquired
subsequent to fiscal year 1997. The table also excludes the 16 Imaging Division
service centers. See "Properties" for a list of the Physician Supply Division,
Imaging Division and European Operations service centers.
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Centers at beginning of year 29 40 45 54 64
Newly opened centers(2) 8 1 5 4 0
Acquired centers(3) 3 4 4 16 6
Centers merged(3) 0 0 0 (10) (9)
== == == == ==
Centers at end of year 40 45 54 64 61
- ------
</TABLE>
(1) Excludes Taylor service centers prior to their acquisition.
(2) Does not include two service centers that were opened but subsequently
combined with existing service centers in fiscal 1993.
(3) Includes centers of acquired companies with multiple center locations which
were merged into existing company service centers and into which existing
customer service centers were merged in fiscal 1996 and 1997.
Of the Company's 61 Physician Supply Division service centers, 31 were
opened as start-ups and 30 resulted from acquisitions. A significant portion of
the Company's growth occurred with the merger of Taylor in fiscal 1996. In
connection with the integration of Taylor into PSS, the Company closed or merged
into existing PSS service centers the majority of the Taylor locations.
Additionally, the Company merged eight PSS service centers into the eight
remaining Taylor locations and established two additional service centers.
In addition to the opening of new service centers and the acquisition
of local medical supply and equipment distributors, PSS sales growth is largely
attributable to high levels of same center sales growth. PSS quantifies same
center sales by aggregating the sales for service centers which have been in
operation for at least two consecutive 12-month periods.
The following table sets forth the same center sales growth of the
Physician Supply Division for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------
1993(1) 1994(1) 1995(1) 1996 1997
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Number of centers per period 25 29 40 45 53
Same center sale growth 18.5% 27.7% 23.3% 26.8% 18.2%
</TABLE>
(1) Excludes Taylor centers.
This same center sales growth has been accomplished by (i) focusing on
diagnostic equipment which produces residual sales of reagents, (ii)
productivity gains of its maturing sales force, (iii) pursuing customer reach
and penetration, and (iv) accessing new products not previously distributed.
-42-
<PAGE>
Sales Mix
The following table sets forth information regarding the Company's
Physician Supply Division net sales mix and gross profit percentages by
significant product category for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended March,
------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales:
Physician Supply Division
Supplies $151,588 $297,058 $404,859
Equipment 51,127 76,144 125,994
Pharmaceuticals 29,836 43,708 66,427
Other 3,637 3,845 4,030
Taylor 130,097 62,539 --
-------- -------- --------
Physician Supply Division total $366,285 $483,294 $601,310
Imaging division 47,016 45,730 74,003
European Operations -- -- 15,707
Company total $413,301 $529,024 $691,020
======== ======== ========
Percentage of net sales (Physician
Supply Division): (1)
Supplies 64.2% 70.6% 67.3%
Equipment 21.7 18.1 21.0
Pharmaceuticals 12.6 10.4 11.0
Other 1.5 0.9 0.7
-------- -------- --------
Total 100.0% 100.0% 100.0%
======== ======== ========
Gross profit percentage: (2)
Physician Supply Division
Supplies 33.3% 30.8% 29.8%
Equipment 26.8 25.3 24.8
Pharmaceuticals 26.6 27.0 27.4
Other 28.2 32.3 37.9
Taylor 30.5 29.4 --
Physician Supply Division weighted
average 30.8 29.4 28.6
Imaging division 14.2 16.9 19.1
European Operations -- -- 40.7
Company weighted average 28.9% 28.3% 27.8%
- ------
</TABLE>
(1) Excludes Taylor net sales by category for period April 1, 1994 through
September 30, 1995. The Company began tracking combined net sales by
category beginning October 1, 1995.
(2) Excludes fiscal 1997 operating write-offs of inventory of branches involved
in mergers of approximately $4.1 million.
Exclusive Distribution Agreements
The Company has focused on a comprehensive and consultative sales
approach with an emphasis on diagnostic products, which includes sophisticated
diagnostic equipment and supplies related to the use of such equipment. As a
result, the Company has been able to expand and increase its diagnostic products
sales in periods of uncertainty in the health care market. Additionally, as
manufacturers search for means to reduce sales and marketing expenses, PSS has
used its expertise and market reach to distribute products to physicians as
evidenced by the increase in total sales dollars of diagnostic equipment and
pharmaceuticals.
-43-
<PAGE>
The Company recently completed the second year of a Distributorship
Agreement (the "Abbott Agreement") with Abbott Laboratories providing for the
exclusive distribution of certain Abbott diagnostic products. Gross profits for
Abbott product sales converted to PSS are generally substantially less than
standard PSS margins. The average gross profit on sales of Abbott products by
the Company's Physician Supply Division was 22.2% and 18.0% for fiscal 1997 and
1996, respectively. Gross profits on these products have gradually improved over
the term of the relationship. PSS and Abbott are currently negotiating fiscal
1998 performance goals and related acquisition cost of product. The Abbott
Agreement has positioned PSS as the sole distributor for the CELL DYN(R) 1400,
1600 and 1700 hematology products, Abbott Vision(R) products, IMx(R) products,
Axym Products(R) and the Abbott Testpack(R) line of rapid tests sold to
physician offices with 24 or less physicians per geographic location.
The Company recently entered into four separate exclusive distribution
agreements for certain products manufactured by Siemens Medical Systems, Inc.,
Hologic, Inc., Bard Diagnostic Sciences, Inc. and Tanita Corporation of America,
Inc. These strategic alliances should continue to broaden the Company's product
offerings to both the Physician Supply Division and Imaging Division customers.
Other Marketing Programs
PSS plans to continue to focus on providing products and services to
the primary care physician market whether the physician is a single practitioner
or a member of a large group practice. In that effort, PSS developed Network
Plus(SM), a comprehensive savings plan for physicians in which PSS offers
special group purchasing contract pricing and provides periodic cost analyses to
help manage the supply needs of each physician. Under this program, when a
physician office guarantees at least 80% of its purchase volume to PSS, the
Company will guarantee the lowest purchase prices on certain products as well as
certain service guarantees. In addition to this program, the Company has
recently signed distribution agreements with several national and regional
integrated and managed care groups.
PSS has implemented a new Penny Saver product line. The Penny Saver
products represent the most frequently used products by PSS customers. This
product line will provide customers a choice between name brand products and the
Penny Saver quality, low price alternatives. Currently, the Company has over 250
products under the Penny Saver label.
Imaging Division
The Company's Imaging Division distributes over 3,500 medical
diagnostic imaging supplies, chemicals and equipment to the acute care and
alternate care market. This division began operations in November 1996 with the
acquisition of 8 service centers, 24 sales representatives and 75 field service
specialists. Currently, the Imaging Division provides service to approximately
8,000 acute and alternate site customers through 20 service centers, 75 sales
representatives and 252 field service specialists. The field service specialists
service products ranging from processors to radiographic equipment.
International Division
The Company also distributes medical supplies and equipment in Belgium,
France, Germany, and the Netherlands through its WorldMed International, Inc.
subsidiary. This division began operations in April 1996 with the acquisition of
its service center in Leuven, Belgium. The Company currently has three
International Division service centers distributing to the acute and alternate
care markets.
-44-
<PAGE>
Results of Operations
The table below sets forth for each of the fiscal years 1995 through
1997 certain financial information as a percentage of net sales. The following
financial information includes the pre-acquisition financial information of
Taylor and X-ray GA.
<TABLE>
<CAPTION>
Fiscal Year Ended March,
----------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income Statement Data:
Net Sales 100% 100% 100%
Gross Profit 28.9 28.3 27.2
Selling and G&A expenses 27.0 24.8 25.1
Restructuring charges(1) 1.1 -- --
Merger costs and expenses(2) -- 3.0 1.8
Net income (loss) (0.2) 0.3 0.6
Unaudited pro forma net income, 0.5 2.3 2.2
including pro forma tax adjustment
on pooled S-corporation income and
excluding merger costs and expenses,
restructuring charges, and 1997
other operating charges(3)
- -----
</TABLE>
(1) The fiscal 1995 restructuring charge reflects Taylor management's assessment
of the under-realization of future benefits related to certain intangible
assets.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as poolings-of-interests.
(3) Fiscal 1997 other operating charges represent write-offs of inventory of
$4,090,000 and accounts receivable of $500,000 at branches involved in
mergers.
Fiscal Year Ended March 28, 1997 Versus Fiscal Year Ended March 29, 1996
Net Sales. Net sales increased $162.0 million to $691.0 million, or
30.6% for the fiscal year ended 1997 compared to fiscal year 1996 sales of
$529.0 million. The increase in net sales was attributable to (i) internal sales
growth of centers operating at least two years, (ii) the Company's focus on
diagnostic equipment sales, (iii) incremental sales generated in connection with
the Abbott Agreement, (iv) net sales of Physician Supply Division centers and
European Operations acquired during fiscal 1997, and (v) sales from the
acquisitions of the imaging companies during fiscal 1997. The net sales increase
was slowed by the Company's efforts in the last six months of fiscal 1997 to
reduce low gross margin sales.
Physician Supply Division same store sales growth approximated 18% for
fiscal year 1997. Fiscal 1997 sales resulting from the acquisitions of the
Imaging Division totaled $74.0 million, an increase of $28.3 million over the
fiscal 1996 X-ray GA revenues. Net sales of the Imaging Division totaled $33.2
million for the three months ended March 28, 1997. Fiscal 1997 sales resulting
from the acquisition of two Physician Supply Division medical supply companies
and three European medical supply companies totaled approximately $25.5 million
and $15.7 million, respectively.
Gross Profit. Gross profit increased $38.5 million, or 25.7%, for the
fiscal year ended 1997 compared to the fiscal year ended 1996. The increase in
gross profit dollars is attributable to the sales growth described above. Gross
profit as a percentage of net sales was 27.2% and 28.3% for the fiscal years
ended 1997 and 1996, respectively. The decrease in gross profit percentage was
attributable to (i) the write-off of inventory related to centers involved in
mergers, (ii) lower gross profit as a percent of sales of the Imaging Division
and (iii) the continued penetration by the Company's Physician Supply Division
into
-45-
<PAGE>
larger physician group practices that require more competitive pricing but
entail lower selling and servicing costs.
Also impacting gross profits are vendor performance incentives earned
by PSS through the achievement of certain predetermined company purchase and
sales levels. These performance incentives totaled $3.1 million and $6.4 million
for the fiscal years ended 1997 and 1996, respectively. Although the Company
plans and expects to continue to negotiate vendor performance incentives, there
is no assurance that vendor performance incentives will continue to positively
impact gross profit at the historical levels.
General and Administrative Expenses. General and administrative
expenses increased $27.8 million, or 33.7%, for the fiscal year ended 1997
compared to the fiscal year ended 1996. General and administrative expenses as a
percentage of net sales, increased to 16.0% for the fiscal year ended 1997 from
15.6% for the fiscal year ended 1996. The increase in general and administrative
expenses as a percentage of net sales was a result of operating costs associated
with transitioning merged and acquired operations offset by the continued
leveraging of fixed cost of mature service center operations.
Selling Expenses. Selling expenses increased $14.4 million, or 29.6%,
for the fiscal year ended 1997 compared to the fiscal year ended 1996 as a
result of an increase in net sales. Selling expense as a percentage of net sales
was 9.1% and 9.2% for fiscal years 1997 and 1996, respectively. The decrease in
selling expense as a percentage of net sales is due to leveraging of existing
service centers' fixed selling expenses, such as salaries paid to sales
representatives during the conversion period from a guaranteed salary to a
commission compensation arrangement and the leveraging of sales management
salaries. The decrease in selling expenses as a percentage of net sales is also
due to the variable commission plan of the Company, which pays commissions based
on gross profit as a percentage of net sales.
Merger Costs and Expenses. During fiscal 1997, the Company recorded
merger costs and expenses of $12.1 million incurred in connection with mergers
accounted for as poolings. Such costs include direct merger costs consisting
primarily 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, and reducing personnel.
Operating Income. Operating income decreased $0.1 million, or 3.1%,
for the fiscal year ended 1997 compared to the fiscal year ended 1996. As a
percentage of net sales, operating income for the fiscal year 1997 decreased to
0.4% from 0.6% for the fiscal year ended 1996 primarily due to operating costs
and asset write-offs associated with transitioning merged and acquired
operations. On a pro forma basis, excluding the effect of merger costs and
expenses and 1997 other operating charges for write-offs of inventory of $4.1
million and receivables of $0.5 million at branches involved in mergers,
operating income for the fiscal year ended 1997 increased to $19.6 million from
$18.7 million for the fiscal year ended 1996.
Interest Expense. Interest expense for the fiscal year ended 1997
decreased approximately $2.7 million, or 89.4%, compared to the fiscal year
ended 1996. Interest expense decreased due to the use of the net proceeds from
an equity offering during the three months ended December 31, 1995 to repay all
outstanding debt other than capital lease obligations. Interest expense for
fiscal 1997 represents interest expense from the accounting restatement for the
operations of X-ray GA.
Interest and Investment Income. Interest and investment income for the
fiscal year ended 1997 increased approximately $1.2 million, or 104.0%, compared
to the fiscal year ended 1996. The Company earned interest income of $1.9
million in 1997 from the short-term investment of the remaining net proceeds
from the equity offering in fiscal 1996 and recorded an unrealized gain of $0.5
million on equity securities.
Other Income. Other income decreased approximately $0.05 million, or
3.0%, for the fiscal year ended 1997 compared to the fiscal year ended 1996.
-46-
<PAGE>
Provision for Income Taxes. Provision for income taxes increased $0.8
million, or 60.1%, for the fiscal year ended 1997 compared to the fiscal year
ended 1996 due to higher pretax income of $6.5 million in fiscal 1997 compared
to $2.7 million in fiscal 1996 as a result of the factors discussed above,
higher nontaxable investment income of $0.7 million in fiscal 1997 compared to
$0.2 million in fiscal 1996 and lower nondeductible merger costs and expenses of
$0.7 million in 1997 compared to $2.2 million in 1996. The effective income tax
rate was 32.7% in 1997 primarily due to an income tax benefit resulting from a
reduction in the deferred tax asset valuation allowance of $0.9 million.
Net Income. Net income increased $3.0 million, or 226.6%, for the
fiscal year ended 1997 compared to the fiscal year ended 1996 for the reasons
discussed above. As a percentage of net sales, net income increased for the
fiscal year ended 1997 to 0.6% from net income of 0.3% for the fiscal year ended
1996. On a pro forma basis, including a pro forma tax adjustment on pooled S-
corporation income and excluding the effect of merger costs and expenses and
1997 other operating charges for write-offs of inventory of $4.1 million and
receivables of $0.5 million at branches involved in mergers, pro forma net
income would have increased 22.8% to $15.1 million for the fiscal year ended
1997 compared to $12.3 million for the fiscal year ended 1996.
Fiscal Year Ended March 29, 1996 Versus Fiscal Year Ended March 30, 1995
Net Sales. Net sales increased $115.7 million to $529.0 million, or
28.0%, for the fiscal year ended 1996 compared to fiscal year 1995 sales of
$413.3 million. The increase in net sales was attributable to (i) internal sales
growth of centers operating at least two years, (ii) incremental sales generated
in connection with the Abbott Agreement, (iii) net sales of centers acquired
during fiscal 1996, and (iv) net sales of fiscal year 1996 company start-up
service centers.
Physician Supply Division same store sales growth approximated 27% for
fiscal year 1996. The first year performance goals as set forth in the Abbott
Agreement were met with PSS realizing approximately $55.0 million in incremental
net sales of Abbott products during fiscal year 1996. Excluding Taylor and X-ray
GA, Company acquisitions and start-ups added to the growth in fiscal year 1996,
with approximately $14.5 million of net sales resulting from the acquisition of
nine local and regional medical suppliers and $9.2 million of net sales
generated by four company start-ups, one of which was merged into an acquired
Taylor location during fiscal year 1996.
Gross Profit. Gross profit increased $30.1 million, or 25.1%, for the
fiscal year ended 1996 compared to the fiscal year ended 1995. The increase in
gross profit dollars is attributable to the sales growth described above. Gross
profit as a percentage of net sales was 28.3% and 28.9% for the fiscal years
ended 1996 and 1995, respectively. The decrease in gross profit percentage as a
percentage of net sales is attributable to the penetration by the Company's
Physician Supply Division into larger physician group practices that require
more competitive pricing but entail lower selling and servicing costs. The
decrease in gross profit percentage is also attributable to lower margins on
diagnostic products distributed under the Abbott Agreement. Margins under the
Abbott Agreement are scheduled to increase annually based on achievement by the
Company of certain performance goals as stipulated therein.
For the fiscal year ended 1996, the Company sold approximately $75
million of Abbott products with a gross profit percentage of 18.0%. Also the
Company's gross profits include first year reimbursements by Abbott for gross
profit on direct sales by Abbott to PSS customers as set forth in the Abbott
Agreement. These reimbursements totaled $1.7 million during fiscal year 1996,
effectively raising gross profit by 0.4%. The Abbott sales, net of
reimbursements, negatively impacted the Company's gross profit percentage by
1.7%.
Also positively impacting gross profits are vendor performance
incentives, in addition to the Abbott direct sales reimbursements, earned by PSS
through the achievement of certain predetermined company purchase and sales
levels. These performance incentives totaled $6.4 million and $4.2 million
-47-
<PAGE>
for the fiscal years ended 1996 and 1995, respectively. These vendor incentives
effectively raised the gross profit percentage by 1.3% and 1.1% during fiscal
years 1996 and 1995, respectively. Although the Company plans and expects to
continue to negotiate vendor performance incentives, there is no assurance that
vendor performance incentives will continue to positively impact gross profit at
the historical levels.
General and Administrative Expenses. General and administrative
expenses increased $12.4 million, or 17.6%, for the fiscal year ended 1996
compared to the fiscal year ended 1995. General and administrative expenses as a
percentage of net sales, however, decreased to 15.6% for the fiscal year ended
1996 from 17.0% for the fiscal year ended 1995. The decrease in general and
administrative expenses as a percentage of net sales was a result of (i)
improved leveraging by PSS of its existing Physician Supply Division service
centers' fixed general and administrative expenses through increased sales
volume; (ii) reduced overhead from the sale of assets by Taylor in fiscal 1995
and decreased depreciation expense associated with the assets sold; and (iii)
reduced amortization relating to intangible assets written off by Taylor during
fiscal 1995. The decrease in general and administrative expenses as a percentage
of net sales was accomplished despite the additional overhead costs associated
with the implementation of the Abbott product line and the acquisition and
start-up of new Physician Supply Division service centers.
Selling expenses. Selling expenses increased $7.1 million, or 17.2%,
for the fiscal year ended 1996 compared to the fiscal year ended 1995. Selling
expense as a percentage of net sales was 9.2% and 10.0% for fiscal years 1996
and 1995, respectively. The decrease in selling expense as a percentage of net
sales is due to improved leveraging of existing Physician Supply Division
service centers' fixed selling expenses, such as salaries paid to sales
representatives during the conversion period from a guaranteed salary to a
commission compensation arrangement and the leveraging of sales management
salaries. The decrease in selling expenses as a percentage of net sales is also
due to the variable commission plan of the Company which pays a lower commission
on Abbott products due to the lower gross profit as a percentage of net sales on
those products.
Merger Costs and Expenses. During fiscal 1996, the Company recorded
merger costs and expenses of $15.7 million associated with the merger of PSS and
Taylor and the other immaterial poolings. Such costs include direct merger costs
consisting primarily 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, and reducing personnel.
Operating Income. Operating income decreased $0.8 million, or 20.5%,
for the fiscal year ended 1996 compared to 1995. As a percentage of net sales,
operating income for the fiscal year 1996 decreased to 0.6% from 0.9% for the
fiscal year ended 1995. The decrease in operating income is the result of the
merger costs and expenses of $15.7 million related to the Taylor merger during
fiscal 1996. On a pro forma basis, excluding the effect of merger costs and
expenses incurred in fiscal year 1996 and the restructuring charge incurred in
fiscal year 1995, operating income for the fiscal year ended 1996 increased
130.9% to $18.7 million from $8.1 million for the fiscal year ended 1995 due to
the factors discussed above.
Interest Expense. Interest expense for the fiscal year ended 1996
decreased approximately $1.0 million, or 24.5%, compared to the fiscal year
ended 1995. Interest expense decreased as a result of the decrease in average
indebtedness and the refinancing at a more favorable rate of Taylor debt assumed
by PSS. The decrease in average indebtedness for fiscal year 1996 compared to
fiscal year 1995 is due to the use of the net proceeds from the secondary
offering of common stock of approximately $58.2 million of the total net
proceeds of $142.9 million to repay all outstanding debt, other than capital
lease obligations, on November 20, 1995.
Interest Income. The Company earned interest income of $1.2 million
from the short-term investment of the remaining net proceeds from the secondary
offering in fiscal 1996.
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<PAGE>
Other Income. Other income decreased approximately $0.3 million, or
16.9%, for the fiscal year ended 1996 compared to the fiscal year ended 1995.
Other income decreased due to a net gain on sale of assets by Taylor recorded
during fiscal 1995 of approximately $0.9 million. Excluding the gain, other
income would have increased approximately $0.6 million primarily due to the
increase in finance charge income on customer accounts.
Provision for Income Taxes. Provision for income taxes decreased $1.1
million, or 45.3%, for the fiscal year ended 1996 compared to the fiscal year
ended 1995 due to a tax adjustment for the utilization of Taylor net operating
losses and a change in the valuation allowance. Net tax adjustments resulted in
a decrease in net income of $0.4 million.
Net Income. Net income increased $2.2 million, or 258.1%, for the
fiscal year ended 1996 compared to the fiscal year ended 1995 for the reasons
discussed above. As a percentage of net sales, net income increased for the
fiscal year ended 1996 to 0.3% from the net loss of 0.2% for the fiscal year
ended 1995. Excluding the effect of merger costs and expenses in fiscal year
1996 and the restructuring charge in fiscal year 1995, pro forma net income
would have increased 515.0% to $12.3 million for the fiscal year ended 1996
compared to $2.0 million for the fiscal year ended 1995. The increase in pro
forma net income is primarily attributable to the increasing profitability of
maturing Physician Supply Division centers and the leveraging of fixed costs
through sales growth.
Quarterly Results of Operations (Unaudited)
The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal years 1997 and 1996, including pre-
acquisition financial information of Taylor and X-ray GA. The Company believes
all necessary adjustments have been included in the amounts stated below to
present fairly the following selected information when read in conjunction with
the Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Offering Memorandum. Future quarterly operating results may
fluctuate depending on a number of factors, including the timing of acquisitions
of service centers, the timing of the opening of start-up service centers, and
changes in physicians' buying patterns of supplies, diagnostic equipment and
pharmaceuticals. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or any other
quarter.
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
------------------------------------------ -----------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- -------- -------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Net sales......................... $151,568 $172,359 $179,612 $187,481 $116,082 $132,040 $137,600 $143,302
Gross profit...................... 41,385 46,768 51,054 48,459 33,575 36,093 39,140 40,856
Merger costs and
expenses......................... 6,934 -- 317 4,877 -- 12,095 3,484 153
Net income (loss)................. $ (1,540) $ 4,152 $ 4,465 $ (2,704) $ 1,317 $ (7,180) $ 1,318 $ 5,884
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss)
per share........................ $ (0.04) $ 0.11 $ 0.12 $ (0.07) $ 0.04 $ (0.23) $ 0.04 $ 0.16
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income
(loss), excluding
merger costs and
expenses......................... $ 3,135 $ 4,105 $ 4,652 $ 732 $ 1,317 $ 2,052 $ 3,366 $ 6,011
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income
(loss) per share,
excluding merger costs
and expenses..................... $ 0.09 $ 0.11 $ 0.13 $ 0.02 $ 0.04 $ 0.07 $ 0.11 $ 0.16
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The fourth quarter of fiscal 1997 includes a $4.1 million write-off of
inventories at branches involved in mergers, a $1.0 million increase in bad debt
expense and a reduction in the deferred tax asset valuation allowance of $0.9
million.
-49-
<PAGE>
Liquidity and Capital Resources
During the first quarter of the 1995 fiscal year, the Company completed
an initial public offering of Common Stock resulting in proceeds, after
deducting issuance costs, of approximately $15.8 million. The Company used all
of the net proceeds to reduce outstanding debt. Also, in the third quarter of
the 1995 fiscal year, the Company amended and restated its credit facility,
thereby increasing the maximum availability under the credit facility to $60
million with the option, on the part of the Company, to increase such
availability to $75 million.
Effective November 13, 1995 the Company completed a secondary offering
of 11.5 million shares of common stock at $17 per share, 8.8 million of which
were offered by the Company. The Company used approximately $58.2 million of the
total net proceeds of $142.9 million to repay debt in fiscal 1996. Management
used approximately $50 million in connection with acquisitions of the Imaging
Division, Physician Supply Division, International Division, and general
corporate purposes, including capital expenditures during fiscal 1997.
Management intends to use the remaining net proceeds of the secondary offering
for general corporate purposes, including future acquisitions. The consummation
of this transaction, along with the Company's financing arrangements, has
provided the Company with resources to continue its strategy of being capable of
servicing the medical equipment and supplying the needs of every office-based
physician in the United States, to create a national imaging distribution
company, and to expand its presence in the European medical equipment and supply
market.
The Company had working capital of $165.5 million and $172.7 million
for the fiscal years ended 1997 and 1996, respectively. The decrease in working
capital is primarily attributable to the merger costs and expenses paid during
fiscal year 1997 and capital expenditures.
Net cash used in operating activities was $0.2 million, $21.0 million,
and $7.4 million in fiscal years 1997, 1996, and 1995, respectively. The net
cash used in fiscal 1996 and 1995 operating activities is a result of the
increase in accounts receivable and funds utilized to fund the growth in the
Company's inventories from start-up service centers, to continue growth in
existing service centers, and to implement the consolidation and transition of
mergers and acquisitions.
Net cash used in investing activities was $10.1 million, $30.5 million,
and $1.3 million in fiscal years 1997, 1996, and 1995, respectively. These funds
were 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 marketable securities.
Net cash (used in) provided by financing activities was $(26.5)
million, $115.8 million, and $8.8 million for fiscal years 1997, 1996, and 1995,
respectively. Net cash used in financing activities is the result of the use of
a part of the remaining net proceeds of an equity offering in fiscal 1996 to pay
off debt assumed through fiscal 1997 acquisitions.
Accounts receivable, net of allowances, were $119.3 million and $96.1
million at March 28, 1997 and March 29, 1996, respectively. The average days
sales outstanding were 56 days and 55 days as of March 28, 1997 and March 29,
1996, respectively. In March 1997, the Company acquired an Imaging Division
company with accounts receivable of $3.3 million. Excluding this increase in
accounts receivable, the average days sales outstanding were 55 days as of March
28, 1997.
Inventories were $67.9 million and $55.8 million as of March 28, 1997
and March 29, 1996, respectively. The Company had inventory turnover of 8.1
times and 8.3 times for the fiscal years ended March 28, 1997 and March 29,
1996, respectively. The increase in inventory resulting from the acquisition
described in the above paragraph was $2.5 million. Excluding this increase in
inventory, average inventory turnover was 8.3 times as of March 28, 1997.
-50-
<PAGE>
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. Inventory financing has historically been
achieved through negotiating extended payment terms from suppliers. The Company
believes that the expected cash flows from operations, bank borrowings, capital
markets, and vendor credit will be sufficient to fund its liquidity needs for
its existing operations and for service center expansion for the next 12 months.
As of June 30, 1997, the Company had no outstanding debt under its credit
facility.
-51-
<PAGE>
BUSINESS OF PSS
General
The Company is a leading distributor of medical supplies, equipment and
pharmaceuticals to primary care and other office-based physicians. The Company
currently operates 61 physician office medical supply distribution ("Physician
Supply Division") service centers distributing to approximately 103,000
physician office sites in all 50 states. The Company's primary market is the
approximately 399,000 physicians who practice medicine in approximately 198,000
office sites throughout the United States. For fiscal 1997, the Company
generated net revenues of $691.0 million.
The Company, through its wholly-owned subsidiary, DI, distributes medical
diagnostic imaging supplies, chemicals, equipment and service to the acute care
and alternate care market ("Imaging Division"). DI currently operates 20
imaging service centers in ten states in the southeast and midwest. The Company
is in the process of developing a separate information system for DI which will
include the current ICON/SM/ and CustomerLink systems.
The Company also distributes medical supplies and equipment in Belgium,
France, Germany, and the Netherlands through its WorldMed International, Inc.
subsidiary ("International Division"). The Company currently has three
International Division service centers distributing to the acute and alternate
care markets.
The Company focuses on complete customer satisfaction, which it
characterizes to its customers as "no hassle" service. Consistent with this
approach, the Company offers its customers same-day delivery service on a
regular basis, highly trained consultative sales professionals, a broad product
line including sophisticated diagnostic equipment and supplies, no minimum order
size or shipping charges and permits returns of unused saleable products for
instant credit. Through its Network Plus/SM/ program, a comprehensive savings
plan for physicians, the Company offers special group purchasing contract
pricing and periodic cost analyses to help manage the supply needs of each
physician. In addition, the Company has developed its ICON/SM/, a sales force
automation technology that allows the Company's Physician Supply Business sales
representatives to place orders immediately upon receipt and facilitates same-
day delivery.
Industry
According to industry estimates, the medical supply and equipment segment
of the health care industry represents a $30.2 billion market, of which $6.6
billion represents the primary care and other office-based physicians. The
medical supply and equipment industry is estimated to be growing at an annual
rate of 6% to 8%. The Company believes that it 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 $4.1 billion market,
representing the sale and service of diagnostic imaging equipment and supplies
to the acute care market, imaging centers and physician offices. Approximately
$2.3 billion of the diagnostic imaging market is sold through independent
distributors and the remainder is sold directly by manufacturers. The diagnostic
imaging industry is highly fragmented with unconsolidated distributors
representing approximately 70% of the market. The Company believes that a
significant opportunity exists for the consolidation of this market.
Company Strategy
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
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<PAGE>
distribution company and to expand its presence in the European medical
equipment and supply markets. The Company's strategies to achieve these
objectives include the following:
. Pursue Strategic Acquisitions of Physician Supply and Diagnostic Imaging
Distributors. The Company has completed ten acquisitions since the beginning
of fiscal 1997 in both its Physician Supply Division and Imaging Division.
The Company's recent acquisitions, including its acquisition of General X-
Ray, bring the Company closer to its goal to be the leading distributor in
the diagnostic imaging distribution market. The Company intends to continue
its efforts to acquire local, regional and other distributors in new and
existing markets in the United States and Europe where it can leverage its
distribution infrastructure, expand its geographic coverage and gain market
share.
. Provide Formalized Training for Sales Representatives and Service
Specialists. The Company seeks to promote and further develop its
consultative sales force through formalized training programs. The Company
heavily recruits new sales representatives, each of whom participates in PSS
University, and provides ongoing training to its representatives regarding
new products available to its physician customers and methods to increase
productivity. The Company is currently developing a similar training programs
for the sales representatives and service technicians of its Imaging
Division.
. Pursue Distribution Agreements with Manufacturers. The Company seeks to
provide a broad product line that includes sophisticated diagnostic equipment
marketed by the Company on an exclusive or semi-exclusive basis. By promoting
its extensive distribution network and same-day service, the Company seeks to
be the point of entry to the market for new health care products and
technologies developed by manufacturers.
. New Service Center Openings. Due to its existing geographic market coverage,
the Company plans to open substantially fewer new service centers in the
future than it has historically opened in order to avoid the start-up losses
associated with new centers. The Company intends to continue to focus more on
acquisitions that do not entail such losses. Of the Company's 84 current
service centers, 32 were new centers started by the Company.
. Continue Investment in Information Systems. The Company has developed
ICON/SM/ to enable Physician Supply Division sales representatives access to
critical customer information from any location. In addition, during fiscal
1997 the Company test marketed and developed the CustomerLink or DIAL
(Digital and Information and Access Line) system, which the Company believes
is the first Internet based healthcare information system designed and used
specifically for inventory management and purchasing for the medical
practice. The Company is also developing and implementing a delivery
automation software system, with electronic signature recognition , radio
frequency communication in customer ordering and automated delivery routing
for maximum efficiency of distribution . The Company is also developing a
separate hardware and software system for its Imaging Division which will
include the ICON/SM/ and CustomerLink system. The Company believes ICON/SM/,
CustomerLink and its other proprietary information systems are important to
its success, and accordingly intends to continue its investment in
information systems to increase efficiency and overall profitability.
Sales and Distribution
PSS focuses on complete customer satisfaction, which it characterizes to
its customers as "no hassle" service. Consistent with this approach, the Company
offers its customers same-day delivery service on a regular basis, highly
trained, consultative sales professionals, a broad product line including
sophisticated diagnostic equipment and supplies, no minimum order size or
shipping charges, and permits returns of unused, salable products for instant
credit.
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The Company has increased its emphasis on national customer accounts,
including large physician group practices, physician practice management
companies, physician-hospital organizations, physician management service
organizations and group purchasing organizations. In selling to these national
accounts, the Company emphasizes its core strengths of same-day service, which
permits stockless inventory, competitive pricing and high service levels,
including inventory maintenance.
At March 28, 1997, the Physician Supply Division of PSS maintained a highly
decentralized distribution network of 61 service centers operating over 550
delivery vans throughout the United States. This distribution network along with
the Company's Instant Customer Order Network ("ICON/SM/"), described in
"Information Technology" herein, has enabled PSS to provide same-day delivery
service on a consistent basis. Customer orders received by 10:30 a.m. at the
local service center are delivered the same day within a 100 mile radius. Within
a 30 mile radius, orders received by noon are delivered the same day.
Through its over 720 sales representatives in its Physician Supply
Division, PSS distributes medical supplies and equipment to physicians in
approximately 103,000 office sites nationally. Generally, each sales
representative is responsible for calling on approximately 150 to 200 physician
offices, with a minimum goal of visiting each office once every one to two
weeks.
The Company is required to carry a significant investment in inventory to
meet the rapid delivery requirements of its customers. The Company distributes
over 35,000 different products manufactured by approximately 3,000
manufacturers. During the twelve months ended March 28, 1997, Abbott was the
only vendor which accounted for more than 10% of the Company's inventory
purchases. The Company believes it is not vulnerable to significant supply
interruptions due to the diverse product base sold by PSS and the significant
number of manufacturers supplying those products. However, the Company's ability
to maintain good relations with these vendors will affect the profitability of
the business.
The Company's Physician Supply Division customer base consists mainly of
primary care and office-based physicians which accounted for approximately 99%
of the Company's net sales for the twelve months ended March 28, 1997. No single
company customer accounted for more than 1% of PSS's net sales for fiscal 1997.
The Company's Imaging Division operates in a similar decentralized format
with 20 service centers operating a total of over 70 delivery vans throughout
ten states. The delivery routes and customer service guarantees are currently
being developed. While Imaging Division gross margins are lower than the
Physician Supply Division gross margins, general and administrative expenses are
also lower than the Physician Supply Division due in part to less products
distributed, larger order size, less frequent deliveries and fewer personnel.
The Imaging Division has over 75 sales representatives and 252 field
service specialists who service customer equipment ranging from processors to
radiographic equipment. This division has approximately 6,000 customers
including 1,750 acute sites and 6,250 alternate care sites.
The Company's International Division operates three European service
centers, located in Belgium, Germany, and the Netherlands, employing
approximately 25 sales representatives and approximately 65 total employees.
All of the Company's service centers operate as a profit center led by a
management team that typically includes a sales manager and an operations
manager. Each service center employs sales representatives and staff, including
purchasing agents, customer service representatives, and warehouse and delivery
personnel. Employees are compensated based upon both individual and service
center performance. Both management and employee bonuses are based largely upon
asset management, attainment of goals and operating profit performance.
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<PAGE>
At March 28, 1997, the Company had approximately 800 sales representatives
and approximately 2,600 total employees. The Company considers its employee
relations to be excellent.
Product and Sales Mix
PSS plans to continue to focus on providing products and services to the
primary care physician market whether the physician is a single practitioner or
a member of a large group practice. In that effort, PSS developed Network
Plus/SM/, a comprehensive savings plan for physicians in which PSS offers
special group purchasing contract pricing and provides periodic cost analyses to
help manage the supply needs of each physician. Under this program, when a
physician office guarantees 80% of its purchase volume to PSS, the Company will
guarantee the lowest purchase prices on certain products as well as certain
service guarantees. The Company has recently signed distribution agreements with
several national and regional integrated and managed care groups.
Through its Physician Supply Division, the Company distributes medical
products consisting of medical supplies, diagnostic equipment, and
pharmaceuticals. The following is a discussion of the types of products offered
by the Company's Physician Supply Division.
Medical Supplies
PSS Physician Supply Division medical supplies include items from
substantially all major product lines. PSS currently sells a broad range of
medical supplies which include over 35,000 stock keeping units, including
various types and sizes of paper goods, needles and syringes, gauze and wound
dressings, sutures, latex gloves, orthopedic soft goods and casting products,
wood tongue blades and applicators, sterilization and intravenous solutions,
specimen containers, diagnostic equipment reagents, and diagnostic rapid test
kits for pregnancy, strep, chlamydia, H-Pylori, and bladder cancer.
PSS has implemented a new Penny Saver product line. The Penny Saver
products represent the most frequently used products by PSS customers. This
product line will provide customers a choice between name brand products and the
Penny Saver quality, low price alternatives. Currently, the Company has over 250
products under the Penny Saver label.
Medical Equipment
The Company's Physician Supply Division equipment lines include blood
chemistry analyzers, automated cell and differential counters, immunoassay
analyzers, bone densitometers, exam tables and furniture, electrocardiograph
monitors, cardiac stress systems, holter monitors, flexible sigmoidoscopy
scopes, autoclaves, spirometers, pulse oximeters, tympanometers, and
microscopes. Demand for diagnostic equipment has increased recently, reflecting
in part, technological advances which enable increasingly sophisticated
diagnostic tests to be performed in the physician's office. Sales of diagnostic
equipment, while generally lower in gross margin than supplies, normally require
the ongoing reordering of disposable diagnostic reagents which generally yield
higher margins.
The Company recently entered into four separate exclusive distribution
agreements for certain products manufactured by Siemens Medical Systems, Inc.,
Hologic, Inc., Bard Diagnostic Sciences, Inc., and Tanita Corporation of
America, Inc. These strategic alliances should continue to broaden the Company's
product offerings to both the Physician Supply Division and Imaging Division
customers.
Pharmaceuticals
The Company's pharmaceutical sales include vaccines, injectables and
ointments. As a result of the changing dynamics in the pharmaceutical industry,
particularly the reduction in sales force for physicians' offices,
pharmaceutical manufacturers are increasingly seeking alternative means of
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distribution. The Company believes that its consultative sales approach and its
emphasis on training have allowed PSS to be highly effective in selling
pharmaceuticals to the physician office market.
Recruitment and Development
The Company believes its managers and sales force are its most valuable
corporate assets. Accordingly, the Company invests significant resources in
recruiting, training and developing these employees. PSS spent approximately
$2.6 million for training and development in fiscal 1997. Over the past ten
years, the Company has refined its recruitment practices and development
procedures for its Physician Supply Division and the Company is currently
developing a similar training programs for the sales representatives and service
specialists of its Imaging Division.. The Company's comprehensive program for
its Physician Supply Division includes the following:
Recruitment. The Company has developed a recruitment program to help
provide it with a source of mobile and committed sales representatives. The
Company believes that it is a leader in its industry in recruiting sales
representatives on college and university campuses. The Company's recruiters use
state-of-the-art marketing materials to attract candidates who demonstrate
superior sales aptitude. The Company also recruits college graduates with up to
five years experience in business, government or the military as operational
management trainees.
Initial Development. Each trainee is initially assigned to a service
center. Under the supervision of local managers, training consists of a
combination of self-study, individual instruction and interaction with customers
and vendors. Such training includes 16 one-week courses providing instruction on
products, procedures and selling skills. During this development program, the
trainee attends the Jacksonville, Florida training center known as PSS
University for a one-week training course titled "Impact Selling." Learning is
measured weekly through formal testing and role playing, resulting in continued
advancement to graduation, usually within 20 weeks. The Company designs the
program to be strenuous and only approximately 70% of the trainees successfully
complete the program. Upon graduation, the newly appointed sales representative
assumes responsibility for the first available sales territory, within a
preferred region regardless of location. The Company typically has approximately
30 sales candidates at various stages of the training process. The Company
believes that the level of its expenditures in developing new sales
representatives and its ability to place new sales representatives quickly in a
new region is unique within the industry. The new sales graduate is placed on a
15 month salary-to-commission conversion program. Presently, approximately 95%
of the Company's sales force is compensated on a straight commission basis. The
Company's development program for its operational management trainees consists
of approximately twelve months of intensive training and development. After
recruitment, the operations management trainee is transferred to at least three
service centers and is given various and gradually increasing levels of
responsibility. The trainee is assigned to an operations management position
when it becomes available at a service center, regardless of location. The
Company continually maintains approximately five operations management trainees
to provide for future expansion needs.
Continued Development. The Company provides several programs to continue
development of its sales and management organization. The programs provided by
PSS University include a leadership program for management candidates, senior
sales representatives and general managers, a program emphasizing creativity and
innovation for first-year managers, and a management development program. In
addition, the Company encourages its sales representatives to participate in
industry-accredited self-study programs. Every sales representative routinely
attends local sales meetings, annual sales and marketing meetings, key vendor
product conferences and continuing education programs at PSS University.
Additionally, the Company is developing training programs on customer service,
purchasing and other field operations.
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Information Systems
PSS' Physician Supply Division maintains a decentralized information system
with data acquisition at the local service centers and a central corporate data
base that is accessible from all of the service centers. The information systems
were designed to allow the service center to have both the hardware and software
to conduct operations independently. The failure of a computer system at a
service center would not affect the operations of any other service center or
the corporate system. Likewise, the short-term failure of the corporate system
would not affect the operations of any service center.
ICON/SM/ is a sales force automation technology enabling the PSS Physician
Supply Division sales representatives access to critical customer information
from any location. ICON/SM/ provides the sales representatives with customer
pricing, contracts, backorders, inventory levels, account status and on the spot
ordering through the use of a wireless network. ICON/SM/ has increased time
available for selling, decreased operating expenses in the service centers and
increased the Company's ability to provide same-day delivery to customers.
Utilizing ICON/SM/, sales representatives can give product demonstrations,
equipment feasibility studies, potential equipment revenue, and return on
investment analyses. Most recently, ICON/SM/ gives the sales representative the
ability to perform quotes and bids to the larger accounts and standing order
capabilities.
During fiscal 1997, PSS test marketed and developed the CustomerLink or
DIAL (Digital Information Access Line) system. The Company believes this system
is the first internet based healthcare information system designed and used
specifically for inventory management and purchasing for the medical practice.
All company customers, regardless of size, with access to the internet, will be
given access to a multitude of services including:
- On-Line Purchasing
- Order placement and confirmation
- Customer specific product availability
- Customer specific pricing
- Product utilization reports
- Back order status reports
- Accounts receivable management reports
- Inventory management tools
- On-Line Information
- Practice compliance assistance for OSHA and CLIA
- Comprehensive database of medical safety data sheets
- Continuing medical and professional education courses
- Scientific and medical journals
- Comprehensive pharmaceutical pharmacology database
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Company customers can access CustomerLink through the internet at
http://www.pssd.com after receiving their personal password from the Company.
The Company is implementing a delivery automation software system that is
expected to be completed in fiscal 1998. The system will provide electronic
signature recognition and delivery routing which the Company believes will
improve the Company's distribution efficiency.
The Company is currently in the process of developing and implementing a
separate hardware and software system for its Imaging Division which will
include the ICON/SM/ and CustomerLink systems. The Company expects the Imaging
Division system to be implemented in fiscal 1998.
Purchasing and Vendor Relationships
The Company aggressively seeks to purchase the medical supplies and
equipment it distributes at the lowest possible price through volume discounts,
rebates and product line consolidation. The Company's corporate materials
management department negotiates all of its contract terms with vendors.
Individual orders are placed by the Company's purchasing agents, located at the
Company's service centers, who are responsible for purchasing and maintaining
the inventory. Supplies and equipment are delivered directly from vendors to the
service centers.
The Company aggressively pursues the opportunity to market and sell medical
equipment and supplies on an exclusive basis. Manufacturers of medical
diagnostic equipment and supplies typically offer distribution rights only to a
selected group of distributors and are increasingly seeking to reduce the number
of distributors selling their products to end users in an effort to reduce the
cost associated with marketing and field support. The Company has been
successful in assisting manufacturers in their development and marketing plans
and in obtaining the exclusive right to sell certain products.
In March 1995, the Company signed an exclusive distributorship agreement
with Abbott Laboratories providing for the Company to be the exclusive
distributor of certain Abbott diagnostic products to a segment of the office-
based physician market. The Abbott Agreement has positioned PSS as the sole
distributor for the CELL DYN(R) 1400, 1600 and 1700 hematology products, Abbott
Vision(R) products, IMx(R) products, and the Abbott Testpack(R) line of rapid
tests sold to physician offices with 24 or less physicians per geographic
location. The Company believes that its ability to capture such distribution
rights represents a significant barrier to the entry of competitors. Abbott may
terminate the Abbott Agreement if the Company fails to meet certain sales
levels. In addition, the Abbott Agreement provides for initially lower gross
margins although these margins will increase over the life of the Abbott
Agreement. Under the terms of its purchase agreement, Abbott agreed to certain
restrictions, including prohibitions on additional purchases of Common Stock and
granted the Company a three-year irrevocable proxy to vote its shares.
Currently, the Company has contractual alliances with many vendors
including Becton Dickinson & Company ("Becton Dickinson") and Roche Diagnostic
Systems. These alliances provide the Company volume incentives, dedicated field
support, and select relationships with world class manufacturers with strong
brand name recognition. As a result of the Company's performance in selling
their products, these entities participate with the Company in relationships
ranging from exclusivity to shared market resources. In the office-based
physician market, the Company is the worldwide leader of sales of hematology
products for Becton Dickinson and the United States leader of sales of
hematology and chemistry products for Roche Diagnostic Systems.
The Company recently entered into four separate exclusive distribution
agreements for products manufactured by Siemens Medical Systems, Inc.
(cardiology and OB/GYN ultrasound equipment), Hologic, Inc. (bone densitometry
analyzer), Bard Diagnostic Sciences, Inc. (bladder cancer diagnostic test) and
Tanita Corporation of America, Inc. (body weight and fat analyzer). These
strategic alliances should
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continue to broaden the Company's product offerings to both the Physician Supply
Division and Imaging Division customers. The Company has also entered into an
exclusive distribution agreement with HumaScan, Inc. (non-invasive breast tumor
detection screen).
Acquisitions
The Company's Physician Supply Division has grown from one service center
located in Jacksonville, Florida in 1983 to 61 service centers currently.
Historically, the Company's growth has been accomplished through both the start-
up of service centers and the acquisition of local and regional medical supply
and equipment distributors. Since fiscal 1994 the Company has accelerated its
acquisition of medical supply and equipment distributors both in number and in
materiality of the operations acquired.
With the November 1996 acquisition of a medical diagnostic imaging supply
and equipment distributor, the Company began the operations of its Imaging
Division. Subsequent acquisitions have resulted in 20 Imaging Division service
centers operating throughout ten states. The Company's objective for the Imaging
Division this year is to (i) continue geographic expansion with acquisitions of
local and regional imaging distributors to leverage existing infrastructure,
(ii) develop and implement a separate hardware and software system for the
division utilizing the Physician Supply Division' ICON/SM/ and CustomerLink
systems, (iii) expand the products and services currently provided, (iv)
implement same day delivery, and (v) develop a university training program
specifically tailored for the division.
PSS views the acquisition of medical and imaging supplies and equipment
distributors as an integral part of its growth strategy. The Company intends to
continue to acquire local and regional distributors especially in existing
markets where it can leverage its distribution infrastructure, gain market
share, and expand geographically. PSS believes that local and regional
distributors are finding competition increasingly difficult as a result of (i)
lack of purchasing and administrative economies of scale, (ii) reduced access to
medical equipment product lines as equipment manufacturers seek to reduce
marketing costs by minimizing the number of distributors to which they must
provide field support, (iii) lack of resources for continued development and
training of personnel for maintenance, expansion or replacement of existing
business, and (iv) lack of resources to develop new distribution system
technologies and services.
PSS has completed four acquisitions to date in fiscal 1998. In July 1997,
the Company completed the acquisition of General X-Ray, Inc. and certain
affiliated entities, distributors of radiology and imaging equipment which
operated seven distribution centers and distributed to seven states, primarily
in the Midwest.
The Company completed ten acquisitions in fiscal 1997, including the
acquisition of Diagnostic Imaging, Inc., a distributor based in Jacksonville,
Florida which began the operations of its Imaging Division. Diagnostic Imaging,
Inc. operated eight distribution centers with 24 sales representatives and 75
field service specialists. In fiscal 1997, the Company expanded its Imaging
Division through the acquisitions of X-Ray of Georgia, Inc. and Rad-Tech X-Ray,
Inc., both based in the Atlanta, Georgia area, which collectively served six
states in the Southeast with 13 sales representatives and 51 field service
specialists and the acquisition of Chesapeake X-Ray Corporation based in
Roanoke, Virginia, which served four states in the Southeast with five sales
representatives and 15 field service specialists.
The Company acquired Taylor Medical, Inc. ("Taylor") in August 1995. A
significant portion of the Company's growth occurred with the merger of Taylor.
In connection with the integration of Taylor into PSS, the Company closed or
merged into existing PSS service centers the majority of the Taylor locations.
Additionally, the Company merged eight PSS service centers into the eight
remaining Taylor locations and established two additional service centers.
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Properties
The Company maintains 84 service centers providing service to 50 states
throughout the United States, as well as Belgium, France, Germany, and the
Netherlands. All service center locations are leased by the Company, with the
exception of the service centers located in Leuven, Belgium and Beaumont, Texas.
The following tables set forth the service center locations and areas which they
service for the Physician Supply Division, Imaging Division and International
Division.
<TABLE>
<CAPTION>
Physician Supply Division
Service Center Location States Serviced Service Center Location States Serviced
----------------------- --------------- ----------------------- ---------------
<S> <C> <C> <C>
Albany, NY NY, CT, VT Louisville, KY IN, KY
Albuquerque, NM NM, CO, TX Lubbock, TX TX
Atlanta, GA GA, AL Memphis, TN AR, MS, TN
Baltimore, MD MD, PA, VA, WV Milwaukee, WI WI
Beaumont, TX TX Minneapolis, MN IA, MN, MT, ND, SD, WI
Birmingham, AL AL, MS Mobile, AL AL, FL, MS
Boise, ID ID, MT Nashville, TN IL, KY, TN
Charlotte, NC NC, SC, VA, TN New Orleans, LA LA, MS, TX
Chattanooga, TN AL, GA, TN Norfolk, VA NC, VA, WV
Chicago, IL IL, IN, WI Omaha, NE CO, NE, IA, WY
Cincinnati, OH KY, IN, OH, WV Orlando, FL FL
Cleveland, OH OH Philadelphia, PA DE, NJ, NY, PA
Columbia, SC SC, GA Phoenix, AZ AZ
Dallas, TX TX, OK Pittsburgh, PA PA, WV, MD, OH, NY
Davenport, IA IA, IL Portland, OR CA, OR, WA
Deerfield Beach, FL FL Raleigh, NC NC, VA
Denver, CO CO, NM, WY Richmond, VA VA
Detroit, MI MI Roanoke, VA TN, VA
Honolulu, HI HI Rochester, NY NY
Houston, TX TX, OK Salt Lake City, UT CO, NV, UT
Indianapolis, IN IN, IL San Antonio, TX TX
Jackson, MS MS, LA San Diego, CA CA
Jacksonville, FL FL, GA, SC San Francisco, CA CA
Kansas City, KS IL, IA, KS, MO Seattle, WA WA, AK
Knoxville, TN KY, NC, TN St. Louis, MO IL, MO
Lafayette, LA LA St. Petersburg, FL FL
Las Vegas, NV NV Tallahassee, FL AL, FL, GA
Little Rock, AR TX, AR Tulsa, OK AK, OK, MO
Long Island, NY MA, NJ, NY Union, NJ NJ, NY
Los Angeles, CA (North) CA Wareham, MA RI, CT, ME, MA, NH
Los Angeles, CA (South) CA
</TABLE>
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<TABLE>
<CAPTION>
Imaging Division
Service Center Locations States Serviced Service Center Locations States Serviced
------------------------ --------------- ------------------------ ---------------
<S> <C> <C> <C>
Atlanta, GA GA Mobile, AL AL, FL, MS
Birmingham, AL AL, MS Nashville, TN(1) KY, TN
Charlotte, NC NC Raleigh, NC NC, VA
Columbia, SC SC, GA Richmond, VA VA
Pompano Beach, FL FL Roanoke, VA TN, VA, WV
Jacksonville, FL FL, GA Tallahassee, FL FL, GA
Gainesville, FL FL Savannah, GA FL, GA, SC
Memphis, TN AR, KY, TN Winston Salem, NC NC, VA
Tampa, FL FL Chicago, IL IL, IN, IA, WI
St. Louis, MO MO, IL, IA, AR Indianapolis, IN IN, OH, KY
</TABLE>
International Division
<TABLE>
<CAPTION>
Service Center Location Country Serviced
----------------------- ----------------
<S> <C>
Leuven, Belgium Belgium, France, Germany
Dusseldorf, Germany Germany
Utrecht, Netherlands(1) Netherlands
</TABLE>
-------------------
(1) Acquired subsequent to March 28, 1997.
In the aggregate, the Company's service centers consist of approximately
875,000 square feet, of which all is leased, with the exception of the locations
in Leuven, Belgium and Beaumont, Texas, under lease agreements with expiration
dates ranging from 1995 to 2001. The Company's service centers range in size
from 4,800 square feet to 51,000 square feet.
The corporate offices of PSS consist of approximately 50,000 square feet of
leased office space located at 4345 Southpoint Boulevard, Jacksonville, Florida
32216. The lease for this space expires in April 2002.
At March 28, 1997, the Company's facilities provided adequate space for the
Company's operations. Throughout the Company's history of growth, the Company
has been able to secure the required facilities.
Competition
PSS operates in a highly competitive environment. The Company's principal
competitors are multi-market medical distributors that are full-line, full-
service medical supply companies, some of which are national in scope. These
national companies have sales representatives competing directly with PSS, are
substantially larger in size, and have substantially greater financial resources
than PSS. There are also numerous local dealers and mail order firms that
distribute medical supplies and equipment within the same market as the Company.
Most local dealers are privately owned and operate with limited product lines.
There are several mail order firms which distribute medical supplies on a
national or regional basis. The Company also competes with certain manufacturers
that sell their products both to distributors and directly to users, including
office-based physicians.
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Regulatory Matters
The Company's business is subject to regulation under the Federal Food,
Drug, and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the
Controlled Substances Act and other regulation by the U.S. Food and Drug
Administration and state laws applicable to the distribution and manufacture of
medical devices and over-the-counter pharmaceutical products as well as the
distribution of prescription pharmaceutical products.
The Federal Food, Drug, and Cosmetic Act generally regulates the
manufacture of drug and medical devices shipped in interstate commerce,
including such matters as labeling, packaging, storage and handling of such
products. The Prescription Drug Marketing Act of 1987, which amended the Federal
Food, Drug and Cosmetic Act, establishes certain requirements applicable to the
wholesale distribution of prescription drugs, including the requirements that
wholesale drug distributors be registered with the Secretary of Health and Human
Services or be licensed in each state in which they conduct business in
accordance with federally established guidelines on storage, handling, and
records maintenance. Under the Controlled Substances Act, the Company, as a
distributor of controlled substances, is required to obtain annually a
registration from the Attorney General in accordance with specified rules and
regulations and is subject to inspection by the Drug Enforcement Administration
acting on behalf of the Attorney General. The Company is required to maintain
licenses and permits for the distribution of pharmaceutical products and medical
devices under the laws of the states in which it operates. In addition, the
Company's physician customers are subject to significant federal and state
regulation. There can be no assurance that regulations that impact the
physicians' practices will not have a material adverse impact on the Company's
business.
The Company is also subject to regulation in the European countries where
its Belgian subsidiary, WorldMed, N.V., markets its products. Many of the
regulations applicable in such countries are similar to those of the U.S. Food
and Drug Administration. The national health or social security organizations of
certain countries require the products distributed by the Company to be
qualified before they can be marketed in those countries.
Federal, state and foreign regulations regarding the sale and distribution
of medical supplies, equipment and devices by the Company are subject to change.
The Company cannot predict what impact, if any, such changes might have on its
business.
Legal Proceedings
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, management believes that the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
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MANAGEMENT OF PSS
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Patrick C. Kelly (1)............ 50 Chairman of the Board, Chief Executive Officer and Director
John F. Sasen, Sr............... 55 President and Director
David A. Smith.................. 37 Executive Vice President, Chief Financial Officer and Director
James B. Stallings, Jr.......... 42 Chief Operating Officer
Thomas A. Crowley, Jr........... 50 Executive Vice President, Investor Relations and Communications
Charles E. Alvarez.............. 29 Vice President - Northern Region
Jeffrey H. Anthony.............. 36 Vice President - Information Technology
James E. Boyd................... 43 Vice President - Diagnostics Division
Gary A. Corless................. 32 Vice President - Western Region
Frederick E. Dell............... 36 Executive Vice President; President of Diagnostic Imaging, Inc.
Edward D. Dienes................ 36 Vice President - Central Region
Kathleen H. Fehling............. 37 Executive Vice President and Chief Operating Officer of Diagnostic Imaging, Inc.
Douglas Harper.................. 45 Senior Vice President - Sales and Marketing
Todd M. LaVelle................. 30 Vice President - Mid America Region
Delmer W. Dallas(3)............. 66 Director
T. O'Neal Douglas(1)(2)......... 61 Director
Fred Elefant(1)(3).............. 50 General Counsel, Secretary and Director
Delores Kesler(2)............... 56 Director
William C. Mason(2)............. 59 Director
James L.L. Tullis(3)............ 50 Director
</TABLE>
_________________________________
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Patrick C. Kelly, a co-founder of the Company, has served as Chairman of
the Board and Chief Executive Officer of the Company since its inception in May
1983 and as President of the Company from May 1983 to August 1995. Prior to
founding the Company, from August 1976 to February 1983, Mr. Kelly served as
Sales Manager, General Manager and Vice President of Intermedco, Inc., a
Houston-based medical supply company. Mr. Kelly also serves as Chairman of the
Board of Diagnostic Imaging, Inc. and WorldMed International, Inc., each wholly
owned subsidiaries of PSS that operate the imaging and international businesses
of PSS.
John F. Sasen, Sr. has served on the Board of Directors of the Company
since July 1993 and as President of the Company since August 1995. Mr. Sasen
served as Chief Operating Officer of the Company from December 1993 to March
1997 and served as Executive Vice President of the Company from December 1993 to
August 1995. From August 1990 to December 1992, he served the Company as Vice
President-Sales and Marketing; from January 1993 to July 1993, as Regional Vice
President, and from August 1993 to December 1993 as Executive Vice President.
Prior to joining the Company, Mr. Sasen was Vice President-Sales, Marketing and
Distributor Relations for a division of Becton Dickinson
-63-
<PAGE>
& Company ("Becton Dickinson"), a manufacturer of health care products. In that
position, Mr. Sasen directed product development and marketing efforts,
technical services, product services and customer service. Mr. Sasen was with
Becton Dickinson for over 20 years. In addition, Mr. Sasen serves as a director
of Humascan, Inc., a manufacturer of a breast thermal detection device.
David A. Smith has served on the Board of Directors of the Company since
July 1993 and as Executive Vice President since April 1996 and Chief Financial
Officer of the Company since April 1992. Mr. Smith served as a Vice President of
the Company from April 1992 to April 1996. Prior to serving as Vice President
and Chief Financial Officer, Mr. Smith served the Company as a Regional Manager,
General Manager, Sales Manager and Operations Manager from July 1987 to June
1993. Prior to joining the Company, Mr. Smith was employed by Coopers & Lybrand
from October 1985 through June 1987, and by Smoak, Davis and Nixon, C.P.A., from
May 1983 through September 1985.
James Stallings has served in the newly created position of Chief Operating
Officer since July 1997. Prior to this position, Mr. Stallings served as
Executive Vice President - Southern Region since March 1997 and Executive Vice
President - Sales and Marketing from April 1996 to March 1997. From 1988 to
1996, Mr. Stallings held several positions with IBM Corporation, including
Director of Worldwide Sales - AS/400 Division, Director of Business Re-
engineering and General Manager. From 1984 to 1987, Mr. Stallings served as a
manager of Rohm Corporation. In addition to his responsibilities with the
Company, Mr. Stallings serves on the Board of Directors for Sun Bank of
Northeast Florida.
Thomas A. Crowley, Jr. has served in the newly created position of
Executive Vice President, Investor Relations and Communications since July 1997.
Prior to joining the Company, Mr. Crowley was employed by Hoffman La-Roche and
by Becton Dickinson.
Charles E. Alvarez has served as Vice President - Northern Region of the
Company since April 1997. Prior to this position, Mr. Alvarez served as Vice
President - Eastern Region from April 1995 until April 1997. Mr. Alvarez has
served the Company in various other positions, including Regional Manager of the
Eastern Region from April 1994 to March 1995, and sales manager and sales
representative from January 1990 to March 1994.
Jeffrey H. Anthony has served the Company as Vice President -Information
Technology since March 1997. Prior to serving in this capacity, Mr. Anthony was
Director of Information Technology from October 1996 to March 1997, Pacific
Region Operations Leader from April 1996 to October 1996 and General Leader -
PSS Delray Beach from November 1992 to March 1996.
James E. Boyd has served as the Company's Vice President - Diagnostics
Division since April 1996. Prior to such position, Mr. Boyd served the Company
as a marketing manager from October 1994 to March 1995 and as the Vice
President - Central Region from March 1992 to September 1994.
Gary A. Corless has served as Vice President - Western Region since October
1996. Prior to serving in this position, Mr. Corless served as Vice President -
Central Region from April 1996 to September 1996. Mr. Corless has served the
Company as General Manager in various cities since February 1992.
Frederick E. Dell has served as Executive Vice President of the Company and
as President of Diagnostic Imaging, Inc. since November 1996. Prior to these
positions, Mr. Dell served as Senior Vice President - Southern Region of the
Company from April 1996 to November 1996 and served as Vice President- Southern
Region from January 1994 to March 1996. Mr. Dell also served as director of the
Company from July 1991 through July 1992. He served as Regional Manager and Vice
President of the Company's Western Region from December 1989 to January 1994.
From April 1984 through November 1989, Mr. Dell served the Company in various
sales and management positions.
-64-
<PAGE>
Edward D. Dienes has served as Vice President - Central Region since
October 1996. Prior to this position, Mr. Dienes served as Vice President -
Pacific Region beginning in April 1995. Prior to such time, Mr. Dienes served
the Company as Director of Marketing from April 1993 to March 1995 and as
General Manager, Sales Manager and Operational Manager from August 1988 to March
1993.
Kathleen H. Fehling has served as Executive Vice President and Chief
Operating Officer of Diagnostic Imaging, Inc. since February 1997. Prior to
joining the Company, Ms. Fehling was employed by Picker International from 1983,
serving most recently as Vice President of Marketing & Service from 1994 to 1997
and as National Service Manager from 1992 to 1994.
Douglas Harper has served as Senior Vice President - Sales and Marketing
since March 1997. Prior to this position, Mr. Harper served as Senior Vice
President - Northern Region of the Company from April 1996 to March 1997 and
served as Vice President - Northern Region from August 1995 to March 1996. He
served as the Northeast Regional Manager for Taylor Medical, Inc. ("Taylor"),
which was acquired by the Company in August 1995, from 1990 to August 1995. Mr.
Harper has over 20 years experience in medical supply distribution. Mr. Harper
founded Medco Systems/Quinoy Medical Supply, which was acquired by Taylor in
1990. Prior to such time, Mr. Harper was a General Manager for Foster Medical
Supply.
Todd M. LaVelle has served as Vice President - Mid America since June 1996.
Prior to that time, Mr. LaVelle served as Vice President - Sales beginning in
April 1996. In addition to these positions, Mr. LaVelle has served as Vice
President - Sales & Marketing from July 1995 to April 1996, as Regional Manager
for the Pacific Region from July 1994 to June 1995, as Diagnostic Market Leader
from April 1994 to June 1994, and as Sales Manager and sales representative from
August 1990 to March 1994.
Delmer W. Dallas has served on the Board of Directors of the Company since
October 1989. Since 1984, Mr. Dallas has been the Chairman of the Board of
Acosta Sales Co., Inc. ("Acosta"), a food brokerage company operating in the
Southeastern United States. He has also served on the Board of Directors of
Acosta since 1966.
T. O'Neal Douglas has served on the Board of Directors of the Company since
July 1993. Mr. Douglas is the Chairman and Chief Executive Officer of American
Heritage Life Insurance Co. and American Heritage Life Investment Company
(collectively, "AHL"). He has been with AHL since 1983, serving as President
since 1986 and Chief Executive Officer since 1990. In addition, Mr. Douglas
serves as a director of Barnett Bank of Jacksonville, N.A.
Fred Elefant has served on the Board of Directors of the Company and as
Secretary of the Company since 1984. Mr. Elefant has been engaged in the private
practice of law in Jacksonville, Florida since 1973. Since January 1989, he has
practiced as Fred Elefant, P.A. He was a member of the law firm of Mahoney,
Adams, Milam, Surface & Grimsley, P.A., now Mahoney Adams & Criser, P.A., from
1983 to 1989.
Delores P. Kesler has served on the Board of Directors of the Company since
July 1993. Ms. Kesler has been Chairman and CEO of Kesler, Pass & Associates,
Inc. since 1996. Prior to that, Ms. Kesler was Chairman of Accustaff,
Incorporated ("AccuStaff"), the successor to ATS Services, Inc. ("ATS"), a
franchisor of temporary employment operations from January until June 1996. She
founded ATS in May 1978 and served as its Chairman and Chief Executive Officer
until its merger with three other temporary employment agencies in May 1992. Ms.
Kesler is a past member of an executive committee with the National Association
of Temporary Services and serves on the Board of Directors of Accustaff and Clay
County Bank in Orange Park, Florida.
-65-
<PAGE>
William C. Mason has served on the Board of Directors of the Company since
April 1996. Mr. Mason is Vice Chairman and Chief Executive Officer of
Baptist/St. Vincent's Health System, Inc. located in Jacksonville, Florida and
has served in various positions throughout the organization since 1984.
James L. L. Tullis has served on the Board of Directors of the Company
since November 1989. Mr. Tullis was nominated to serve on the Board of Directors
of the Company for a three year term beginning in 1994 pursuant to an agreement
with the Company. Since September 1987, Mr. Tullis has been a general partner of
Tullis-Dickerson Partners, the general partner of Tullis-Dickerson Capital
Focus, L.P., a venture capital fund that invests in the health care industry and
a shareholder of the Company. Mr. Tullis has served as Chairman of the Board of
Directors and Chief Executive Officer of Tullis-Dickerson & Co., Inc., a venture
capital company which acts as a management company for Tullis-Dickerson Capital
Focus, L.P., since July 1986. Mr. Tullis also serves on the Board of Directors
of American Consolidated Laboratories, Inc., a manufacturer of contact lenses,
Scandipharm, Inc., a developer and manufacturer of pharmaceutical products and
services, and Acme United, Inc., a manufacturer of scissors and other medical
products.
Executive officers of the Company are elected annually and serve at the
discretion of the Board. There are no family relationships between or among any
of the Company's directors or executive officers.
Compensation Committee Interlocks and Insider Participation
The Company's compensation committee for the fiscal year ended March 28,
1997 was comprised of Messrs. Dallas, Elefant and Tallis. Mr. Elefant provides
legal services as general counsel to the Company. Fees for such legal services
were approximately $132,000 in fiscal year 1997.
Executive Compensation
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company, for services rendered in all
capacities for the fiscal years 1995 through 1997, for its Chief Executive
Officer and the four other most highly compensated officers.
-66-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------- ---------------------------------
Securities
Underlying All Other
Name and Principal Position Year Salary(1) Bonus(2) Options(3) Compensation(4)
--------------------------- ---- --------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Patrick C. Kelly ................... 1997 $475,000 $ 76,000 -- $58,001
Chairman of the Board and Chief 1996 360,000 154,800 290,462 30,434
Executive Officer 1995 324,996 128,100 150,000 12,017
John F. Sasen, Sr. ................ 1997 300,000 36,000 13,157 46,693
President 1996 212,083 69,300 54,282 4,427
1995 175,008 48,027 30,000 4,424
David A. Smith .................... 1997 235,000 28,200 9,045 7,785
Executive Vice President and Chief 1996 145,799 47,850 31,251 2,628
Financial Officer 1995 135,000 37,049 15,000 2,622
Frederick E. Dell ................. 1997 170,000 21,591 4,217 9,114
Executive Vice President; President 1996 138,000 15,660 21,084 2,630
of Diagnostic Imaging, Inc. 1995 132,000 50,108 15,000 2,596
James B. Stallings, Jr.(5) ........ 1997 160,417 17,500 20,000 11,528
Executive Vice President - Southern
Region
</TABLE>
- ---------------
(1) Total base salary earned during the fiscal years presented. The Company
has established base salaries for its fiscal year ending March 27, 1998
as follows: Mr. Kelly, $535,000; Mr. Sasen, $330,000; Mr. Smith,
$255,000; Mr. Dell, $200,000; and Mr. Stallings, $190,000.
(2) Annual incentive award paid for results achieved during the fiscal years
presented. Any amounts deferred at the election of the executive are
included in the reported amounts.
(3) Grants of stock options made during the fiscal years presented. These
awards were made under the Company's 1994 Long Term Incentive Plan and
1994 Long Term Stock Plan.
(4) All other compensation which is not included in the aforementioned
categories. Amounts shown in this column include the following payments
for fiscal year 1997: (i) for Mr. Kelly, $506 for PSS contributions to
the Employee Stock Ownership Plan (the "ESOP"), $27,765 for total
premiums under a ten year term life insurance policy and $29,730 for
total premiums under a key-man life insurance policy; (ii) for Mr.
Sasen, $493 for PSS contributions to the ESOP and $46,200 for total
premiums under a split dollar life insurance policy; (iii) for Mr.
Smith, $500 for PSS contributions to the ESOP and $7,285 for total
premiums under a split dollar life insurance policy; (iv) for Mr. Dell,
$319 for PSS contributions to the ESOP and $3,795 for total premiums
under a split dollar life insurance policy; and (v) for Mr. Stallings,
$11,528 for total premiums under a split dollar life insurance policy.
(5) Mr. Stallings has served the newly created position of Chief Operating
Officer since July 1977 and has been employed by the Company since April
1996.
-67-
<PAGE>
Option Grants in Fiscal 1997
The following table sets forth information concerning the grant of
stock options made during fiscal year 1997 pursuant to the Company's 1994 Long
Term Incentive Plan and 1994 Long Term Stock Plan:
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------------
Percentage Potential Realized Value at
of Total Assumed Actuarial Rates
Number of Options of Stock Price
Securities Granted to Appreciation
Underlying Employees Exercise For Option Term (3)
Options in Fiscal Price Expiration -------------------
Name Granted (1) Year 1997 ($/Sh)(2) Date 5% 10%
- ---- ------------ ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Patrick C. Kelly ........... -- --% -- -- -- --
John F. Sasen, Sr. ......... 13,157 4.8 $23.94 7/8/06 $198,088 $501,995
David A. Smith ............. 9,045 3.3 23.94 7/8/06 136,179 345,105
Frederick E. Dell .......... 4,217 1.6 23.94 7/8/06 63,490 160,896
James B. Stallings, Jr. .... 20,000 7.4 23.94 7/8/06 301,115 763,084
</TABLE>
- ----------------------
(1) Issued from the Long Term Incentive Plan and the Long Term Stock Plan,
each of which became effective in March 1994. The options issued in
fiscal year 1997 to the named executive officers are nonqualified stock
options for federal income tax purposes and accordingly are not entitled
to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended. The options granted in fiscal year 1997 to the
named executive officers are exercisable immediately and expire ten
years from the date of grant.
(2) In fiscal year 1997, the named executive officers were granted options
to acquire an aggregate of 46,419 shares of Common Stock at an exercise
price of fair market value as of the date of grant.
(3) The dollar amount under the columns assumes that the market price of the
Common Stock from the date of the option grant appreciates at cumulative
annual rates of 5% and 10%, respectively, over the term of each option
granted in fiscal year 1997. The assumed rates of 5% and 10% were
established by the Securities and Exchange Commission and therefore are
not intended to forecast possible future appreciation, if any, of the
price or value of the Common Stock.
-68-
<PAGE>
Option Exercises and Holdings as of March 28, 1997
The following tables set forth information regarding stock options
exercised in fiscal year 1997 by each of the named executive officers and the
value of the unexercised options held by these individuals as of March 28, 1997,
based on the market value of the Common Stock on that date:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal Year 1997
and Option Values as of March 28, 1997
-----------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Shares Underlying Options at In-the-Money Options
Acquired Value March 28, 1997 at March 28, 1997(2)
Name on Exercise Realized Exercisable(1) Exercisable(1)
---- ----------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Patrick C. Kelly ......... 10,000 $2,105,625 630,462 $3,190,750
John F. Sasen, Sr. ....... 36,000 777,750 67,439 --(3)
David A. Smith ........... 15,000 296,250 40,296 --(3)
Frederick E. Dell ........ 6,000 192,000 40,301 139,995
James B. Stallings, Jr. .. -- -- 20,000 --(3)
</TABLE>
- ---------------
(1) All options held by the named executive officers are currently exercisable.
(2) Based upon the closing price of $13.00 of the Common Stock on the Nasdaq
National Market on March 27, 1997.
(3) Based upon the closing price of $13.00 of the Common Stock on the Nasdaq
National Market on March 27, 1997, the exercise prices for the options
held by these officers exceed the closing price on such date.
<TABLE>
<CAPTION>
Long Term Incentive Plans - Awards in Last Fiscal Year
-------------------------------------------------------------
Estimated Future Payouts Under
Number of Non-Stock Price-Based Plan
Performance Period Until --------------------------------------
Name Units (1) Payout Threshold(2) Target(3) Maximum(4)
- ---- --------- ----------------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Patrick C. Kelly ......... 238 1/1/97 - 12/31/99 $119,000 $238,000 $714,000
John F. Sasen, Sr. ....... 150 1/1/97 - 12/31/99 75,000 150,000 450,000
David A. Smith ........... 118 1/1/97 - 12/31/99 59,000 118,000 354,000
Frederick E. Dell ........ 85 1/1/97 - 12/31/99 42,500 85,000 255,000
James B. Stallings, Jr. .. 80 1/1/97 - 12/31/99 40,000 80,000 240,000
</TABLE>
- -----------------
(1) Under the Company's 1994 Long Term Incentive Plan, officers of the
Company may be awarded a certain number of Performance Units each year
equal to a percentage of the officer's salary. Each Performance Unit
granted has a target value of $1,000 assuming the Company's total
shareholder return result is in the 60th percentile of peer group
companies. The actual value of each Performance Unit depends on the
Company's performance over a period of three fiscal years, beginning on
the effective date of the award.
(2) The threshold amounts shown are based upon the Company achieving a total
shareholder return result in the 50th percentile of peer group
companies, at which point each Unit granted will have a value of $500.
(3) The target amounts shown are based upon the Company achieving a total
shareholder return result in the 60th percentile of peer group
companies, at which point each Unit granted will have a value of $1,000.
(4) The maximum amounts shown are based upon the Company achieving a total
shareholder return result in the 90th percentile or greater of peer
group companies, at which point each Unit granted will have a value of
three times the target value, or $3,000.
-69-
<PAGE>
Employment Agreements
The Company has entered into employment agreements with each of its named
executive officers, which include the terms described below:
Term. Mr. Kelly's employment agreement was for an initial period of five
years expiring June 1, 1997, was renewed for a five-year period ending June 1,
2002, and is automatically renewable for additional five year terms. The other
executive officers' employment agreements are for terms of two years and are
automatically renewable for additional two year terms.
Covenants Not to Compete. Each executive officer has agreed not to compete
with the Company for a period of 18 months following the termination of his
employment within the territory in which the Company is then operating.
The covenants not to compete are not valid upon the occurrence of certain
events. In Mr. Kelly's employment agreement, such events include either Mr.
Kelly not being re-elected to or resigning his position as a director of the
Company or the acquisition of a voting majority of the issued and outstanding
capital stock of the Company by an outside entity. In the other executive
officers' employment agreements, such events include, in addition to those set
forth in the previous sentence, Mr. Kelly no longer being employed by or
resigning his employment with the Company or, following Mr. Kelly's death or
disability, Fred Elefant being removed as a director of the Company.
Termination. Each employment agreement includes several provisions
requiring the Company to make certain payments upon the occurrence of certain
events.
Following Mr. Kelly's termination by the Company for any reason except for
good cause or if Mr. Kelly resigns from the Company for good cause, the Company
is required to pay Mr. Kelly's full salary for 24 months following such
termination or resignation, and to provide Mr. Kelly with insurance coverage
during that period. In addition, the Company is required to repurchase up to 50%
of the Common Stock owned by Mr. Kelly at its market value within 30 days of
demand by Mr. Kelly at any time during the 24 month period. During that period,
Mr. Kelly is entitled to have his shares of Common Stock registered in the event
that securities held by any persons who are at such time members of Board of
Directors are registered. The other executive officers have similar rights as to
payment of salary, provision of insurance benefits, repurchase of up to 20% of
their Common Stock and registration of Common Stock for a period of six months.
Upon a change in control of the Company, if the Company then terminates
Mr. Kelly's employment or if Mr. Kelly resigns, the Company is required to pay
Mr. Kelly's salary and provide Mr. Kelly with insurance coverage for a period of
three years and to repurchase all of Mr. Kelly's Common Stock at its market
value upon demand. A change in control of the Company is defined as the
resignation, removal or failure to re-elect Mr. Kelly as a director of the
Company, or following Mr. Kelly's death or disability, the resignation, removal
or failure to re-elect Fred Elefant as a director of the Company. Mr. Kelly is
also entitled to reimbursement of up to $100,000 per year for office,
secretarial, and related expenses. In this case, Mr. Kelly also has registration
rights as described above during such three year period. The other executive
officers have similar rights for a period of one year in the event of their
termination or resignation following a change in control of the Company.
If the Company terminates Mr. Kelly for cause, or if Mr. Kelly resigns
from the Company without good reason, Mr. Kelly is entitled to receive his
salary and full insurance coverage for a period of 12 months or, if earlier,
until his employment with another company. The other executive officers have
similar rights for a period of three months or, if earlier, until their
employment with another company.
-70-
<PAGE>
PSS CERTAIN TRANSACTIONS
Fred Elefant, a member of the Board of Directors and Secretary of the
Company, provides legal services as general counsel to the Company. Fees for
such legal services were approximately $132,000 in fiscal year 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF PSS
The following table reflects the number of shares of Common Stock
beneficially owned as of March 28, 1997, by (i) each person who is known by the
Company to beneficially own more than 5% of the outstanding Common Stock, (ii)
each of the executive officers named in the Summary Compensation Table, (iii)
each director, and (iv) all of the Company's executive officers and directors as
a group. Unless otherwise noted, all shares are owned directly with sole voting
and dispositive powers.
<TABLE>
<CAPTION>
Number of Percent of
Name Shares Total(1)
---- ------ --------
<S> <C> <C>
Putnam Investments, IC(2)........................................... 3,429,284 8.8%
Pilgrim Baxter & Associates, Ltd. (2)............................... 3,400,800 9.2
Patrick C. Kelly (3)(4)............................................. 1,335,466 3.5
John F. Sasen, Sr. (3).............................................. 187,177 *
Frederick E. Dell (3)............................................... 213,590 *
David A. Smith (3).................................................. 176,524 *
James B. Stallings, Jr.(3).......................................... 23,000 *
Delmer W. Dallas (3)................................................ 131,144 *
T. O'Neal Douglas................................................... 18,000 *
Fred Elefant (3)(5)................................................. 702,616 1.9
Delores P. Kesler (3)............................................... 1,500 *
James L.L. Tullis (6)............................................... 217,860 *
William C. Mason.................................................... -- --
All Executive Officers and Directors as a group (19 persons)(3)..... 3,300,718 8.7
</TABLE>
- ----------------
* Less than 1%
(1) Based upon 37,061,615 shares of Common Stock outstanding as of March 28,
1997.
(2) The addresses for holders of five percent or more of the Common Stock
outstanding are as follows: Putnam Investments, Inc., One PO Box Square,
Boston, MA 02109; and Pilgrim Baxter & Associates, Ltd. is 1255 Drummers
Lane, Suite 300, Wayne Pennsylvania 19087-1590. All information
regarding the foregoing shareholders was obtained solely from a Schedule
13G filed by Putnam Investments, Inc. on January 31, 1997 and from a
Schedule 13G/A filed by Pilgrim Baxter & Associates, Ltd. on March 12,
1997.
(3) Included in such beneficial ownership are shares of Common Stock
issuable upon the exercise of certain options exercisable immediately or
within 60 days of March 28, 1997 as follows: Mr. Kelly, 630,462 shares;
Mr. Sasen, 67,439 shares; Mr. Dell, 40,301 shares; Mr. Smith, 40,296
shares; Mr. Stallings, 20,000 shares; Mr. Elefant, 17,539 shares; Mr.
Tullis, 14,296 shares; and executive officers and directors as a group,
886,515 shares. Also included in such beneficial ownership are shares
held for the account of certain individuals by the ESOP as follows: Mr.
Kelly, 154,974 shares; Mr. Sasen, 18,872 shares; Mr. Smith, 25,959
shares; Mr. Dell, 96,420 shares; and all executive officers and
directors as a group, 386,830 shares.
(4) Excludes 600,000 shares held in trust for Mr. Kelly's daughters.
(5) Includes 600,000 shares held in trust for Mr. Kelly's daughters for
which Mr. Elefant serves as co-trustee.
(6) Includes 127,881 shares owned by Tullis Dickerson Capital Focus, L.P.
and 11,200 shares owned by Tullis Dickerson Partners. Mr. Tullis is the
general partner of Tullis-Dickerson Partners, the sole general partner
of Tullis-Dickerson Capital Focus, L.P.
-71-
<PAGE>
SELECTED FINANCIAL DATA OF S&W
The selected financial data of S&W presented as of and for the periods
ended March 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
audited and/or reviewed financial statements of S&W. See "Business of S&W --
General," "S&W Management's Discussion and Analysis of Financial Conditions and
Results of Operations" and "S&W Financial Statements."
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Statements of Income Data: (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue 50,042 54,332 58,684 60,096 72,034
Gross profit 10,590 10,895 12,702 12,926 16,774
General and administrative expenses 9,025 9,099 10,748 11,044 15,773
Depreciation and amortization 103 140 182 202 295
Earnings before interest and taxes 1,582 1,789 1,965 1,891 1,014
Net income 775 849 907 790 53
Net income per share $3.10 $4.40 $4.43 $3.65 $.23
Dividends per common share None None None None None
Working capital 2,759 3,468 4,230 4,567 6,145
Total assets 11,383 12,440 14,398 16,912 22,984
Long-term indebtedness 540 3,879 3,224 2,682 3,266
Retained earnings and common stock 3,236 4,399 5,307 6,097 6,150
Less: Unearned ESOP shares 0 3,638 3,021 2,516 1,368
Add: Paid in capital 0 0 0 0 173
Total equity 3,236 761 2,286 3,581 4,955
</TABLE>
-72-
<PAGE>
S&W MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of S&W's financial condition and results of
operations should be read in conjunction with the more detailed information and
the S&W Financial Statements and notes thereto appearing elsewhere in this Proxy
Statement-Prospectus.
General
S&W is a leading distributor of x-ray chemicals, film, equipment and
related medical products in hospitals, imaging centers, MRI offices,
orthopedics, chiropractic, veterinary, and dental facilities. Founded in 1973,
S&W has grown primarily through expanded sales territories with significant and
growing equipment sales and service.
S&W distributes products to its customers through five regional
distribution centers located in Buffalo, Rochester, Syracuse, Albany and
Newburgh, New York and three sales/service offices located in Erie and Scranton,
Pennsylvania and Hartford, Connecticut. S&W's 94-person sales and service force
calls on 3,000 hospital-physician customers in six states. S&W offers over
15,000 medical products, related supplies and diagnostic imaging equipment.
Results of Operations
The following table represents certain consolidated statements of
operations data as a percentage of such items to revenues:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Statements of Income Data:
Revenues 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of Goods Sold 78.4 78.5 76.7
General Administration 18.3 18.4 21.9
Depreciation and Amortization 0.3 0.3 0.4
Interest 0.8 0.8 1.2
Income Before Income Taxes 2.5 2.3 0.2
Income Taxes 1.0 1.0 0.1
Net Income 1.5 1.3 0.0
</TABLE>
Fiscal Year Ended March 31, 1997 Versus March 31, 1996
Revenues. Revenues for the fiscal year ended March 31, 1997 increased by
19.9% to $72 million, compared to $60 million for the fiscal year ended March
31, 1996. The increase is due to a full year effect of an acquisition and
continued market penetration resulting in branch sales growth.
Cost of Goods Sold. Cost of goods sold as a percent of revenues decreased
slightly to 76.7% for the fiscal year ended March 31, 1997 from 78.5% for the
fiscal year ended March 31, 1996.
General and Administrative Expenses. General and administrative expenses
as a percent of revenues for the fiscal year ended March 31, 1997 increased to
21.9% from 18.4% for the fiscal year ended March 31, 1996. The increase
reflected an addition of 25 sales, service and support personnel during the most
recent acquisition.
-73-
<PAGE>
Depreciation and Amortization. Depreciation and amortization for the
fiscal year ended March 31, 1997 increased slightly to $295,000 from $202,000
for the fiscal year ended March 31, 1996. The increase is primarily due to the
goodwill amortization resulting from an acquisition that occurred in March 1996
and the purchase of computer equipment and software.
Interest Expense. Interest expense increased to $865,000 in the fiscal
year ended March 31, 1997 compared to $500,000 in the fiscal year ended March
31, 1996. The increase was primarily due to the increased use of borrowed funds
to fund working capital requirements.
Income Tax Expense. Income taxes for the fiscal year ended March 31, 1997
were $95,900 as compared to $601,100 for the fiscal year ended March 31, 1996.
Net Income. Net income for the fiscal year ended March 31, 1997 was
$53,275 as compared to $790,000 for the fiscal year ended March 31, 1996.
Fiscal Year Ended March 31, 1996 Versus March 31, 1995
Revenues. Revenues for the fiscal year ended March 31, 1996 grew slightly
to $60 million as compared to $58.7 million for the fiscal year ended March 31,
1995.
Cost of Goods Sold. Cost of goods sold as a percent of revenues increased
slightly to 78.5% for the fiscal year ended March 31, 1996 from 78.4% for the
fiscal year ended March 31, 1995.
General and Administrative Expenses. General and administrative expenses
as a percent of revenues increased slightly to 18.4% for the fiscal year ended
March 31, 1996 from 18.3% for the fiscal year ended March 31, 1995.
Depreciation and Amortization. Depreciation and amortization for the
fiscal year ended March 31, 1996 increased slightly to $202,000 from $182,000
for the fiscal year ended March 31, 1995.
Interest Expense. Interest expense as a percent of revenues remained
unchanged at approximately 0.8% for the fiscal years ended March 31, 1996 and
1995.
Income Tax Expense. Income taxes for the fiscal year ended March 31, 1996
were $601,100 as compared to $616,582 for the fiscal year ended March 31, 1995.
Net Income. Net income for the fiscal year ended March 31, 1996 was
$790,000 as compared to $907,019 for the fiscal year ended March 31, 1995.
Liquidity and Capital Resources
As of March 31, 1997, total current assets were $20.9 million and total
current liabilities were $14.7 million, resulting in working capital of $6.2
million, compared to $15.2 million in current assets and $10.6 million in
current liabilities ($4.6 million in working capital) at March 31, 1996. The
current ratio was 1.4 to 1 at March 31, 1997 and 1996.
Operating Activities. Net cash used in operating activities was $438,000,
$1.0 million, and $944,000 in fiscal years ended March 31, 1997, 1996, and 1995,
respectively. The net cash used in fiscal 1996 and 1995 operating activities was
a result of increasing inventories in anticipation of a manufacturer price
increase and an increase in accounts receivable. Fiscal year ended March 31,
1997 operating activities were offset by increased accounts payables.
Investing Activities. Net cash used in investing activities was $475,000,
$585,000, and $247,000 in fiscal years ended March 31, 1997, 1996, and 1995,
respectively. These funds were primarily used for
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fixed asset purchases in fiscal years ended 1997 and 1995 and an acquisition in
fiscal year ended March 31, 1996.
Financing Activities. Net cash provided by financing activities was $1.1
million, $1.6 million, and $1.1 million in fiscal years ended 1997, 1996, and
1995, respectively. These funds were used for the borrowings and pay downs on
the two working capital lines of credit.
As of March 31, 1997, S&W had two working capital line of credit
agreements and an equipment line of credit agreement with a local bank in the
aggregate amount of $10,000,000. The revolving lines of credit are secured by
S&W's accounts receivable, equipment and inventory, along with the personal
guarantee of one of the shareholders. In addition, the agreements require S&W to
maintain certain financial covenants and specified ratios.
The primary credit line is available up to $3,500,000 for working capital
requirements and bears interest at the prime rate (an effective rate of 8.5% at
March 31, 1997). At March 31, 1997, there was $1,714,550 outstanding against
this line.
The equipment credit line is available for purchases of equipment for
resale up to $500,000 and bears interest at the prime rate plus 1-1/4%. No
amounts were outstanding under this credit line at March 31, 1997.
S&W estimates that existing line of credit availability, working capital
and cash from operations will be sufficient to fund operations for the next
twelve months.
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BUSINESS OF S&W
General
S&W offers imaging products and services to health care providers with
the objective of satisfying technical imaging needs. S&W's headquarters is
located in Rochester, New York and S&W maintains branch offices in Buffalo,
Syracuse, Albany and Newburgh, New York. S&W also has sales/service satellite
facilities in Erie, Pennsylvania, Scranton, Pennsylvania and Hartford,
Connecticut. S&W services over 4,000 customers, including over 250 hospitals,
700 radiographic and imaging centers, and other industrial, alternate care and
dental accounts. S&W serves customers throughout New York State (excluding Long
Island), Northern Pennsylvania, Northern New Jersey and Western New England.
S&W's sales representatives meet daily with health care professionals
to provide solutions for a wide spectrum of needs. In the acute care market, S&W
representatives interact with imaging and materials management department heads,
as well as physicians and hospital administrators. Due to the pressure of health
care reform, down sizing, managed care and capitated provider contracts, S&W
sales representatives work with hospital administration staff to increase
efficiency and reduce the cost of the products and services consumed by the
facilities. S&W sales representatives also assist customers in complying with
health department quality assurance policies and meeting EPA film processor
effluent discharge regulations. In addition, S&W maintains relationships with
Group Purchasing Organizations and Integrated Delivery Networks. These
organizations and networks make decisions for as few as three to as many as
1,800 hospitals. S&W considers these organizations and networks to be very
effective resources.
Each S&W branch office consists of three teams: consumables/accessories
sales, imaging equipment sales, and multi-vendor imaging equipment service. The
team approach allows for a comprehensive understanding of customer goals.
Frequent interaction among these teams allows S&W to service a variety of
customer needs.
Consumables/Accessories and Sales
Film sales account for approximately 50% of S&W's revenues. Nearly half
of the film sold by S&W is manufactured by Kodak. S&W distributes film and
services film handling equipment manufactured by the world's major
manufacturers - Kodak, Sterling, Imation, Konica, Fuji and Agfa.
S&W provides its acute care and larger alternate care customers with
pre-mixed developer and fixer solution. In addition to selling products to these
customers, S&W assumes responsibility for ordering, inventory maintenance, and
delivery, which saves its customers the time and cost associated with these
processes and allows them to focus on providing health care services.
All S&W processor service personnel must matriculate through the Kodak
Imagewatch certification program, which includes general processing, mammography
and silver management. Continuing technical education courses offered by other
film handling manufacturers also are attended.
In addition to film and film handling products, S&W offers thousands of
imaging accessory products manufactured by hundreds of large and small
companies, and include such products as paper filing envelopes, barium, lead and
lead apparel, darkroom cabinets, grids, buckles, mew boxes, shelving, cassettes
and markers.
S&W offers three inventory management distribution programs: a
stockless inventory program, a JIT program and a conventional program. S&W's
inventory management programs are designed to increase efficiencies and decrease
costs for customers through outsourcing the order procurement process to S&W. By
integrating the entire inventory ordering and maintenance process, S&W helps
customers
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identify and eliminate duplicative and unnecessary costs, thus allowing imaging
department managers to focus on patient care.
S&W is EDT capable and utilizes an ANSI-X12 P.C. platform on-call
system to further reduce ordering costs.
S&W sells film, film handling products and accessories through a
telemarketing division in its Rochester branch. This division services over
2,200 dental customers nationally and abroad, and accounted for approximately
$1.3 million in revenue in fiscal 1997.
Imaging Equipment Sales
S&W distributes specialty lines of imaging equipment for several
manufacturers, including Camtronics, Comdisco, CompuRad, Shimadzu, Infimed and
Trex Medical Products. Trex distributes products through four subsidiaries:
Bennett, Continental X-Ray, Lorad and XRE. Below is a brief description of these
companies and certain of their products.
Trex Medical Products - A leading manufacturer of mammography and
stereotactic needle biopsy systems, and quality radiographic systems.
Trex is an innovator with the new fill breast digital technology which
is expected to be available in 1998.
Bennett - Manufactures mammography (Contour) and general radiographic
systems. The Contour product is a market leader in mammography due to
its tilt feature which visualizes additional breast tissue. Bennett
also manufactures stereotactic equipment.
Continental X-Ray - Designs, manufactures and markets general purpose
and specialty X-Ray systems, including radiographic/fluoroscopic and
electrophysiologic systems. Continental's new flagship product, the
DigiSpot R&F room, provides high quality imaging with low radiation to
the patient.
Lorad - Its breast imaging systems are regarded in the industry as the
most technically advanced available, and provide the highest image
resolution available. Products include M-IV & M-III Mammography
Systems, StereoGuide prone stereotactic breast biopsy systems, DSM and
StereoLoc II. Together with U.S. Surgical, Lorad developed the ABBI
System, a minimally invasive breast biopsy instrument which decreases
provider costs by eliminating certain surgical procedures.
XRE - Through dealer organizations and private label agreements with
several global medical imaging companies (including Philips, G.E. and
Picker), XRE has become a leading designer and manufacturer of
angiographic equipment. XRE's patented parallelogram positioner offers
virtually unlimited angulations for complex cardiac imaging.
Camtronics - Manufactures digital imaging systems for R/F, angio and
cardiac applications. Its VP System includes a direct to disk
technology that is new in the industry and allows for increased image
storage and faster image review. Camtronics' products are distributed
through an exclusive dealer network as well as OEM arrangements.
Comdisco - Remanufactures state-of-the art diagnostic imaging equipment
and specializes in high-end ISO-9002 certified MRI, CT, angio, cath
lab, R&F and mobil vascular labs.
CompaRad - Manufactures equipment for affordable image transmission to
increase service levels and imaging efficiencies for the referring
physician and the patient. CompuRad's non-
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proprietary Windows NT software complies with industry dicom standards
and is upgradeable and user friendly.
Shimadzu - Manufactures high tech imaging equipment such as general X-
ray, angio, CT and MRI.
Infimed - Manufactures digital imaging systems for R/F, angio and
cardiac applications. Infimed's products are based on Microsoft's
Windows 95, and are primarily sold as "add on" systems through a
dealership network.
Multi-Vendor Imaging Equipment Service
S&W's customers utilize equipment from a wide variety of vendors and
S&W's multivendor service provides a cost efficient alternative to these
customers who would otherwise be required to contract with a large number of
servicing companies.
S&W has 28 imaging equipment service personnel with various backgrounds
and expertise. S&W's imaging equipment service personnel service all makes and
models available from the manufacturers represented by S&W and from most other
manufacturers. S&W personnel have the skill to repair a wide variety of
equipment with a set of schematics and with the resources of second source
vendors who assist S&W by supplying cost effective part and component
alternatives.
S&W provides multi-vendor service for the following types of imaging
equipment: radiographic, portables, fluoroscopic, CT, tomographic, C-arm,
special procedures and ultrasound.
Competition
The imaging equipment and services businesses are highly competitive.
Many large, multi-national companies, such as G.E., Phillips, Siemens, Picker
and Toshiba, compete with S&W in the imaging equipment marketplace and utilize a
spectrum of resources ranging from designated equipment specialists to creative
financial arrangements.
S&W differentiates itself from large, original equipment manufacturers
by offering a higher level of local customer service and lower delivered cost.
S&W's local, decentralized structure allows flexibility to address customer
needs and to create opportunities for future sales and services.
S&W also encounters heavy competition in the area of consumable and
accessory sales from Picker and from locally based firms. E. G. Baldwin Co., L.
M. Goodyear X-Ray Co., and Buffalo X-Ray Co. compete in the Buffalo market; L.
M. Goodyear X-Ray Co., V-Med, and Buffalo X-Ray Co. compete in the Rochester
market; V-Med, Reliance X-Ray, and North Central X-Ray compete in the Syracuse
market; Associated X-Ray, E. M. Parker Co., and Schiring Radiographic Imaging
compete in the Albany market; and E. M. Parker Co., Standard Medical Imaging,
and Parker X-Ray Solutions compete in the Newburgh market.
Facilities
S&W distributes products through its seven branch and satellite service
centers, and operates a fleet of approximately 20 leased trucks to service
customers. S&W believes that its facilities are adequate to support its current
and anticipated business for the foreseeable future. The following table lists
S&W's facilities by center, all of which are leased except for the Syracuse, New
York center:
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<TABLE>
<CAPTION>
Date Approximate
---- -----------
Location Opened Square Feet Service Area
-------- ------ ----------- ------------
<S> <C> <C> <C>
Rochester, NY 1973 12,000 Western and Southern NY, Northern PA
Buffalo, NY 1985 12,000 Western NY and Northern PA
Syracuse, NY 1976 20,000 Central NY and North Central PA
Albany, NY 1984 14,000 Northern and Eastern NY, VT, CT, MA
Hartford, CT 1996 3,000 West and Central CT
Erie, PA 1993 3,000 Western PA
Scranton, PA
Newburgh, NY 1991 12,000 Downstate NY, CT, NJ, Eastern PA
</TABLE>
Employees
S&W employs approximately 175 persons (including 15 part-time
employees), of whom 28 are engaged in management, administration and accounting,
24 are in direct sales, 70 are in equipment services, 25 are in customer
service, and 28 are in warehouse and distribution operations (including
drivers).
Insurance
S&W maintains general liability, product liability and automobile
liability insurance. While S&W believes its insurance is adequate in amount and
coverage, there can be no assurance that the coverage maintained by S&W is
sufficient to cover all future claims or will be available in adequate amounts
or at a reasonable cost.
Legal Proceedings
S&W is involved from time to time in various legal proceedings
incidental to its business. In the opinion of S&W's management, no pending
litigation is likely to have a material effect on S&W's financial position,
results of operations or liquidity.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF S&W
The following table sets forth certain information with respect to the
beneficial ownership of S&W Shares as of August 10, 1997, by (i) each person who
is known by S&W to beneficially own more than 5% of any class of outstanding
capital stock of S&W, (ii) each of the executive officers named in the S&W
Summary Compensation Table above, (iii) each of S&W's directors, and (iv) all of
S&W's executive officers and directors as a group. See "The Merger--Exchange
Ratio."
<TABLE>
<CAPTION>
Name Number of Shares Percent Owned
---- ---------------- --------------
<S> <C> <C>
Joseph E. Miller, Jr. 85,200 32.82%
Bruce P. Ashby 85,200 32.82%
William K. Luety, Jr. 1,820 *
James F. Goldner 1,820 *
Employee Stock Ownership Trust 85,534 32.96%
All executive officers and directors as
a group (3 persons)
</TABLE>
- ----------------------
* Less than one percent.
(1) The named stockholders have sole voting and investment power with
respect to all shares shown as being beneficially owned by them, except
as otherwise indicated.
The addresses of those persons who are known to S&W to be the
beneficial owners of 5% or more of the any outstanding class of S&W capital
stock are as follows: Joseph E. Miller, Jr.: 340 Gateway Park Drive, North
Syracuse, New York 13212; Bruce P. Ashby: 79 Brown Road, Stillwater, New York,
12170; and the S&W X-Ray, Inc. Employee Stock Ownership Trust: Cornerstone
Center, 2300 Buffalo Road, Rochester, New York 14824.
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DESCRIPTION OF PSS CAPITAL STOCK
The authorized capital stock of PSS consists of 60,000,000 shares of
common stock, $0.01 par value ("PSS Common Stock"), of which 37,087,601 shares
were issued and outstanding on June 16, 1997, and 1,000,000 shares of preferred
stock, $0.01 par value (the "PSS Preferred Stock"), of which no shares are
issued and outstanding. There were approximately 1,065 record holders of PSS
Common Stock as of June 16, 1997.
PSS Common Stock
Holders of PSS Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders of PSS and may not cumulate votes
for the election of directors. Holders of PSS Common Stock have the right to
receive dividends when, as, and if declared by the Board of Directors from funds
legally available therefor. Upon the liquidation of PSS, holders of PSS Common
Stock are entitled to share pro rata in any assets available for distribution to
shareholders after payment of all obligations of PSS. Holders of PSS Common
Stock have no preemptive rights and have no rights to convert their PSS Common
Stock into any other securities. All shares of PSS Common Stock have equal
rights and preferences. All shares of PSS Common Stock now outstanding are fully
paid for and non-assessable.
PSS Preferred Stock
There are currently no shares of PSS Preferred Stock outstanding. The
Board of Directors has the authority to establish, by amendment to the Articles
of Incorporation in accordance with the Florida Business Corporation Act (the
"FBCA") law, one or more series of PSS Preferred Stock, to designate each such
series and to establish the variations in rights, preferences and limitations
for each series, without further shareholder approval. Any issuance of PSS
Preferred Stock could be used to dilute the stock ownership of persons seeking
to gain control of PSS and could otherwise have the effect of delaying,
deferring or preventing a change in control of PSS.
Certain Articles of Incorporation and Bylaw Provisions of PSS
The Amended and Restated Articles of Incorporation of PSS (the "PSS
Articles") contain several provisions that may make more difficult the
acquisition of control of PSS by means of a tender offer, open market purchase,
proxy fight or otherwise. The Amended and Restated Bylaws of PSS (the "PSS
Bylaws") also contain provisions that could have an anti-takeover effect.
Classified Board of Directors. The PSS Articles and Bylaws provide for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. PSS believes that a classified Board of Directors
will help to assure the continuity and stability of the Board of Directors and
of the business strategies and policies as determined by the Board of Directors.
The classified board provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, and, therefore
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of PSS, even though such an attempt might be beneficial to PSS
and its shareholders. Thus, the classified board provision could increase the
likelihood that incumbent directors will retain their positions.
Number of Directors; Removal; Filling Vacancies. The PSS Articles and
Bylaws provide that the number of directors will be fixed from time to time by
the consent of three-fifths of the Board of Directors. Accordingly, any four
members of the board could prevent a shareholder from obtaining representation
on the board by enlarging the board and filling the new directorships with its
own nominees.
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Moreover, the PSS Articles provide that directors may be removed with
or without cause only by the affirmative vote of holders of at least four-fifths
of the outstanding shares of the capital stock of PSS entitled to vote on
election of directors at a meeting called for that purpose ("PSS Voting Stock"),
except that if the Board of Directors, by an affirmative vote of at least three-
fifths of the entire Board of Directors recommends removal of a director to the
shareholders, such removal may be effected by the affirmative vote of the
holders of a majority of the PSS Voting Stock. This provision, when coupled with
the provisions of the PSS Articles and the Bylaws authorizing the Board of
Directors to fill vacant directorships only by a vote of three-fifths of the
Board of Directors in office, will preclude shareholders having less than four-
fifths of the PSS Voting Stock from removing incumbent directors with or without
cause and filling the vacancies created by such removal with their own nominees,
without the affirmative vote of three-fifths of the Board of Directors.
Preferred Stock. As described above, the Board of Directors is
authorized to provide for the issuance of shares of PSS Preferred Stock in one
or more series, and to fix by amendment to the PSS Articles, as provided by the
FBCA, the terms and conditions of each such series. PSS believes that the
availability of the PSS Preferred Stock issuable in series will provide it with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which might arise. Although the Board of
Directors has no present intention of doing so, it could issue a series of PSS
Preferred Stock that could, depending on its terms, either impede or facilitate
the completing of a merger, tender offer or other takeover attempt.
Certain Amendments. The PSS Articles provide that if the shareholders
have adopted or amended a provision of the PSS Articles or the Bylaws that fixes
a greater quorum or voting requirement for shareholders or voting groups of
shareholders than is required by the FBCA law, the adoption or amendment of a
provision in the PSS Articles or Bylaws that adds, changes, or deletes a greater
quorum or voting requirement for shareholders must meet the same quorum
requirement and be adopted by the same vote and voting groups required to take
action under the quorum and voting requirements then in effect or proposed to be
adopted, whichever is greater. The PSS Articles provide that a provision of the
PSS Bylaws which fixes a greater quorum or voting requirement for shareholders
may not be adopted, amended, or repealed by the Board of Directors.
Fair Price Provision. The PSS Articles provide that, in addition to any
affirmative vote required by law or other provisions of the Articles, the
affirmative vote of the holders of at least 80% of the voting power of the PSS
Voting Stock, voting together as a single class, is required for the approval or
authorization of any Business Combination (as defined below) with an Interested
Shareholder (as defined below) . However, the 80% voting requirement is not
applicable if the Business Combination is approved by a two-thirds vote of the
Disinterested Directors (as defined below), and if the Business Combination
meets certain minimum price and procedural requirements. Generally, the
consideration to be received in the Business Combination must not be less than
the higher of (a) the highest per share price paid by the Interested Shareholder
for any shares of PSS Common Stock acquired by it within the two-year period
immediately prior to the first public announcement of the proposed Business
Combination (the 'Announcement Date"), or in the transaction in which the
Interested Shareholder became an interested Shareholder, whichever is higher; or
(b) the fair market value per share of PSS Common Stock on the Announcement Date
or on the date on which the Interested Shareholder became an Interested
Shareholder, whichever is higher. The consideration paid to a particular class
of outstanding PSS Voting Stock shall be in cash or in the same form as the
Interested Shareholder has previously paid for shares of such class of PSS
Voting Stock. After such Interested Shareholder has become an interested
Shareholder and prior to the consummation of the Business Combination, except as
approved by a majority of the Disinterested Directors, there shall have been no
failure to pay quarterly dividends on the outstanding PSS Preferred Stock, if
any, and no reduction in the annual rate of dividends paid on PSS Common Stock
(and an increase in such annual rate of dividends as necessary to reflect any
transaction which has the effect of reducing the number of outstanding shares of
PSS Common Stock); and such Interested Shareholder shall not become the
beneficial owner of any additional shares of PSS Voting Stock except as part of
the transaction which results in such Interested Shareholder becoming an
Interested Shareholder. Such
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Interested Shareholder, after becoming an Interested Shareholder, shall not have
received the benefit, directly or indirectly (except proportionately as a
shareholder) of any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided by PSS, whether
in anticipation of or in connection with such Business Combination or otherwise.
In the event these and other minimum price criteria and procedural requirements
are met and the requisite approval of the Disinterested Directors Is obtained
with respect to a particular Business Combination, then the requirements of the
FBCA shall apply (which may require a majority vote of the shareholders, or in
some instances, no vote of shareholders).
A "Business Combination" is (a) any merger or consolidation of PSS with
any Interested Shareholder or any other corporation which is or after such
merger or consolidation would be an affiliate of the Interested Shareholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or disposition to or
with any interested Shareholder or any affiliate of any Interested Shareholder,
of any assets of PSS or any subsidiary having an aggregate fair market value of
$1 million or more; or (c) the issuance or transfer by PSS or any subsidiary of
any securities of PSS or any subsidiary to any Interested Shareholder or any
affiliate of any Interested Shareholder in exchange for cash, securities or
other property having an aggregate fair market value of $1 million or more; or
(d) the adoption of any plan or proposal for the liquidation or dissolution of
PSS proposed by or on behalf of any Interested Shareholder or any affiliate of
any Interested Shareholder; or (e) any reclassification of securities or
recapitilization of PSS, or any merger or consolidation of PSS with any of its
subsidiaries, or any other transaction which has the effect of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of PSS or any subsidiary directly or indirectly owned by
any Interested Shareholder or any affiliate of any interested Shareholder.
An "Interested Shareholder" shall mean any person (other than PSS, any
of its subsidiaries, PSS or any subsidiary acting as a trustee or in a similar
fiduciary capacity, or any person who would have met the definition of an
interested Shareholder as of March 1, 1994) who or which (a) is the beneficial
owner of more than 10% of the voting power of the outstanding PSS Voting Stock;
or (b) is an affiliate of PSS and at any time within the two-year period
immediately prior to the date in question was the beneficial owner of 10% or
more of the voting power of the then outstanding PSS Voting Stock; or (c) is an
assignee of or has otherwise succeeded to any shares of PSS Voting Stock which
were at any time within the two-year period immediately prior to the date in
question beneficially owned by any Interested Shareholder, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act.
"Disinterested Director" means any member of the Board of Directors who
is unaffiliated with the Interested Shareholder and was a member of the Board of
Directors prior to the time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Disinterested Director who is unaffiliated
with the interested Shareholder and is recommended to succeed a Disinterested
Director by a majority of Disinterested Directors then on the Board of
Directors.
The PSS Articles provide that a vote of the holders of 80% or more of
the voting power of the PSS Voting Stock would be required in order to amend,
alter or repeal, or adopt any provisions inconsistent with, the foregoing fair
price provisions.
Control-Share Acquisition. PSS will be subject to the provisions of
Section 607.0902 of the FBCA. In general, the statute denies voting rights to
shares purchased by an acquiring person who has obtained or anticipates
obtaining a specified level of voting control in shares of an issuing public
corporation as part of a control-share acquisition, except to the extent to
which voting rights are conferred by resolution approved by the shareholders of
the issuing public corporation. A vote of the shareholders to confer voting
power under the statute must meet the criteria set forth in the statute,
including the requirement for approval by a majority of all votes entitled to be
cast in each voting group entitled to vote separately, excluding all interested
shares. For the purpose of the statute, an "issuing public corporation" is a
corporation which has more than 100 shareholders, has its principal office and
place of business or
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substantial assets in the State of Florida, and either has (a) more than 10% of
its shareholders resident in this state; or (b) more than 10% of its shares
owned by residents of this state; or (c) 1,000 shareholders resident in this
state. Provisions of the statute become effective when a person acquires or
intends to acquire stock which, when added to all other shares owned by such
person or in respect of which such person may exercise or direct voting power,
either alone or as part of a group, would entitle such person to exercise at
least 20% of the voting power of the stock of the issuing public corporation.
The statute, when addressing the acquisition of voting power, makes no
distinction between irrevocable proxies and revocable proxies. Arguably then,
the provisions of the statute could be invoked by the solicitation of revocable
proxies although PSS is unaware of any recorded instance where this has
occurred. The statute is self-operative and, therefore, PSS need not assert the
defense in order for the provisions of the statute to apply.
This provision may have the effect of delaying, deferring or preventing
a change in control of PSS without further action of its shareholders.
Transfer Agent and Registrar
The Transfer Agent and Registrar for PSS Common Stock is Continental
Stock Transfer & Trust Company.
CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND S&W STOCKHOLDERS
PSS is a Florida corporation subject to the provisions of the Florida
Business Corporation Act ("FBCA"). S&W is a New York corporation subject to the
provisions of the New York Business Corporation Law ("NYBCL"). Stockholders of
S&W whose rights are governed by the Certificate of Incorporation, as amended,
(the "S&W Certificate) and Bylaws, as amended of S&W (the "S&W Bylaws"), and by
the NYBCL will, upon consummation of the Merger, become stockholders of PSS. The
rights of such stockholders as stockholders of PSS will then be governed by
PSS's Articles and Bylaws and by the FBCA.
Except as set forth below, there are no material differences between
the rights of a PSS stockholder under the PSS Articles and Bylaws and under the
FBCA, on the one hand, and the rights of a S&W stockholder under the S&W
Certificate and Bylaws and under the NYBCL, on the other hand. This summary does
not purport to be a complete discussion of, and is qualified in its entirety by
reference to, the governing law and the Articles or Certificate of Incorporation
and Bylaws of each corporation.
Authorized Capital Stock
PSS. The authorized capital stock of PSS consists of 60,000,000 shares
of Common Stock and 1,000,000 shares of Preferred Stock. As of June 16, 1997,
there were 37,087,601 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding. In addition, as of June 30, 1997 there were
outstanding options under PSS stock option plans to purchase an additional
1,704,809 shares of PSS Common Stock. The Board of Directors of PSS has the
authority to issue the PSS Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions for each such series
(including, without limitation, the right to convert the shares of such PSS
Preferred Stock into shares of PSS Common Stock or preferential voting,
dividend, dissolution or other rights), without any further vote or action by
the stockholders. The Board of Directors of PSS has no present intention of
issuing shares of PSS Preferred Stock.
S&W. S&W is authorized by its Certificate to issue up to 500,000 shares
of Common Stock. There are 259,574 shares of S&W Common Stock outstanding and
4,009 shares of S&W Common Stock to be issued on the Closing Date pursuant to
the S&W Supplemental Executive Retirement Plan.
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<PAGE>
Size and Classification of Board of Directors
PSS. The PSS Articles and Bylaws provide that the number of directors
will be fixed from time to time by the consent of three-fifths of the Board of
Directors. The PSS Articles and Bylaws provide for the Board of Directors to be
divided into three classes of directors, with each class consisting, as nearly
as possible, of one-third of the total number of directors constituting the
entire Board. The term of one class of officers expires every year, so that each
director's term is for a period of three years.
S&W. The S&W Bylaws provide that the number of directors which shall
constitute the whole board shall be not less than three. Except for a decrease
in the number of directors, the number of directors are from time to time fixed
and determined by the directors and are to be set forth in the notice of any
meeting of the shareholders held for the purpose of electing directors. The
Board of Directors of S&W is not divided into classes.
Amendment of Articles or Certificate of Incorporation and Bylaws
PSS. The PSS Articles provide that if the shareholders have adopted or
amended a provision of the PSS Articles or Bylaws that fixes a greater quorum or
voting requirement for shareholders or voting groups of shareholders than is
required by the FBCA law, the adoption or amendment of a provision in the PSS
Articles or Bylaws that adds, changes, or deletes a greater quorum or voting
requirement for shareholders must meet the same quorum requirement and be
adopted by the same vote and voting groups required to take action under the
quorum and voting requirements then in effect or proposed to be adopted,
whichever is greater. The PSS Articles provide that a provision of the PSS
Bylaws which fixes a greater quorum or voting requirement for shareholders may
not be adopted, amended or repealed by the Board of Directors.
S&W. The NYBCL provides that a certificate of incorporation may be
amended by the vote of the majority of the shareholders of a corporation
entitled to vote. The NYBCL provides that bylaws may be amended, repealed or
adopted by the vote of the shares of a corporation entitled to vote on the
election of directors. In addition, the NYBCL provides that bylaws may also be
amended, repealed or adopted by the board of directors, provided that such
bylaws may be amended by the shareholders entitled to vote on the election of
directors. The S&W Bylaws do not alter the required vote.
Special Meetings of Stockholders
PSS. The PSS Bylaws provide that special meetings of stockholders may
be called, as provided under the FBCA, by a corporation's board of directors or
any other person as may be authorized by the corporation's articles or bylaws,
or by the holders of not less than ten percent of the shares entitled to vote.
S&W. The S&W Bylaws provide that special meetings of the shareholders
may be called as provided under the NYBCL by a corporation's board of directors
or by any other person authorized by a corporation's certificate of
incorporation or bylaws.
Removal of Directors
PSS. The PSS Articles provide that directors may be removed with or
without cause only by the affirmative vote of holders of at least four-fifths of
the outstanding shares of the capital stock of PSS entitled to vote on election
of directors at a meeting called for that purpose, except that if the Board of
Directors, by an affirmative vote of at least three-fifths of the entire Board
of Directors, recommends removal of a director to the shareholders, such removal
may be effected by the affirmative vote of the holders of a majority of the PSS
Common Stock entitled to vote at such meeting. The PSS Articles provide that the
affirmative vote of the holders of at least four-fifths of the PSS Common Stock
entitled to
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<PAGE>
vote at such meeting is required to alter, amend or adopt any provision
inconsistent with, or to repeal, this provision.
S&W. The S&W Bylaws provide that any director may be removed for cause
by vote of the shareholders or by action of the board, and that directors may be
removed without cause by vote of the shareholders.
Director Liability
PSS. Under the FBCA, a director is not personally liable for monetary
damages to PSS or any other person for any statement, vote, decision or failure
to act, regarding corporate management or policy, unless the director breached
or failed to perform his duties as a director and the director's breach of, or
failure to perform those duties constitutes (i) a violation of criminal law,
unless the director had reasonable cause to believe his conduct was lawful or
had no reason to believe his conduct was unlawful, (ii) a transaction from which
the director derived an improper personal benefit, (iii) a violation of Section
607.0834 of the FBCA, which concerns unlawful payment of dividends, (iv) in a
proceeding by or in the right of the corporation or a shareholder, conscious
disregard for the best interest of the corporation, or willful misconduct, or
(v) in a proceeding by or in the right of someone other than the corporation or
a shareholder, recklessness or an act or omission which was committed in bad
faith or with malicious purpose or in a manner exhibiting wanton and willful
disregard of human rights, safety or property.
S&W. Under the NYBCL, a corporation may limit or eliminate the
personal liability of directors to the corporation or its shareholders for
damages for breach of duty in such capacity. This limitation on liability is not
available for acts or omissions by a director which (i) were in bad faith, (ii)
involved intentional misconduct or a knowing violation of law, (iii) involved
financial profit or other advantage to which the director was not entitled, or
(iv) resulted in a violation of Section 719 of the NYBCL, prohibiting certain
dividend declarations, certain payments to shareholders after dissolution and
particular types of loans. The S&W Certificate does not provide for exculpation
of directors for breaches of fiduciary duty.
Indemnification
PSS. The PSS Articles state that PSS shall indemnify officers and
directors to the fullest extent permitted by law. The FBCA provides that a
person who is a party to a legal proceeding by reason of the fact that such
person is or was a director, officer, employee or agent of a corporation shall
be indemnified if such person is successful on the merits in a proceeding giving
rise to the claim for indemnification. According to the FBCA, a director,
officer, employee or agent of the corporation shall be indemnified if such
person shall have acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect to
criminal proceedings, shall have no reason to believe his conduct was unlawful.
The FBCA also provides that a person may not be indemnified nor may expenses be
advanced if a judgment or final adjudication establishes that his actions or
omissions to act were material to the cause of action so adjudicated and
constitute: (a) a violation of criminal law, unless such person had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful; (b) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (c) an unlawful
distribution under Florida law; or (d) willful misconduct or conscious disregard
for the best interests of the corporation in a proceeding by or in the right of
the corporation to procure a judgment in its favor or in a proceeding by or in
the right of a shareholder. The PSS bylaws provide that any indemnification or
advance shall be made promptly and in any event within sixty (60) days upon the
written request of the person to be indemnified. In the event the corporation
does not pay such indemnification or advance on the basis that such person has
not met the requisite standard of conduct, the burden of proof of such defense
shall be on the corporation. PSS maintains insurance for PSS and its directors
and officers against such liabilities.
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<PAGE>
S&W. Neither the S&W Certificate nor the S&W Bylaws provide for
indemnification of directors, officers, employees or agents. S&W's directors and
officers are covered by insurance policies providing them with coverage against
any matter asserted against them solely by reason of their being directors and
officers of S&W. Under the NYBCL, a corporation may indemnify any person made,
or threatened to be made, a party to any action or proceeding except for
shareholder derivative suits, by reason of the fact that he or she was a
director or officer of the corporation, provided such director or officer acted
in good faith for a purpose which he or she reasonably believed to be in the
best interests of the corporation and, in criminal proceedings, in addition, had
no reasonable cause to believe his or her conduct was unlawful. In the case of
shareholder derivative suits, the corporation may indemnify any person who was a
director or officer of the corporation if he or she acted in good faith for a
purpose which he or she reasonably believed to be in the best interests of the
corporation, except that no indemnification may be made for (i) a threatened
action, or a pending action which is settled or otherwise disposed of, or (ii)
any claim, issue or matter as to which such person has been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action was brought or, if no action was brought, any court competent
jurisdiction, determines upon application that, in view of all circumstances,
the person is fairly and reasonably entitled to an indemnity for such portion of
the settlement amount and expenses as the court deems proper. The statutory
provisions for indemnification and advancement of expenses are not exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be entitled independently of the applicable statutory provision.
Dissenters' Rights
PSS. The FBCA sets forth procedures under which shareholders may
dissent from, and receive payment of the fair value of their shares in
connection with most mergers, consolidations and exchanges or sales of
substantially all or all of a corporation's assets. Such dissenter's rights are
not available with respect to a plan of merger, consolidation or sale or
exchange of assets, to the holders of shares of any class or series which were
either registered on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
shareholders.
S&W. The NYBCL sets forth procedures under which stockholders may
dissent from, and receive payment in the amount of the fair value of their
shares in connection with, most mergers, consolidations and exchanges or sales
of substantially all or all of a corporation's assets. Such dissenter's rights
are not available with respect to a merger or consolidation if the shares
entitled to receive notice of and to vote on the merger or consolidation are
either listed on a national securities exchange, designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 stockholders
("Public Shares"), or where the corporation is the surviving corporation and no
vote of its stockholders is required for such transaction, unless the holders
thereof are required by the terms of an agreement of merger or consolidation to
accept for their shares anything other than (i) shares of the surviving or
resulting corporation, (ii) Public Shares of any corporation, (iii) cash in lieu
of fractional shares of such corporations or, (iv) any combination of the
consideration described in clauses (i), (ii) and (iii). The rights to dissent
from the Merger under the NYBCL are summarized under "The Merger--Dissenters'
Rights" and Sections 623 and 910 of the NYBCL regarding dissenters' rights is
attached to this Proxy Statement-Prospectus as Annex C.
Dividends and Other Distributions
PSS. The FBCA provides that distributions may be made unless, after
giving it effect, (i) the corporation would not be able to pay its debts as they
become due in the usual course of business or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus the amount
needed to satisfy the preferential rights of any preferred shareholders of the
company.
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<PAGE>
S&W. The NYBCL generally allows dividends to be paid out of surplus of
the corporation or out of the net profits of the corporation for the current
fiscal year and/or the prior fiscal year. The NYBCL requires a board of
directors to make certain disclosure when paying dividends out of any account
other than earned surplus.
Mergers and Consolidations
PSS. The FBCA provides that a vote of a majority of the shares of each
class of stock outstanding and entitled to vote thereon is required to authorize
a merger or consolidation of a corporation into any other corporation, unless
the articles of incorporation require a greater vote or a vote by classes.
S&W. The NYBCL provides that a vote of two-thirds of the shares
entitled to vote is required to authorize a merger or consolidation of a
corporation into any other corporation.
Fair Price Provision
PSS. The PSS Articles subject PSS to certain restrictions on business
combinations with interested stockholders. See "Description of PSS Capital
Stock - Certain Articles of Incorporation and Bylaw Provisions."
S&W. Although the NYBCL contains a provision limiting certain business
combinations with interested stockholders, such restrictions are not applicable
to S&W in connection with the Merger.
Control Share Acquisition Statute
PSS. As a Florida corporation, PSS is subject to provisions of Section
607.0902 of the FBCA, which denies voting rights to shares purchased by an
acquiring person who has obtained or anticipates obtaining a specified level of
voting control in shares of an issuing public corporation as part of a control-
share acquisition, except to the extent to which voting rights are conferred by
resolution approved by the shareholders of the issuing public corporation. (See
"Description of PSS Capital Stock - Certain Article and Bylaw Provisions.")
S&W. The NYBCL does not have a similar statute.
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<PAGE>
EXPERTS
The consolidated financial statements and schedule of PSS included
elsewhere in this Proxy Statement-Prospectus as of March 28, 1997 and March 29,
1996, and for each of the three years for the period ended March 28, 1997, have
been audited by Arthur Andersen LLP, independent certified public accountants,
as set forth in their report thereon included therein, and are included herein
in reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of S&W X-Ray, Inc. as of March
31, 1997 and 1996, and each of the three years in the period ended March 31,
1997, included in this Proxy Statement-Prospectus, have been so included in
reliance upon the report of May, Robinson, Gordon & Penta, P.C., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The legality of the shares of PSS Common Stock being offered hereby is
being passed upon for PSS by Fred Elefant, P.A., Jacksonville, Florida.
OTHER MATTERS
As of the date of this Proxy Statement-Prospectus, S&W's Board of
Directors does not know of any matters that will be presented for consideration
at the Special Meeting other than as described in this Proxy Statement-
Prospectus. However, if any other matter shall come before the Special Meeting
or any adjournments or postponements thereof and shall be voted upon, the
proposed proxy will be deemed to confer authority to the individuals named as
authorized therein to vote the shares represented by such proxy as to any such
matters that fall within the purposes set forth in the Notice of Special Meeting
as determined by a majority of the Board of Directors.
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<PAGE>
INDEX TO PSS CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants.................................................. 91
Financial Statements:
Consolidated Balance Sheets-- March 28, 1997 and March 29, 1996................................ 92
Consolidated Statements of Operations for the Years Ended March 28, 1997,
March 29, 1996, and March 30, 1995....................................................... 93
Consolidated Statements of Shareholders' Equity for the Years Ended
March 28, 1997, March 29, 1996, and March 30, 1995....................................... 94
Consolidated Statements of Cash Flows for the Years Ended March 28, 1997,
March 29, 1996, and March 30, 1995....................................................... 95
Notes to Consolidated Financial Statements..................................................... 96
Supplemental Schedule:
Schedule II Valuation and Qualifying Accounts for the Years Ended
March 30, 1995, March 29, 1996, and March 28, 1997....................................... 115
</TABLE>
90
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physician Sales & Service, Inc.:
We have audited the accompanying consolidated balance sheets of
Physician Sales & Service, Inc. (a Florida corporation) and subsidiaries as of
March 28, 1997 and March 29, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 28, 1997. 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Physician Sales &
Service, Inc. and subsidiaries as of March 28, 1997 and March 29, 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended March 28, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Schedule of Valuation and
Qualify Accounts is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
May 27, 1997 (except with
respect to Note 16, as to which
the date is August 8, 1997)
91
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, 1997 and March 29, 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 28,740,123 $ 65,566,189
Marketable securities................................................... 15,045,482 20,767,600
Accounts receivable, net................................................ 119,292,896 96,080,135
Inventories............................................................. 67,895,154 55,755,869
Prepaid expenses and other.............................................. 21,971,847 9,801,631
--------------- ---------------
Total current assets............................................ 252,945,502 247,971,424
Property and equipment, net............................................... 18,811,691 14,764,706
Other Assets:
Intangibles, net........................................................ 21,616,893 13,884,322
Other................................................................... 4,911,501 2,337,547
--------------- ---------------
Total assets.................................................... $ 298,285,587 $ 278,957,999
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................ $ 64,063,501 $ 59,307,636
Accrued expenses........................................................ 18,263,097 6,115,973
Other................................................................... 5,164,751 9,852,159
--------------- ---------------
Total current liabilities....................................... 87,491,349 75,275,768
Long-term debt and capital lease obligations, net of current
portion................................................................. 559,764 583,900
Other..................................................................... 4,634,291 3,548,168
--------------- ---------------
Total liabilities............................................... 92,685,404 79,407,836
--------------- ---------------
Commitments and contingencies (Notes 1, 3, 4, 9, 10, 12, and 13)
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, 37,061,615 and 35,122,486 shares issued and
outstanding at March 28, 1997 and March 29, 1996,
respectively......................................................... 370,616 351,225
Additional paid-in capital.............................................. 207,509,342 200,193,475
Accumulated deficit..................................................... (2,372,463) (994,537)
Cumulative foreign currency translation adjustment...................... 92,688
--------------- ---------------
Total shareholders' equity...................................... 205,600,183 199,550,163
--------------- ---------------
Total liabilities and shareholders' equity...................... $ 298,285,587 $ 278,957,999
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
92
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 28, 1997, March 29, 1996, and March 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales............................................... $ 691,019,996 $ 529,023,956 $ 413,301,365
Cost of goods sold...................................... 502,903,993 379,359,624 293,688,246
--------------- --------------- ---------------
Gross profit.................................. 188,116,003 149,664,332 119,613,119
General and administrative expenses..................... 110,316,575 82,527,856 70,174,747
Selling expenses........................................ 62,796,860 48,438,162 41,317,526
Restructuring charges................................... -- -- 4,388,592
Merger costs and expenses............................... 12,128,168 15,731,716 --
--------------- --------------- ---------------
Income from operations........................ 2,874,400 2,966,598 3,732,254
--------------- --------------- ---------------
Other income (expense):
Interest expense...................................... (323,826) (3,068,196) (4,064,454)
Interest and investment income........................ 2,406,131 1,179,684
Other income.......................................... 1,536,636 1,584,909 1,906,508
--------------- --------------- ---------------
3,618,941 (303,603) (2,157,946)
--------------- --------------- ---------------
Income before provision for income taxes................ 6,493,341 2,662,995 1,574,308
Provision for income taxes.............................. (2,120,000) (1,324,000) (2,421,000)
--------------- --------------- ---------------
Net income (loss)....................................... $ 4,373,341 $ 1,338,995 $ (846,692)
=============== =============== ===============
Net income (loss) per common and common equivalent
share................................................. $ 0.12 $ 0.04 $ (0.04)
=============== =============== ===============
Pro forma tax adjustment on pooled S-Corporation
income................................................ 357,000 438,000 23,000
--------------- --------------- ---------------
Pro forma net income (loss)............................. $ 4,016,341 $ 900,995 $ (869,692)
=============== =============== ===============
Pro forma tax adjustment per common and common
equivalent share on pooled S-Corporation income....... $ (0.01) $ (0.01) $
--------------- --------------- ---------------
Pro forma net income (loss) per common and common
equivalent share...................................... $ 0.11 $ 0.03 $ (0.04)
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
93
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended March 28, 1997, March 29, 1996, and March 30, 1995
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Currency
-------------------------- Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustment Total
------------ ----------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994...... 18,053,326 $ 180,533 $ 25,190,215 $ (1,783,144) $ -- $ 23,587,604
Issuance of common stock..... 6,718,875 67,189 24,033,753 -- -- 24,100,942
Distributions to former S-
Corporation shareholders... -- -- -- (516,000) -- (516,000)
Net loss..................... -- -- -- (846,692) -- (846,692)
------------- ---------- --------------- ------------- --------- ---------------
Balance at March 30, 1995...... 24,772,201 247,722 49,223,968 (3,145,836) -- 46,325,854
Issuance of common stock..... 10,059,699 100,597 148,274,378 -- -- 148,374,975
Tax benefits related to stock
option plans............... -- -- 2,687,118 -- -- 2,687,118
Distributions to former S-
Corporation shareholders... -- -- -- (455,000) -- (455,000)
Net income................... -- -- -- 1,338,995 -- 1,338,995
Other poolings............... 290,586 2,906 8,011 1,267,304 -- 1,278,221
------------- ---------- --------------- ------------- --------- ---------------
Balance at March 29, 1996...... 35,122,486 351,225 200,193,475 (994,537) -- 199,550,163
Issuance of common stock..... 473,987 4,740 2,456,890 -- -- 2,461,630
Tax benefits related to stock
option plans............... -- -- 1,832,149 -- -- 1,832,149
Distributions to former S-
Corporation shareholders... -- -- -- (1,100,000) -- (1,100,000)
Net income................... -- -- -- 4,373,341 -- 4,373,341
Other poolings............... 1,465,142 14,651 3,026,828 (4,651,267) -- (1,609,788)
Cumulative foreign currency
translation adjustment..... -- -- -- -- 92,688 92,688
------------- ---------- --------------- ------------- --------- ---------------
Balance at March 28, 1997...... 37,061,615 $ 370,616 $ 207,509,342 $ (2,372,463) $ 92,688 $ 205,600,183
============= ========== =============== ============= ========= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
94
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 28, 1997, March 29, 1996, and March 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ---------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)................................. $ 4,373,341 $ 1,338,995 $ (846,692)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization.................. 5,690,393 4,100,775 4,210,805
Provision for doubtful accounts................ 2,463,000 1,448,000 1,651,000
Merger costs and expenses...................... 3,433,190 5,435,196 --
Restructuring charge........................... -- -- 4,388,592
Benefit for deferred income taxes.............. (4,611,000) (789,000) --
Gain on sale of equipment...................... -- -- (920,124)
Employee benefit plan stock contribution....... 160,000 120,000 85,175
Foreign currency translation adjustment........ 92,688 -- --
Investment income.............................. (520,315) -- --
Changes in operating assets and liabilities,
net of effects from business acquisitions:
Increase in accounts receivable, net......... (1,831,440) (24,385,911) (8,267,662)
Decrease (increase) in inventories........... 5,712,693 (18,659,894) (1,670,306)
(Increase) decrease in prepaid expenses and
other assets.............................. (6,511,771) (1,960,718) 128,628
Increase in other assets..................... (3,162,802) (960,194) (1,247,031)
(Decrease) increase in accounts payable,
accruals, and other liabilities........... (5,523,970) 13,331,640 (4,930,187)
-------------- --------------- ---------------
Net cash used in operating activities..... (235,993) (20,981,111) (7,417,802)
-------------- --------------- ---------------
Cash Flows From Investing Activities:
Purchases of marketable securities................ (19,186,172) (317,769,635) --
Proceeds from sales and maturities of marketable
securities..................................... 25,428,605 297,002,035 --
Proceeds from sales of assets..................... -- -- 11,985,542
Capital expenditures.............................. (5,579,526) (5,349,928) (3,220,847)
Purchases of net assets from business
acquisitions................................... (6,801,092) (2,838,529) (9,010,130)
Payments on noncompete agreements................. (3,980,225) (1,545,970) (1,036,957)
-------------- --------------- ---------------
Net cash used in investing activities..... (10,118,410) (30,502,027) (1,282,392)
-------------- --------------- ---------------
Cash Flows From Financing Activities:
Principal payments under capital lease
obligations.................................... (880,166) (1,124,293) (931,949)
Proceeds from long-term debt...................... -- 284,862,211 420,751,863
Principal payments of long-term debt.............. (26,913,127) (315,718,771) (434,044,855)
Distributions to former S-Corporation
shareholders................................... (1,100,000) (455,000) (516,000)
Proceeds from issuance of common stock............ 2,421,630 148,253,975 23,498,353
-------------- --------------- ---------------
Net cash (used in) provided by financing
activities.............................. (26,471,663) 115,818,122 8,757,412
-------------- --------------- ---------------
Net (decrease) increase in cash and cash
equivalents....................................... (36,826,066) 64,334,984 57,218
Cash and cash equivalents, beginning of year........ 65,566,189 1,231,205 1,173,987
-------------- --------------- ---------------
Cash and cash equivalents, end of year.............. $ 28,740,123 $ 65,566,189 $ 1,231,205
============== =============== ===============
Supplemental Disclosures:
Interest paid..................................... $ 323,826 $ 3,186,105 $ 4,356,763
============== =============== ===============
Income taxes paid................................. $ 4,299,900 $ 2,084,282 $ 3,018,917
============== =============== ===============
Merger costs and expenses paid.................... $ 8,694,978 $ 10,296,520 $ --
============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
95
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 28, 1997, March 29, 1996 and March 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Nature of Business
Physician Sales & Service, Inc. (the "Company" or "PSS") was incorporated
in 1983 in Jacksonville, Florida. The Company, in its core business, is a
leading distributor of medical supplies, equipment, and pharmaceuticals to
primary care and other office-based physicians. As of March 28, 1997, the
Company operated 61 core business service centers in the United States
distributing to approximately 103,000 physician office sites in all 50 states.
In November 1996, the Company established a new subsidiary, Diagnostic
Imaging, Inc. ("DI" or "imaging division"). DI distributes medical diagnostic
imaging equipment, supplies and service to acute and alternate care sites. As of
March 28, 1997, DI operated 14 imaging division service centers distributing to
approximately 6,000 medical imaging sites in 9 southeastern states.
In March 1996, the Company established two new subsidiaries, WorldMed
International, Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries
were established to manage and develop the Company's European medical equipment
and supply distribution market ("European operation"). As of March 28, 1997, the
European operation included 2 service centers distributing to approximately
1,000 acute and alternate care sites in Belgium, Germany and France.
Principles of Consolidation
The consolidated financial statements include the accounts of PSS and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Stock Split
All stock-related data has been retroactively adjusted to reflect a
three-for-one stock split effective on September 22, 1995 which was distributed
on October 5, 1995.
Consolidated Financial Statements
The accompanying consolidated financial statements give retroactive effect
to the mergers (the "Mergers") with Taylor Medical, Inc. ("Taylor") and X-ray
Corporation of Georgia ("X-ray GA"). On August 21, 1995, PSS issued 3,790,215
shares of its common stock in exchange for all of the outstanding equity
interest of Taylor. Taylor was engaged in the distribution and sale of medical
supplies, equipment, and pharmaceuticals to office-based physicians and managed
care facilities in 24 states. On December 20, 1996, PSS issued 593,672 shares of
its common stock in exchange for all of the outstanding equity interest of X-ray
GA. X-ray GA distributed radiology and imaging equipment, chemicals and supplies
and provided technical service to the acute and alternate site markets. These
transactions were accounted for under the pooling-of-interests method of
accounting, and accordingly, the accompanying consolidated financial statements
have been retroactively adjusted as if PSS, Taylor and X-ray GA had operated as
one entity since inception.
Certain items have been reclassified to conform to the current year
presentation.
96
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year
Beginning in fiscal year 1996, the Company's fiscal year ends on the Friday
closest to March 31 of each year. The Company's fiscal year ended on the
Thursday closest to March 31 of each year prior to fiscal year 1996. Fiscal
years 1997, 1996, and 1995 consist of 52 weeks.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes 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 as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of Credit Risk
The Company's trade accounts receivable are exposed to credit risk;
however, the risk is limited, as the balance is comprised of numerous individual
accounts, none of which is individually significant. The Company monitors the
creditworthiness of its customers on an ongoing basis and provides reserves for
estimated bad debt losses and sales returns. The Company had reserves for
doubtful accounts of approximately $3,581,000 and $2,218,000 as of the end of
fiscal years 1997 and 1996, respectively. Provisions for doubtful accounts were
approximately $2,463,000, $1,448,000, and $1,651,000 for fiscal years ended
1997, 1996, and 1995, respectively.
Cash Management
The Company utilizes a zero balance bank account, and checks issued for
cash disbursements are funded by advances from overnight investments.
Outstanding checks are recorded as accounts payable until they are presented to
the bank, at which time the payments are applied against the overnight
investments. The Company had approximately $8,060,000 and $6,841,000 of
outstanding checks recorded in accounts payable as of the end of fiscal years
1997 and 1996, respectively.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks,
short-term government obligations, and money market instruments. The Company
invests its excess cash in high-grade investments and, therefore, bears minimal
risk. These instruments have original maturity dates not exceeding three months.
Marketable Securities
The Company classifies its marketable securities as trading securities and
carries such securities at fair market value. Net unrealized gains and losses on
trading securities are included in net income.
Marketable securities include municipal bond issues with maturity dates
exceeding three months and equity securities classified as trading securities.
Management's intent is to liquidate these securities within one year.
97
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, marketable securities, short-term trade receivables and
payables, and long-term debt and capital lease obligations, approximate their
fair values.
Inventories
Inventories are comprised principally of medical supplies and equipment and
are stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property and
equipment is recorded in other income in the accompanying consolidated
statements of operations.
Intangibles
Noncompete agreements are amortized on a straight-line basis over the lives
of the agreements, which range from three to ten years. Customer lists are
amortized on a straight-line basis over ten years.
The Company has classified as goodwill the cost in excess of the fair value
of net identifiable assets purchased in business acquisitions which are
accounted for as purchase transactions. Goodwill is being amortized over fifteen
to thirty years using the straight-line method. Subsequent to the date of
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate a change in the estimated useful life
or recoverability of goodwill.
Self-Insurance Coverage
The Company maintains a self-insurance program for employee health costs.
Additional coverage is provided by a third party for stop-loss based on maximum
costs of $100,000 per employee and approximately $5.3 million in the aggregate.
Claims that have been incurred but not reported are recorded based on estimates
of claims provided by a third-party administrator and are included in accrued
expenses in the accompanying consolidated balance sheets.
Income Taxes
The Company uses the asset and liability method in accounting for income
taxes. Deferred income taxes result primarily from the use of different bases
for financial reporting and tax purposes.
Shareholders' Equity
On May 5, 1994, the Company completed an initial public offering of
5,100,000 shares of its common stock at $3.67 per share, of which 4,200,000 were
offered by the Company. On June 3, 1994, the Company's underwriters exercised
their overallotment option for an additional 765,000 shares of the Company's
common stock at $3.67 per share. The proceeds of the sale after deducting
issuance costs were approximately $15,800,000. The Company used all of the net
proceeds to reduce outstanding bank debt.
98
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 27, 1995, the Company signed a Distributorship Agreement (the
"Abbott Agreement") with Abbott Laboratories ("Abbott") providing for the
exclusive distribution of certain Abbott diagnostic products. As part of the
Abbott Agreement, Abbott purchased 825,000 unregistered, restricted shares of
PSS common stock. The proceeds of approximately $5,900,000 were used to reduce
outstanding bank debt.
Effective November 13, 1995, the Company completed a secondary offering of
11,500,000 shares of common stock at $17 per share, 8,800,000 of which were
offered by the Company.
During fiscal 1996, the Company merged with three medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies. During fiscal
1997, the Company merged with one core business medical supply and equipment
distributor and three imaging division companies in stock mergers accounted for
under the pooling-of-interests method by issuing approximately 1,465,000 shares
of PSS common stock in exchange for all of the common stock of the acquired
companies. The accompanying consolidated financial statements have not been
restated for periods prior to these poolings due to immateriality.
During 1997 and 1996, the Company realized an income tax benefit from the
exercise or early disposition of certain stock options. This benefit results in
a decrease in current income taxes payable and an increase in additional paid-in
capital.
Foreign Currency Translation
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at year-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.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method. The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, for footnote
disclosure purposes only, the Company computes its earnings and earnings per
share on a pro forma basis as if the fair value method had been applied.
Net Income (Loss) Per Common and Common Equivalent Share
Net income (loss) per common and common equivalent share is computed using
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Weighted average shares outstanding for
purposes of this calculation were approximately 36,501,000, 31,454,000, and
23,762,000 for 1997, 1996, and 1995, respectively.
Statements of Cash Flows
The Company issued stock in the amount of $40,000 and $121,000 related to
acquisitions accounted for as purchases in fiscal 1997 and 1996, respectively.
The Company assumed net liabilities of approximately $1,610,000 and recorded
noncompete assets and liabilities of approximately $4,300,000 in connection with
the mergers of four other medical supply and equipment distributors accounted
for under the pooling-of-interests method in fiscal 1997. The Company also
assumed net assets of approximately $1,278,000 in conjunction with the mergers
of three other medical supply and equipment distributors accounted for under the
pooling-of-interests method in fiscal
99
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1996. Also, the Company incurred capital lease obligations to obtain equipment
of approximately $514,000 in fiscal year 1995. All of the above items were
excluded from the statements of cash flows as these items were noncash
transactions.
Accounting Standards Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes new standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock and is effective for
financial statements issued for periods ending after December 15, 1997.
Management expects that the impact of SFAS No. 128 will not be material.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 establishes new standards for disclosing
information about an entity's capital structure and applies to all entities.
SFAS No. 129 is effective for financial statements for periods ending after
December 15, 1997. Management expects that the impact of SFAS No. 129 will not
be material.
2. MARKETABLE SECURITIES
The Company's marketable securities are comprised of municipal bond issues
and equity securities classified as trading securities and are carried at their
fair values based upon the quoted market prices at March 28, 1997 and March 29,
1996. At March 28, 1997 and March 29, 1996, the aggregate fair market value of
the municipal bonds was approximately $14,469,000 and $20,768,000, respectively,
and the aggregate cost was approximately $14,552,000 and $20,800,000,
respectively. The gross unrealized loss on municipal bonds for each year was
approximately $83,000 and $32,000, respectively. Interest income, including
realized gains, on the municipal bonds was approximately $626,000 and $195,000
for fiscal years 1997 and 1996, respectively. At March 28, 1997, the fair market
value of equity securities was $576,000, with a cost of $56,000, and an
unrealized gain of $520,000 which is included in investment income during fiscal
year 1997.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
March 28, March 29,
1997 1996
------------ ------------
<S> <C> <C>
Lines of credit........................... $ -- $ 3,100,000
Other notes............................... 774,794 262,961
Capital lease obligations................. 457,124 1,259,393
------------ ------------
1,231,918 4,622,354
Less current maturities................... 672,154 4,038,454
------------ ------------
$ 559,764 $ 583,900
============ ============
</TABLE>
Lines of Credit
The Company has a financing and security agreement (the "Agreement") with a
bank (the "Bank"). The Agreement allows the Company to obtain loans from the
Bank on a revolving basis. The Agreement provides for loans in the amount of 85%
of the outstanding amount of eligible accounts receivable plus the lesser of
$25,000,000 or 50% of eligible inventory. The total amount of loans outstanding
under the Agreement cannot exceed the lesser of $60,000,000 or amounts available
subject to eligible collateral. The Agreement provides for an
100
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
option, on the part of the Company, to increase the availability to $75,000,000.
There was no balance outstanding at March 28, 1997 and March 29, 1996.
The loans are collateralized by all company assets. Interest accrues,
subject to certain leverage ratio requirements, at a variable rate indexed on
the London Interbank Offered Rate ("LIBOR") plus the applicable margin or the
Bank's prime rate plus the applicable margin at the option of the Company.
Interest rates may vary from prime to prime plus 75 basis points or from LIBOR
plus 150 basis points to LIBOR plus 250 basis points, based on the Company's
leverage ratio. The Agreement provides for a termination date of April 30, 1998,
at which time the Agreement may be extended annually at the Bank's sole
discretion upon request by the Company.
The Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a current ratio of 2 to 1, a debt
service coverage ratio of 1.1 to 1 and a debt leverage ratio no greater than 5
to 1, all computed as defined in the Agreement. In addition, the Company must
maintain minimum tangible net worth plus subordinated indebtedness, as defined
in the Agreement, of $24,500,000 as of March 28, 1997, increasing by $1,000,000
as of the end of each subsequent fiscal year. The Agreement also contains
restrictions on mergers, acquisitions, investments, capital expenditures,
intangible assets, indebtedness, and stock transactions, among other things.
Other Notes
X-ray GA maintained various other notes which were repaid by the Company in
fiscal 1997 in conjunction with the merger.
Long-term debt outstanding at March 28, 1997 totaled $775,000. As of March
28, 1997, future minimum payments of long-term debt, by fiscal year and in the
aggregate, are approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998......... $ 272,000
1999......... 197,000
2000......... 80,000
2001......... 54,000
2002......... 56,000
Thereafter..... 116,000
-----------
Total $ 775,000
===========
</TABLE>
Capital Lease Obligations
As of March 28, 1997, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998...................................................... $ 432,000
1999...................................................... 34,000
2000...................................................... 28,000
-----------
Net minimum lease payments.................................. 494,000
Less amount representing interest........................... 37,000
-----------
Present value of net minimum lease payments under
capital leases.................................... 457,000
Less amounts due in one year................................ 400,000
-----------
Amounts due after one year........................ $ 57,000
===========
</TABLE>
101
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. OPERATING LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
which expire at various dates through 2005. Certain lease commitments provide
that the Company pay taxes, insurance, and maintenance expenses related to the
leased assets.
Rent expense approximated $6,249,000, $5,369,000, and $5,230,000 for fiscal
years 1997, 1996, and 1995, respectively. As of March 28, 1997, future minimum
payments, by fiscal year and in the aggregate, required under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998......... $ 8,752,000
1999......... 5,662,000
2000......... 4,209,000
2001......... 2,844,000
2002......... 1,627,000
Thereafter..... 993,000
-------------
Total $24,087,000
=============
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
Land............................................ $ 233,312 $ 121,524
Building........................................ 2,161,698 1,207,560
Equipment....................................... 23,265,561 18,907,914
Furniture, fixtures and leasehold improvements.. 6,754,303 3,756,862
-------------- -------------
32,414,874 23,993,860
Accumulated depreciation........................ (13,603,183) (9,229,154)
-------------- -------------
$ 18,811,691 $ 14,764,706
============== =============
</TABLE>
Equipment includes equipment acquired under capital leases with a cost of
$109,000 and $3,909,000 and related accumulated depreciation of $38,000 and
$1,766,000 at March 28, 1997 and March 29, 1996, respectively. Depreciation
expense aggregated approximately $3,219,000, $2,210,000, and $2,214,000 for
1997, 1996, and 1995, respectively, and is included in general and
administrative expenses.
102
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. INTANGIBLES
Intangibles, stated at cost, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Customer lists................. $ 3,228,105 $ 3,466,285
Goodwill....................... 11,870,204 6,941,804
Noncompete agreements.......... 11,921,251 7,146,913
------------- -------------
27,019,560 17,555,002
Accumulated amortization....... (5,402,667) (3,670,680)
------------- -------------
$ 21,616,893 $ 13,884,322
============= =============
</TABLE>
As of March 28, 1997, approximate future minimum payments, by fiscal year
and in the aggregate, required under noncompete agreements are as follows:
<TABLE>
<S> <C>
1998................. $ 2,312,000
1999................. 1,736,000
2000................. 550,000
2001................. 85,000
2002................. 42,000
Thereafter........... 73,000
------------
$ 4,798,000
============
</TABLE>
Amortization expense aggregated approximately $2,471,000, $1,891,000, and
$1,997,000 for 1997, 1996, and 1995, respectively, and is included in general
and administrative expenses.
7. INCOME TAXES
The provisions for income taxes are detailed below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- ------------
<S> <C> <C> <C>
Current tax provision:
Federal.............................. $ 5,481,000 $ 1,719,000 $ 1,982,000
State................................ 1,250,000 394,000 439,000
------------- ------------ ------------
Total current................ 6,731,000 2,113,000 2,421,000
------------- ------------ ------------
Deferred tax benefit:
Federal.............................. (3,755,000) (643,000) --
State................................ (856,000) (146,000) --
------------- ------------ ------------
Total deferred............... (4,611,000) (789,000) --
------------- ------------ ------------
Total income tax provision... $ 2,120,000 $ 1,324,000 $ 2,421,000
============= ============ ============
</TABLE>
103
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The difference between income tax computed at the federal statutory rate
and the actual tax provision is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Income before provision for taxes............. $ 6,493,000 $ 2,663,000 $ 1,574,000
============ ============ ============
Tax provision at the statutory rate........... $ 2,208,000 $ 905,000 $ 535,000
------------ ------------ ------------
(Decrease) increase in taxes:
Change in valuation allowance for
deferred taxes........................... (900,000) (956,000) 1,023,000
State income tax, net of federal benefit.... 370,000 329,000 94,000
Write-off of intangibles.................... -- -- 562,000
Meals and entertainment..................... 163,000 134,000 162,000
Goodwill amortization....................... 8,000 8,000 10,000
Cash surrender value of life insurance...... 62,000 45,000 26,000
Nontaxable interest income.................. (660,000) (198,000) --
Merger costs and expenses................... 721,000 2,216,000 --
Utilization of tax net operating losses..... -- (776,000) --
LIFO reserve of pooled companies............ 121,000 -- --
Other, net.................................. 346,000 9,000 30,000
Income of S-corporation..................... (319,000) (392,000) (21,000)
------------ ------------ ------------
Total (decrease) increase in taxes....... (88,000) 419,000 1,886,000
------------ ------------ ------------
Total income tax provision.......... $ 2,120,000 $ 1,324,000 $ 2,421,000
============ ============ ============
Effective tax rate............................ 32.7% 49.7% 153.8%
============ ============ ============
</TABLE>
Deferred income taxes for 1997 and 1996 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at March 28, 1997 and March 29, 1996 are detailed below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Merger costs and expenses.............................. $ 1,455,000 $ 204,000
Allowance for doubtful accounts and sales returns...... 1,359,000 717,000
Intangibles............................................ 617,000 681,000
Inventory uniform cost capitalization.................. 959,000 482,000
Net operating loss carryforwards....................... 1,738,000 219,000
Accrued expenses....................................... 435,000 399,000
Reserve for inventory obsolescence..................... 39,000 105,000
Long-term incentive plan............................... 174,000 --
Other.................................................. 163,000 197,000
------------- -------------
Gross deferred tax assets...................... 6,939,000 3,004,000
------------- -------------
Deferred tax liabilities:
Excess of tax depreciation and amortization over
book depreciation and amortization.................. (1,539,000) (1,179,000)
Other.................................................. -- (136,000)
-------------
Gross deferred tax liabilities...................... (1,539,000) (1,315,000)
------------- -------------
5,400,000 1,689,000
Valuation allowance............................ -- (900,000)
------------- -------------
Net deferred tax asset......................... $ 5,400,000 $ 789,000
============= =============
</TABLE>
104
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A valuation allowance was provided in prior years for those temporary
differences for which utilization was uncertain. Based on an evaluation of the
realizability of deferred tax assets, the valuation allowance was reduced by
$900,000 and $956,000 during fiscal 1997 and 1996, respectively.
The income tax benefit related to the exercise or early disposition of
certain stock options reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts approximated $1,832,000 and $2,687,000
for fiscal years 1997 and 1996, respectively.
At March 28, 1997, the Company had net operating loss carryforwards for
income tax purposes arising from mergers of approximately $4,486,000 which
expire from 2006 to 2011. The utilization of the net operating loss
carryforwards is subject to limitation in certain years.
8. RELATED-PARTY TRANSACTIONS
A member of the board of directors provides legal services as general
counsel to the Company. Fees for such legal services were approximately
$132,000, $136,000, and $124,000 in 1997, 1996, and 1995, respectively.
A member of the board of directors is chairman and CEO of the insurance
company that administered the Company's self-insurance program through December
31, 1995. Administrative fees paid to the company were approximately $484,000
during the first nine months of fiscal year 1996 and $339,000 for fiscal year
1995. The Company changed its self-insurance administrator as of January 1, 1996
to an unrelated party.
9. STOCK-BASED COMPENSATION PLANS
At March 28, 1997, the Company had five stock-based compensation plans as
described below:
Incentive Stock Option Plan
Under the Company's qualified 1986 Incentive Stock Option Plan, 8,001,000
shares of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.
Information regarding this plan is summarized below:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price Per Share
------------- ------------------------
<S> <C> <C>
Balance, March 31, 1994............. 1,540,497 $ 2.47
Granted............................. 648,000 4.18
Exercised........................... (817,899) 2.17
Canceled............................ (12,000) 1.59
------------ -----------
Balance, March 30, 1995............. 1,358,598 2.89
Granted............................. -- --
Exercised........................... (607,405) 2.68
Canceled............................ (30,297) 1.48
------------ -----------
Balance, March 29, 1996............. 720,896 2.94
Granted............................. -- --
Exercised........................... (345,570) 2.83
Canceled............................ (12,000) 3.28
------------ -----------
Balance, March 28, 1997............. 363,326 $ 3.05
============ ===========
</TABLE>
105
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
At March 31, 1994, March 30, 1995, March 29, 1996, and March 28, 1997,
1,411,542, 1,274,688, 682,031, and 363,326, respectively, of outstanding options
were exercisable. The weighted average remaining life of the options outstanding
at March 28, 1997 is approximately 1.7 years. No compensation expense has been
recorded because the options were granted at fair market value. As of March 28,
1997, approximately 2,388,000 shares of common stock are available for issuance
under the plan. The Company does not intend to issue any more options under this
plan.
Options Issued in Exchange for Former Taylor Medical Options
In conjunction with the acquisition of Taylor Medical, Inc., the Company
assumed the nonqualified Taylor Medical Stock Option Plans of 1986 and 1993. The
options outstanding at the time of acquisition were converted to allow grantees
the right to acquire the Company's common stock at a rate consistent with the
merger's stock pooling agreement. All options under this plan are priced at
$5.08 per common share and are not subject to future performance.
Information regarding these options is summarized below:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Balance, March 31, 1994.......... 613,776
Granted.......................... 15,747
Exercised........................ (5,118)
Canceled......................... (8,268)
-----------
Balance, March 30, 1995.......... 616,137
Granted.......................... 7,825
Exercised........................ (538,815)
Canceled......................... --
-----------
Balance, March 29, 1996.......... 85,147
Granted.......................... --
Exercised........................ (37,509)
Canceled......................... --
-----------
Balance, March 28, 1997.......... 47,638
===========
</TABLE>
The Company does not intend to issue any more options under this plan.
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 1.8 years.
Long Term Stock Plan
In March 1994, the Company adopted the 1994 Long Term Stock Plan under
which the Compensation Committee has discretion to grant nonqualified stock
options and restricted stock to any employee of the Company. A total of
2,190,000 shares of the Company's common stock, as adjusted by stock splits,
consolidations, or other changes in capitalization, have been reserved for
issuance under this plan. The exercise price of options granted under this plan
may be no less than the fair market value of the Company's common stock on the
date of grant.
106
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ---------
<S> <C> <C>
Balance, March 31, 1994............. -- --
Granted............................. 160,200 $ 5.32
Exercised........................... -- --
Canceled............................ -- --
--------- --------
Balance, March 30, 1995............. 160,200 5.32
Granted............................. 492,300 16.96
Exercised........................... (37,500) 13.07
Canceled............................ -- --
--------- --------
Balance, March 29, 1996............. 615,000 14.17
Granted............................. 203,179 23.90
Exercised........................... (27,050) 13.35
Canceled............................ (3,000) 5.79
------- --------
Balance, March 28, 1997............. 788,129 $ 16.52
======== ========
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 5.6 years. As of March 28, 1997, approximately 1,340,000 shares of
common stock were available for issuance under the plan.
Long Term Incentive Plan
In March 1994, the Company adopted the 1994 Long Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year. At March 28, 1997, the Company has
accrued approximately $448,000 related to awards granted under this plan.
The plan also provides for nonqualified stock options or restricted stock
to be granted at the full discretion of the Compensation Committee of the Board
of Directors. The exercise price of options granted under this plan may be no
less than the fair market value of the Company's common stock on the date of
grant, and accordingly, no compensation expense is recorded on the date the
stock options are granted. The aggregate number of shares of common stock,
including shares reserved for issuance pursuant to the exercise of options,
which may be granted or issued may not exceed 730,000 shares.
107
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Information regarding the stock option component of the plan is summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ---------
<S> <C> <C>
Balance, March 30, 1995............... -- --
Granted............................... 350,643 $ 14.88
Exercised............................. (32,406) 14.88
Canceled.............................. -- --
--------- --------
Balance, March 29, 1996............... 318,237 14.88
Granted............................... 68,364 23.94
Exercised............................. (61,158) 14.88
Canceled.............................. -- --
--------- --------
Balance, March 28, 1997 325,443 $ 16.78
========= ========
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 8.5 years. To date, no cash or restricted stock have been issued
under this plan.
Directors' Stock Plan
In March 1994, the Company adopted the Directors' Stock Plan under which
nonemployee directors receive an annual grant of an option to purchase 2,000
shares of common stock. A total of 200,000 shares of the Company's common stock,
as adjusted for stock splits, consolidations, or other changes in
capitalization, have been reserved for issuance under this plan. The exercise
price of options granted under this plan may be no less than the fair market
value of the Company's common stock on the date of grant, and accordingly, no
compensation expense has been recorded in connection with the stock options
granted. Each nonemployee director receives a grant of 2,000 restricted shares
upon initial election and reelection to the Board.
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ---------
<S> <C> <C>
Balance, March 31, 1994 .......... -- --
Granted .......................... 27,000 $ 5.48
Exercised ........................ -- --
Canceled ......................... -- --
--------- ---------
Balance, March 30, 1995 .......... 27,000 5.48
Granted .......................... 22,500 14.75
Exercised ........................ (4,500) 5.48
Canceled ......................... -- --
--------- ---------
Balance, March 29, 1996 .......... 45,000 10.12
Granted .......................... 12,000 23.94
Exercised ........................ (3,000) 5.48
Canceled ......................... -- --
--------- ---------
Balance, March 28, 1997 .......... 54,000 $ 13.44
========= =========
</TABLE>
108
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is 8.4
years. To date, 13,500 restricted shares have been issued under this plan.
Fair Value of Stock Options
Under SFAS No. 123, the fair value of stock options granted in the years
ended March 28, 1997 and March 29, 1996 have been estimated using a
Black-Scholes option pricing model with the following weighted average
assumptions for grants: risk-free interest rate ranging from 5.8% to 6.8%,
expected option life ranging from 3.5 to 5 years, expected volatility of 40% for
1996 and 55% for 1997 and no expected dividend yield. Using these assumptions,
the estimated fair values of options granted for the years ended March 28, 1997
and March 29, 1996 were approximately $2.9 million and $6.0 million,
respectively, and such amounts would be included in compensation expense. Pro
forma net income and net income per share for the years ended March 28, 1997 and
March 29, 1996, assuming the Company had accounted for the plans under the fair
value approach, are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
Net income:
<S> <C> <C>
As reported............................................ $ 4,373 $ 1,339
Pro forma.............................................. $ 2,599 $ (2,315)
Net income per share:
As reported............................................ $ 0.12 $ 0.04
Pro forma.............................................. $ 0.07 $ (0.07)
</TABLE>
Because the fair value method of accounting has not been applied to options
granted prior to March 31, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Weighted average per share fair value of options
granted:
Incentive Stock Option Plan............................. N/A N/A
Long Term Stock Plan.................................... $ 11.08 $ 6.91
Long Term Incentive Plan................................ $ 11.08 $ 6.73
Directors' Stock Plan................................... $ 13.22 $ 6.67
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has an employee stock ownership plan ("ESOP") available to all
employees with at least one year of service. Effective January 1, 1996, the
Company amended the plan to allow participants to direct the investment of a
portion of their plan balances. Prior to this change, the trustees directed the
investment of the participants' balances. As of March 28, 1997, the ESOP owns
approximately 2,034,000 shares of the Company's common stock. Company
contributions to the plan were approximately $160,000, $120,000, and $85,000 for
1997, 1996, and 1995, respectively, and are made at the discretion of the
Company.
The Company also has an employee stock purchase plan available to employees
with at least one year of service. The plan allows eligible employees to
purchase company stock over the counter through payroll deductions.
109
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. BUSINESS ACQUISITIONS
Pooling With X-ray GA
On December 20, 1996, the Company acquired X-ray GA in a merger pursuant to
which the Company issued 593,672 shares of common stock to the former
shareholders of X-ray GA (of which 52,675 shares are being held in escrow as of
March 28, 1997) in exchange for all of the outstanding shares of capital stock
of X-ray GA valued at $11.0 million at the time of the merger. The merger has
been accounted for as a pooling-of-interests, and accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of X-ray GA for all periods prior to the merger.
X-ray GA was an S-Corporation for income tax purposes, and therefore, did
not pay U.S. federal income taxes. X-ray GA will be included in the Company's
U.S. federal income tax return subsequent to the date of acquisition. Separate
net sales, net income (loss) and related per share amounts of merged entities
are presented in the following table. In addition, the table includes pro forma
net income (loss) and net income (loss) per share amounts which reflect pro
forma adjustments to present income taxes of X-ray GA on the basis on which they
will be reported in future periods.
<TABLE>
<CAPTION>
March 30 through
December 31, 1996
(Unaudited) March 29, 1996 March 30, 1995
----------- --------------- --------------
(In thousands)
<S> <C> <C> <C>
Net sales
PSS and Taylor combined........................ $ 470,357 $ 483,294 $ 366,285
X-ray GA....................................... 33,182 45,730 47,016
-------------- ---------- ----------
Total.................................. $ 503,539 $ 529,024 $ 413,301
Net income (loss)
PSS and Taylor combined........................ $ 6,139 $ 186 $ (909)
X-ray GA....................................... 938 1,153 62
-------------- ---------- ----------
Net income (loss) as reported.................... $ 7,077 $ 1,339 $ (847)
Pro forma tax provision for X-ray GA............. 357 438 23
-------------- ---------- ----------
Pro forma net income (loss)...................... $ 6,720 $ 901 $ (870)
Net income (loss) per share As reported.......... $ 0.19 $ 0.04 $ (0.04)
Pro forma........................................ $ 0.19 $ 0.03 $ (0.04)
Other changes in shareholders' equity
PSS and Taylor combined........................ $ 1,446 $ 152,340 $ 24,101
X-ray GA....................................... (1,100) (455) (516)
-------------- ---------- ----------
Total.................................. $ 346 $ 151,885 $ 23,585
============== ========== ==========
</TABLE>
110
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Pooling With Taylor
On August 21, 1995, the Company issued approximately 3,790,000 shares of
its common stock in exchange for all of the outstanding common stock of Taylor,
including approximately 416,000 shares held in escrow to satisfy certain
obligations of Taylor related to its operations prior to the merger. Subsequent
to August 21, 1995, approximately 244,000 shares of common stock were returned
to the Company as settlement of the escrow and were canceled. These canceled
shares had no resulting impact on the net income per share calculation. The
merger has been accounted for as a pooling-of-interests, and accordingly, the
Company's consolidated financial statements have been restated to include the
accounts and operations of Taylor for all periods prior to the merger.
Separate net sales, net income (loss) and other changes in shareholders'
equity of the merged entities prior to the merger are presented in the following
table:
<TABLE>
<CAPTION>
April 1 through
June 30, 1995
(unaudited) March 30, 1995
----------- --------------
(In thousands)
<S> <C> <C>
Net sales
PSS................................. $ 73,670 $ 236,188
Taylor.............................. 31,640 130,097
---------- ----------
Combined.............................. $ 105,310 $ 366,285
Net income
PSS................................. $ 980 $ 3,680
Taylor.............................. 193 (4,589)
---------- ----------
Combined.............................. $ 1,173 $ (909)
Other changes in shareholders' equity
PSS................................. $ 1,036 $ 24,075
Taylor.............................. 1 26
---------- ----------
Combined.............................. $ 1,037 $ 24,101
========== ==========
</TABLE>
Other Poolings
During fiscal 1997, the Company merged with four other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing approximately 1,465,000 shares of PSS
common stock in exchange for all of the common stock of the acquired companies.
The accompanying consolidated financial statements have not been restated for
periods prior to these poolings due to immateriality. Accordingly, the results
of operations have been reflected in the consolidated financial statements
prospectively from the acquisition date and the accumulated deficit as of their
acquisition dates of approximately $4.7 million has been recorded as an
adjustment to the accumulated deficit of the Company.
During fiscal 1996, the Company merged with three other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies. The accompanying
consolidated financial statements have not been restated for periods prior to
these poolings due to immateriality. Accordingly, the results of operations have
been reflected in the consolidated financial statements prospectively from the
acquisition date, and the accumulated retained earnings as of their acquisition
dates of approximately $1.3 million have been recorded as adjustments to the
accumulated deficit of the Company.
111
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Asset Purchases
During fiscal 1997, the Company acquired certain assets, accounted for by
the purchase method, including accounts receivable, inventories, equipment, and
other assets of five medical supplies and equipment distributors for
approximately $14.2 million. The aggregate purchase price paid consisted of cash
of approximately $6.8 million, assumption of accounts payable and accrued
liabilities of approximately $7.4 million, and the issuance of 2,700 shares of
common stock with a fair market value of approximately $40,000. The excess of
the purchase price over the estimated fair value of the net assets acquired of
approximately $2.8 million has been recorded as goodwill and will be amortized
over thirty years. In addition, the Company entered into noncompete agreements
with shareholders of the acquired companies which provide for payments of
approximately $220,000 through the year 2001. The operations of the acquired
companies have been included in the Company's results of operations subsequent
to the dates of acquisition.
During fiscal 1996, the Company acquired certain assets, accounted for by
the purchase method, including accounts receivable, inventories, equipment, and
other assets of seven medical supplies and equipment distributors for
approximately $5.5 million. The aggregate purchase price paid consisted of cash
of approximately $2.8 million, assumption of accounts payable and accrued
liabilities of approximately $2.5 million, and the issuance of 5,700 shares of
common stock with a fair market value of $121,000. The excess of the purchase
price over the estimated fair value of the net assets acquired of approximately
$1.2 million has been recorded as goodwill and will be amortized over thirty
years. In addition, the Company entered into noncompete agreements with
shareholders of the acquired companies which provide for payments of $1.2
million through the year 2000. The operations of the acquired companies have
been included in the Company's results of operations subsequent to the dates of
acquisition.
During fiscal 1995, the Company acquired certain assets, including accounts
receivable, inventories, equipment, and other assets, of nine medical supplies
and equipment distributors for approximately $11.6 million. The aggregate
purchase price paid consisted of cash of approximately $6.9 million, assumption
of accounts payable and accrued liabilities of approximately $4.2 million, and
the issuance of approximately 70,000 shares of common stock with a fair market
value of approximately $0.5 million. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately $4.0 million
has been recorded as goodwill. In addition, the Company entered into noncompete
agreements with shareholders and an officer of the acquired companies which
provide for payments of approximately $2.3 million through the year 1998.
During fiscal 1995, Taylor acquired certain assets of three medical
supplies and equipment distributors for approximately $2.2 million.
For acquisitions accounted for as purchases, the results of operations
acquired have been included in the financial statements since the dates of
acquisition. Supplemental pro forma information is not presented because the
impact on the Company's results of operations would not be material.
12. COMMITMENTS AND CONTINGENCIES
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, management believes that the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
112
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under certain
conditions, the Company may be required to continue salary payments and provide
insurance for a period ranging from 12 to 36 months for the chief executive
officer and from 3 to 12 months for other executives and to repurchase a portion
or all of the shares of common stock held by the executives upon their demand.
The period of salary and insurance continuation and the level of stock
repurchases are based on the conditions of the termination or resignation.
13. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with Abbott
Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a
five-year term, although it may be terminated earlier if the Company fails to
meet certain performance objectives. Under the Abbott Agreement, the Company has
become the exclusive distributor in the United States of certain Abbott
diagnostic products and reagents to office-based physician practices with 24 or
fewer physicians per office site. The Abbott Agreement also provides the
Company's sales force with access to over 15,000 physician practices that were
not previously purchasing diagnostic products from the Company. Abbott products
constituted approximately 16% of the Company's sales in fiscal 1997 and 1996.
Simultaneous with the closing of the Abbott Agreement, Abbott purchased 825,000
unregistered, restricted shares of PSS common stock. A three-year irrevocable
proxy to the PSS Board of Directors and a perpetual stand still agreement were
provided by Abbott in the Stock Purchase Agreement.
14. SALES OF ASSETS
On July 1, 1994, Taylor sold the assets of its Taylor Home Health division
for $12,000,000 in cash and an escrow receivable of $1,051,000 based on
subsequent receivables collections and other factors, resulting in a gain on
sale of assets of approximately $2,078,000. In March 1995, Taylor negotiated a
final settlement of the escrowed receivable which included the return to Taylor
of certain receivables. Taylor recorded a $600,000 reduction in the gain
originally recognized to record these receivables at their estimated net
realizable value. The net gain of approximately $1,478,000 is included in other
income for fiscal year 1995.
On November 30, 1994, Taylor sold the assets of its Labcare division, whose
principal business was the repair of medical equipment, for $1,100,000,
resulting in a loss of approximately $403,000. In March 1995, Taylor recorded an
additional loss on the sale of approximately $154,000 related to the write-down
of certain notes receivable issued in conjunction with the sale. The net loss of
approximately $558,000 is included in other income for fiscal year 1995.
15. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES
The Company recorded merger costs and expenses of approximately $12,100,000
and $15,700,000 in fiscal 1997 and 1996, respectively, associated with mergers
accounted for as poolings-of-interests. Such costs include direct merger costs
consisting primarily 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, and reducing personnel.
At March 28, 1997, accrued merger costs were approximately $3.0 million.
113
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1995, Taylor management concluded that recent industry
developments had affected Taylor's strategy and operations. Taylor assessed its
relative position in its major markets and determined that competitive pressures
on margins and cost structures in its Arizona, Indiana and Massachusetts
distribution centers as well as the prospects for its physician consulting
services and equipment repair businesses would not result in full realization of
the future benefits expected from the related intangible assets. Accordingly,
Taylor management concluded that the intangible assets were impaired and
recorded a $4,388,592 noncash charge to write off the intangible assets
associated with these markets and operations.
16. SUBSEQUENT EVENTS.
Subsequent to March 28, 1997, the Company acquired four imaging and
equipment distributors for aggregate consideration of approximately $2.5 million
comprised of 1,275,681 shares of PSS common stock approximately $24.3 million.
On August 12, 1997, the Company signed a definitive agreement to merge with
S&W X-Ray, Inc. ("S&W"). As discussed further elsewhere in this Proxy Statement-
Prospectus, the Company intends to acquire S&W in a stock-for-stock merger, to
be accounted for as a pooling-of-interests by issuing shares of PSS common stock
with a value of $26,000,000, subject to adjustment.
114
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 30, 1995, March 29, 1996, and March 28, 1997
<TABLE>
<CAPTION>
Balance at Provision
Valuation allowance beginning of charged to Transfers Balance at
for accounts receivable period expense from Poolings Write-offs end of period
----------------------- ------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year ended March 30, 1995 $1,848,000 $1,651,000 $ -- $2,245,000 $1,254,000
Year ended March 29, 1996 1,254,000 1,448,000 400,000 884,000 2,218,000
Year ended March 28, 1997 $2,218,000 $2,463,000 $881,000 $1,981,000 $3,581,000
</TABLE>
115
<PAGE>
INDEX TO S&W FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..................................... 117
Balance Sheets................................................... 118
Statements of Income ............................................ 120
Statements of Shareholders' Equity............................... 121
Statements of Cash Flows......................................... 122
Notes to Financial Statements.................................... 124
</TABLE>
116
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of S & W X-Ray, Inc.
We have audited the accompanying balance sheet of S & W X-Ray, Inc. as of March
31, 1997, and the related statements of income, shareholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of S & W X-Ray, Inc. as of March
31, 1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The 1996 and 1995 financial statements were reviewed by us and our reports
thereon, dated May 29, 1996 and May 26, 1995, respectively, stated that we were
not aware of any material modifications that should be made to those statements
for them to be in conformity with generally accepted accounting principles.
However, a review is substantially less in scope than an audit and does not
provide a basis for the expression of an opinion on the 1996 and 1995 financial
statements taken as a whole.
MAY, ROBINSON, GORDON & PENTA, P.C.
Rochester, New York
July 31, 1997
117
<PAGE>
S & W X-RAY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
----------------------------------
1997 1996
---- ----
(Audited) (Reviewed)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash.................................................................. $ 335,034 $ 115,153
Accounts receivable, less allowances for doubtful accounts
of $653,000 and $100,000 in 1997 and 1996, respectively............. 11,133,430 9,547,463
Inventory ............................................................ 7,290,574 5,075,811
Prepaid expenses...................................................... 1,538,151 402,325
Deferred income taxes................................................. 611,000 71,200
------------- -------------
TOTAL CURRENT ASSETS........................... 20,908,189 15,211,952
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Land.................................................................. 150,000 150,000
Building.............................................................. 681,066 667,866
Transportation equipment.............................................. 510,567 390,738
Equipment............................................................. 1,085,264 700,375
Furniture............................................................. 151,419 132,450
Leasehold improvements................................................ 56,448 47,638
------------- -------------
........................................................................ 2,634,764 2,089,067
Less: accumulated depreciation and amortization...................... 1,243,488 981,874
------------- -------------
........................................................................ 1,391,276 1,107,193
OTHER ASSETS
- ------------
Goodwill (net of accumulated amortization of
$33,333 in 1997)................................................... 466,667 500,000
Other assets.......................................................... 158,147 92,844
Deferred income taxes................................................. 59,400 -
------------- -------------
........................................................................ 684,214 592,844
------------- -------------
........................................................................ $ 22,983,679 $ 16,911,989
============= =============
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
March 31,
--------------------------------
1997 1996
---- ----
(Audited) (Reviewed)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
- -------------------
Notes payable to bank................................................. $ 5,214,550 $ 5,750,000
Current portion of long-term debt..................................... 1,082,360 284,167
Notes payable to related parties...................................... 1,130,000 1,245,000
Accounts payable...................................................... 4,947,746 1,813,375
Customer deposits..................................................... 376,362 348,083
Other current liabilities............................................. 262,092 26,209
Accrued salaries and pension.......................................... 1,749,759 1,177,711
----------- -----------
TOTAL CURRENT LIABILITIES...................... 14,762,869 10,644,545
LONG-TERM LIABILITIES
- ---------------------
Long-term debt........................................................ 3,265,569 2,681,762
Deferred income taxes................................................. -- 4,800
----------- -----------
........................................................................ 3,265,569 2,686,562
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $.04 par value
Authorized, 500,000 shares
Issued and outstanding, 259,574 shares............................ 10,383 10,383
Paid-in capital....................................................... 172,811 --
Retained earnings..................................................... 6,139,703 6,086,428
----------- -----------
........................................................................ 6,322,897 6,096,811
Less: Unearned ESOP shares .......................................... 1,367,656 2,515,929
----------- -----------
........................................................................ 4,955,241 3,580,882
----------- -----------
........................................................................ $ 22,983,679 $ 16,911,989
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
119
<PAGE>
S & W X-RAY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
Sales............................................................ $72,034,238 $60,096,315 $58,683,889
Cost of sales.................................................... 55,260,054 47,170,205 45,981,570
----------- ----------- -----------
GROSS PROFIT............................ 16,774,184 12,926,110 12,702,319
General and administrative expenses.............................. 15,773,740 11,044,352 10,747,621
----------- ----------- -----------
INCOME FROM OPERATIONS.................. 1,000,444 1,881,758 1,954,698
Other income (expense):
Interest expense............................................... (864,756) (499,985) (441,545)
Interest income................................................ 13,037 8,208 4,540
Sundry......................................................... 450 450 248
Gain on disposal of equipment.................................. -- 669 5,660
----------- ----------- -----------
................................................................. (851,269) (490,658) (431,097)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.............. 149,175 1,391,100 1,523,601
Income taxes:
Federal........................................................ 623,100 452,000 571,500
States......................................................... 192,000 143,000 186,582
Deferred (credit).............................................. (719,200) 6,100 (141,500)
----------- ----------- -----------
................................................................. 95,900 601,100 616,582
----------- ----------- -----------
NET INCOME.............................. $ 53,275 $ 790,000 $ 907,019
=========== =========== ===========
Share Data:
Net income per common and common equivalent share:
Primary.................................................... $ .23 $ 3.65 $ 4.43
=========== =========== ===========
Fully diluted.............................................. $ .23 $ 3.65 $ 4.43
=========== =========== ===========
Weighted average common shares outstanding:
Primary.................................................... 234,779 216,463 204,819
=========== =========== ===========
Fully diluted.............................................. 234,779 216,463 204,819
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
120
<PAGE>
S & W X-RAY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
<TABLE>
<CAPTION>
COMMON STOCK UNEARNED
------------------------ PAID-IN RETAINED ESOP
SHARES AMOUNT CAPITAL EARNINGS SHARES TOTAL
------- ------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 259,574 $10,383 $ -- $4,389,409 $(3,638,335) $ 761,457
Release of unallocated
shares to employee
stock ownership plan.. -- -- -- -- 617,410 617,410
Net income ............. -- -- -- 907,019 -- 907,019
------- ------- -------- ---------- ----------- ----------
Balance, March 31, 1995 259,574 10,383 -- 5,296,428 (3,020,925) 2,285,886
Release of unallocated
shares to employee
stock ownership plan -- -- -- -- 504,996 504,996
Net income ............. -- -- -- 790,000 -- 790,000
------- ------- -------- ---------- ----------- ----------
Balance, March 31, 1996. 259,574 10,383 -- 6,086,428 (2,515,929) 3,580,882
Release of unallocated
shares to employee
stock ownership plan -- -- 172,811 -- 1,148,273 1,321,084
Net income ............. -- -- -- 53,275 -- 53,275
------- ------- -------- ---------- ----------- ----------
Balance, March 31, 1997. 259,574 $10,383 $172,811 $6,139,703 $(1,367,656) $4,955,241
======= ======= ======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
121
<PAGE>
S & W X-RAY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net income for year........................................................ $ 53,275 $ 790,000 $ 907,019
Adjustments to reconcile net income to net
cash (used for) operating activities:
Depreciation and amortization.......................................... 294,947 201,871 182,258
Bad debts.............................................................. 577,548 15,758 29,585
Inventory, warranty and other.......................................... 301,732 -- --
Gain on disposal of equipment.......................................... -- (669) (5,660)
Deferred income taxes (credit)......................................... (719,200) 6,100 (141,500)
Changes in certain assets and liabilities
affecting operations:
Accounts receivable................................................ (2,163,515) (1,016,986) (676,621)
Inventory.......................................................... (2,318,863) (624,209) (1,494,978)
Prepaid expenses................................................... (1,135,826) (236,118) 309,814
Other assets....................................................... (65,303) (45,833) (46,542)
Accounts payable................................................... 3,134,371 (541,946) 180,251
Customer deposits.................................................. 28,279 91,940 (2,233)
Other current liabilities.......................................... 38,251 (99,054) 9,235
Accrued salaries and pension ...................................... 1,536,446 437,120 (194,964)
------------- ----------- -----------
NET CASH (USED FOR)
OPERATING ACTIVITIES.................. (437,858) (1,022,026) (944,336)
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Purchases of property, plant and equipment................................. (474,630) (59,417) (255,667)
Proceeds from disposal of equipment........................................ -- 9,050 9,150
Net asset acquisition...................................................... -- (535,055) --
------------- ----------- -----------
NET CASH (USED FOR)
INVESTING ACTIVITIES.................. (474,630) (585,422) (246,517)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Net (payments) borrowings of short-term debt............................... (535,450) 2,100,000 1,350,000
Proceeds from long-term borrowings......................................... 2,471,886 504,996 617,410
Principal payments of long-term borrowings................................. (689,067) (542,496) (654,910)
Additional borrowings from related parties................................. 1,059,350 350,094 1,109,224
Principal payments to related parties...................................... (1,174,350) (791,194) (1,275,150)
------------- ----------- -----------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES.................. 1,132,369 1,621,400 1,146,574
------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH....... 219,881 13,952 (44,279)
Cash at beginning of year.................................................... 115,153 101,201 145,480
------------- ----------- -----------
CASH AT END OF YEAR............... $ 335,034 $ 115,153 $ 101,201
============= =========== ===========
</TABLE>
122
<PAGE>
S & W X-RAY, INC.
STATEMENTS OF CASH FLOWS -- (Continued)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.................................... $ 710,719 $ 499,050 $ 406,888
=========== =========== ===========
Income taxes................................ $ 796,935 $ 663,805 $ 712,508
=========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITY
- -----------------------------------------
Seller financed vehicle purchase............ $ 71,067 $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
123
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------
The Company
- -----------
The Company, incorporated in the state of New York, is principally a distributor
of x-ray chemicals, film, equipment and related products. The Company grants
credit to its customers located principally in New York State.
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.
Inventory
- ---------
Inventory consists principally of film and x-ray chemicals and is valued at the
lower of cost or market. At March 31, 1997 and 1996, the cost of the film
inventory was determined by the last-in, first-out (LIFO) method, while the cost
of the remaining inventory was determined by the first-in, first-out (FIFO)
method. The cost of the Company's inventory consists of material purchase costs
only.
Prepaid expenses
- ----------------
Prepaid expenses consist primarily of deposits paid to vendors for the purchase
of imaging equipment for the Company's customers.
Property, plant and equipment
- -----------------------------
Property, plant and equipment is valued at cost and is depreciated or amortized
for financial reporting purposes by straight-line and accelerated methods over
the estimated useful lives of the various assets.
Maintenance and repairs are charged to income when incurred. Additions and major
betterments are capitalized. The cost and accumulated depreciation or
amortization of assets sold or retired are removed from the respective accounts
and any gain or loss is reflected in income for the year.
Goodwill
- --------
Goodwill is being amortized on the straight-line method over a fifteen year
period.
124
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
- ------------------------------------------------------------------------------
Income taxes
- ------------
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis of
assets and liabilities, as measured by the enacted rates which are expected to
be in effect when these differences reverse. Deferred tax assets and liabilities
are classified as current or noncurrent depending on the classification of the
assets and liabilities to which they relate. Deferred tax assets and liabilities
not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse. The principal types of temporary differences between assets and
liabilities for financial statement and tax return purposes are described in
Note L.
Advertising costs
- -----------------
Advertising costs are expensed as incurred. Advertising costs approximated
$12,000, $14,000 and $8,000 for the years ended March 31, 1997, 1996 and 1995,
respectively.
NOTE B: CASH
- -------------
The Company maintains cash balances at several branches of a financial
institution located in the Northeast. The total of all accounts at the
institution is insured by the Federal Deposit Insurance Corporation up to
$100,000. Uninsured cash balances approximated $620,000 at March 31, 1997.
NOTE C: INVENTORY
- ------------------
At March 31, 1997, 1996 and 1995, inventory consisted of the following:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
Film $4,810,420 $3,714,887 $3,071,646
X-ray chemicals and other 2,480,154 1,360,924 1,170,000
---------- ---------- ----------
$7,290,574 $5,075,811 $4,241,646
========== ========== ==========
</TABLE>
Film inventory was stated at cost, determined by the last-in, first-out (LIFO)
method. If the first-in, first-out (FIFO) method of accounting for this
inventory had been utilized, this inventory would have been $447,797, $375,816
and $132,388 higher than reported for the years ended March 31, 1997, 1996 and
1995.
125
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE D: NOTES PAYABLE TO BANK
- ------------------------------
The Company has available two working capital line of credit agreements and an
equipment line of credit agreement with a local bank in the aggregate amount of
$10,000,000.
The primary credit line is available up to $3,500,000 for working capital
requirements and bears interest at the prime rate minus 1/4% or the LIBOR rate
plus 2% (an effective rate of 7.56% at March 31, 1997). At March 31, 1997 and
1996 there was $3,500,000 outstanding against this credit line.
The secondary credit line is available for bulk inventory purchases up to
$6,000,000 and bears interest at the prime rate (an effective rate of 8.5% at
March 31, 1997). At March 31, 1997 and 1996, there was $1,714,550 and
$2,250,000, respectively, outstanding against this line.
The equipment credit line is available for purchases of equipment for resale up
to $500,000 and bears interest at the prime rate plus 1 1/4% (an effective rate
of 9.75% at March 31, 1997). No amounts were outstanding under this credit line
at March 31, 1997 and 1996.
As collateral for the lines of credit, the bank has a security interest in the
Company's accounts receivable, equipment and inventory, along with the personal
guarantee of one of the shareholders.
NOTE E: NOTES PAYABLE TO RELATED PARTIES
- -----------------------------------------
<TABLE>
<CAPTION>
March 31,
------------------------------------
1997 1996
---- ----
(Audited) (Reviewed)
<S> <C> <C>
Demand notes payable to shareholders and other related parties bear interest at
the prime plus 1% (effective rate of 9.5% at March 31, 1997). No formal
repayment terms have been established. $1,130,000 $1,245,000
</TABLE>
NOTE F: LONG-TERM DEBT
Long-term debt of the Company is summarized as follows:
<TABLE>
<CAPTION>
March 31,
------------------------------------
1997 1996
---- ----
(Audited) (Reviewed)
<S> <C> <C>
Mortgage note payable to a bank due in monthly principal installments of $3,125
plus interest at the prime rate plus 1% (an effective rate of 9.5% at March 31,
1997), through March 31, 1998 at which time all remaining principal is due. This
mortgage note is secured by the underlying property and the same collateral
arrangements as described in Note D. 412,500 450,000
------------ ------------
Balance brought forward $ 412,500 $ 450,000
----------- -----------
</TABLE>
126
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE F: LONG-TERM DEBT, Continued
<TABLE>
<CAPTION>
March 31,
--------------------------------
1997 1996
---- ----
(Audited) (Reviewed)
<S> <C> <C>
Balance brought forward $ 412,500 $ 450,000
Note payable to a bank for the Employee Stock Ownership Trust (see Note I)
payable in minimum monthly principal installments of $20,555 plus interest at
the LIBOR rate plus 1.5% (an effective rate of 7.06% at March 31, 1997), through
February 1, 2001 at which time all remaining principal is due. This note is
secured by company stock held within the ESOP and the same collateral
arrangements as described in Note D. 2,044,043 2,515,929
Note payable to a bank due in monthly principal installments of $33,333 plus
interest at the LIBOR rate plus 2.25% (an effective rate of 7.8% at March 31,
1997), through November 31, 2001. This note is secured by the same collateral
arrangements as described in Note D. 1,833,334 --
==========
Note payable to financing institution due in monthly principal and
interest (4.9%) installments of $2,127 through August 31, 1999.
This note is secured by a certain vehicle. 58,052 --
---------- ==========
4,347,929 2,965,929
Less current portion of long-term debt and notes payable to
related parties 1,082,360 284,167
---------- ----------
$3,265,569 $2,681,762
========== ==========
</TABLE>
Current maturities of long-term debt and notes payable to related parties are as
follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
--------------------- ------
<S> <C>
1999 $ 671,022
2000 657,172
2001 1,704,041
2002 233,334
Thereafter --
===========
$3,265,569
===========
</TABLE>
127
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE G: COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company acquired certain assets from Rossi Walling X-Ray Corp. as further
described in Note K. In connection with this acquisition, the Company entered
into a consulting agreement with James Walling commencing March 20, 1996 and
expiring March 31, 1998. The agreement requires Walling to provide advisory and
consulting services for the Company during this two year period. As
consideration for these services, the Company agreed to pay Walling $125,000 on
March 30, 1997 and March 30, 1998.
In addition, Walling has entered into a five year non-compete agreement with the
Company expiring March 31, 2001. As consideration for this agreement, the
Company is obligated to pay to Walling a percentage of sales ranging from 2% to
3% per year relating to former customers of Rossi Walling X-Ray Corp. As
consideration for this agreement, the Company charged $152,478 to operations for
the year ended March 31, 1997.
The Company leases office and warehouse space at branch locations in Rochester,
Albany, Buffalo, and Newburgh, New York, under operating leases expiring in
various years through 2001. The Rochester facility is leased on a month to month
basis from an entity in which an officer of the Company has an ownership
interest. Payments to this entity approximated $88,500, $84,000 and $80,000 for
the years ending March 31, 1997, 1996, and 1995, respectively.
Total rent expense for the years ended March 31, 1997, 1996, and 1995 was
$384,780, $322,217, and $312,428, respectively.
Minimum future rental payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
--------------------- ------
<S> <C>
1998 $ 285,651
1999 243,493
2000 141,555
2001 80,055
-----------
$ 750,754
===========
</TABLE>
128
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE G: COMMITMENTS AND CONTINGENCIES, Continued
- -------------------------------------------------
The Company is a defendant in a lawsuit pending in the U.S. District Court for
the Northern District of New York. The lawsuit has been brought about by a
former employee of Rossi Walling X-Ray Corp. (see Note K) alleging age
discrimination at the time S & W X-Ray, Inc. acquired Rossi Walling X-Ray Corp.
In addition, the Company is a party in an age discrimination claim pending
before the New York State Division of Human Rights. Outside counsel for the
Company has advised that at this time the likelihood of an unfavorable judicial
or administrative outcome is more remote than probable. Therefore, no provision
for loss has been made in the accompanying financial statements. The Company
believes that the suit and claim are without merit and is vigorously defending
its position. However, should the judicial or administrative outcomes be
unfavorable, the range of potential loss is approximated at $75,000 to $145,000.
NOTE H: SHAREHOLDERS' AGREEMENTS
- ---------------------------------
The two majority shareholders of the Company are subject to an agreement which
stipulates the terms under which the Company's shares can be sold, transferred
or pledged. Among other things, the agreement gives each majority shareholder an
option to acquire the shares of the other shareholder wishing to sell his
shares, and may require mandatory redemption by the Company of the shares of a
deceased shareholder at a price specified in the agreement.
The majority shareholders have personally purchased life insurance on the lives
of each other in the amount of $2,500,000, respectively. In the event of the
death of one of the shareholders, the other would be required to purchase the
outstanding shares held by the estate of the deceased at a price specified in
the agreement. However, the remaining shareholder shall not be required to
purchase more shares than there is insurance money available. Any shares which
the remaining shareholder does not agree to purchase will be purchased by the
Company.
As of March 31, 1997, the maximum redemption amount that the Company could be
liable for under such agreement, assuming complete redemption upon the death of
either of its two majority shareholders, would approximate $1,800,000, payable
over a period not to exceed ten years.
129
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE I: EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
- ---------------------------------------------
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers all employees with one year of service. Contributions to the plan are at
the discretion of the Board of Directors and are deposited under a trust
agreement in the form of cash or Company stock. The number of shares of Company
stock to be contributed or purchased is based upon the fair market value of the
common stock as determined by an independent appraisal. The ESOP shares are
pledged as collateral for its debt. As the debt is repaid, shares are released
from collateral and allocated to active employees, based on the proportion of
debt service paid in the year. The Company accounts for its ESOP in accordance
with Statement of Position 93-6. Accordingly, the debt of the ESOP is recorded
as debt and the shares pledged as collateral are reported as unearned ESOP
shares in the balance sheet. As shares are released from collateral, the Company
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for earnings-per-share (EPS) computation.
At March 31, 1997, 1996 and 1995, approximately 85,000 shares of the Company's
common stock was held by the Employee Stock Ownership Trust, which was
established to fund the plan. The trust purchased these shares with the proceeds
of a $3,700,000 loan from the Company. The Company, in turn, obtained a
$3,700,000 loan from a bank. Under the loan agreement, the Company is obligated
to make minimum monthly principal payments to the bank of $20,555 plus interest
at the LIBOR rate plus 1.5% (an effective rate of 7.06% at March 31, 1997).
Total contributions to the plan for the years ended March 31, 1997, 1996, and
1995 totaled $1,446,060, $849,596, and $837,903, respectively.
The ESOP shares as of March 31 were as follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Allocated shares 42,423 30,779 18,881
Shares released for allocation 18,316 11,644 11,898
Unreleased shares 24,795 43,111 54,755
-------- -------- --------
Total ESOP shares 85,534 85,534 85,534
======== ======== ========
Fair value of unreleased shares at March 31, $1,512,495 $2,392,661 $2,885,589
========== ========== ==========
</TABLE>
130
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE J: MAJOR SUPPLIERS
- ------------------------
For the year ended March 31, 1997, four suppliers comprised approximately 63% of
the Company's purchases and for each of the years ended March 31, 1996 and 1995,
three suppliers comprised approximately 62% of the purchases. Purchases from
these suppliers approximated $35 million at March 31, 1997 and $29 million for
each of the years ended March 31, 1996 and 1995.
NOTE K: ASSET ACQUISITION
- --------------------------
On March 20, 1996, the Company acquired certain assets and assumed certain
liabilities from Rossi Walling X-Ray Corp. in a business combination accounted
for as a purchase. Rossi Walling X-Ray Corp. is primarily engaged in the sale
and service of x-ray supplies and imaging equipment. The accompanying financial
statements for the years ended March 31, 1997 and 1996, include the results of
operations of Rossi Walling X-Ray Corp. since the date of acquisition. Sales,
costs and expenses, and results of operations for the acquired operation are not
significant to S&W X-Ray, Inc.'s total sales, costs and expenses, and results of
operations.
The following is a summary of the net assets acquired:
<TABLE>
<S> <C>
Inventory $ 209,956
Fixed assets 35,100
Goodwill 500,000
-----------
745,056
Liabilities assumed 210,001
-----------
Net acquisition cost $ 535,055
===========
</TABLE>
NOTE L: INCOME TAXES
- ---------------------
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts measured by tax law.
131
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE L: INCOME TAXES, Continued
- --------------------------------
Deferred taxes resulting from temporary differences are as follows:
<TABLE>
<CAPTION>
Assets/(Liabilities)
------------------------------
March 31,
------------------------------
1997 1996
----------- ------------
(Audited) (Reviewed)
<S> <C> <C>
Excess of tax depreciation over book depreciation $ (2,000) $ (4,800)
Inventory uniform cost capitalization 47,700 31,200
Allowance for doubtful accounts 261,200 40,000
Reserve for inventory obsolescence 41,600 --
Accrued expenses 365,800 --
Intangibles 56,900 --
Deferred revenue 14,400 --
----------- ------------
$ 785,600 $ 66,400
=========== ============
Classification of deferred taxes:
Current asset $ 611,000 $ 71,200
Non-current asset 59,400 --
Non-current liability -- (4,800)
Reduction of paid-in capital 115,200 --
----------- ------------
$ 785,600 $ 66,400
=========== ============
</TABLE>
The difference between income tax computed at the federal statutory rate and the
actual tax provision is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
Income before provision for taxes $ 149,175 $1,391,100 $1,523,601
=========== =========== ============
Tax provision at the statutory rate $ 50,720 $ 472,974 $ 518,024
Increase in taxes:
State income tax, net of federal benefit 18,624 95,295 77,532
Meals and entertainment 16,779 32,831 21,026
Other non-deductible expenses 9,777 -- --
----------- ----------- ------------
TOTAL INCREASE IN TAXES 45,180 128,126 98,558
----------- ----------- ------------
TOTAL INCOME TAX PROVISION $ 95,900 $ 601,100 $ 616,582
=========== =========== ============
Effective tax rate 64.3% 43.2% 40.5%
========== ========== ===========
</TABLE>
132
<PAGE>
S & W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE M: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
The fair value of cash, accounts receivable, accounts payable, and accrued
expenses are estimated to approximate their carrying value because of the
short-term maturity of these instruments.
Based on borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of the Company's notes
payable to bank and long-term debt approximates stated values aggregating
approximately $10,700,000.
Estimates of the fair values of financial instruments are subjective in nature
and involve uncertainties and judgments and, as such, cannot be determined with
precision. Any change in assumptions would effect these changes.
NOTE N: SUBSEQUENT EVENT
- -------------------------
On August 12, 1997, the Company signed a definitive agreement to merge with
Physician Sales & Service, Inc. ("PSS"), one of the leading distributors of
medical supplies and equipment to the physician market. Under the agreement, PSS
will acquire the Company in a stock-for-stock merger with a value of
$26,000,000, subject to adjustment. The consummation of the merger is contingent
upon the transaction qualifying for pooling of interests accounting treatment
and is subject to customary closing conditions. Upon consummation of the merger,
in connection with the consolidation and restructuring of PSS and S & W X-Ray,
Inc., expenses related to closing duplicate service center locations,
restructuring regional and corporate functions, consolidating information
systems and reducing personnel are expected to be incurred. The costs associated
with these activities will be expensed in the period in which the merger is
consummated.
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AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of August 12, 1997, by and among S&W X-RAY, INC. ("S&W"), a New York
corporation having its principal office located in Rochester, New York;
DIAGNOSTIC IMAGING, INC. ("DI"), a Florida corporation having its principal
office located in Jacksonville, Florida; and PHYSICIAN SALES & SERVICE, INC.
("PSS"), a Florida corporation having its principal office located in
Jacksonville, Florida.
Preamble
--------
The Boards of Directors of PSS, DI, a wholly owned subsidiary of PSS, and
S&W are of the opinion that the transactions described herein are in the best
interests of the parties and their respective shareholders. This Agreement
provides for the acquisition of S&W by PSS pursuant to the Merger of S&W with
and into DI. At the Effective Time of such Merger, the outstanding shares of
the capital stock of S&W shall be converted into the right to receive shares
of the common stock of PSS (except as provided herein). As a result,
shareholders of S&W shall become shareholders of PSS and DI shall conduct the
business and operations of S&W as a wholly owned subsidiary of PSS. It is the
intention of the parties to this Agreement that the Merger shall qualify (i)
as a "reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code for federal income tax purposes, and (ii) for treatment as a
pooling of interests for accounting purposes.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants and agreements set forth herein, the parties agree
as follows:
ARTICLE I
TRANSACTIONS AND TERMS OF MERGER
--------------------------------
1.1 Merger. Subject to the terms and conditions of this Agreement, at
------
the Effective Time, S&W shall be merged with and into DI (the "Merger") in
accordance with the applicable provisions of the Florida Business Corporation
Act ("FBCA") and the New York Business Corporation Law ("NYBCL"). DI shall be
the Surviving Corporation resulting from the Merger and shall continue to be
governed by the Laws of the State of Florida. The Merger shall be consummated
pursuant to the terms of this Agreement, which has been approved and adopted
by the respective Boards of Directors of S&W, DI and PSS.
1.2 Time and Place of Closing. The closing (the "Closing") will take
-------------------------
place at 10:00 A.M. on a date to be specified by the parties (the "Closing
Date"), which (subject to the satisfaction or waiver of the conditions set
forth in Sections 9.2 and 9.3) shall be no later than the second business day
after the satisfaction of the conditions set forth in Section 9.1. The place
of Closing shall be at the offices of Alston & Bird, One Atlantic Center, 1201
West Peachtree Street, Atlanta, Georgia 30309-3424, or such other place as may
be mutually agreed upon by the Parties.
1.3 Effective Time. Subject to the provisions of this Agreement, the
--------------
parties shall file a Certificate of Merger and Articles of Merger executed in
accordance with the relevant provisions of the NYBCL and FBCA, respectively,
and shall make all other filings or recordings required under the NYBCL and
FBCA as soon as practicable on the Closing Date. The Merger and other
transactions contemplated by this Agreement shall become effective on the
Closing Date and at later of the time the Certificate of Merger or Articles of
Merger reflecting the Merger become effective with the Secretary of State of
the State of New York or Florida, respectively (the "Effective Time").
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ARTICLE II
TERMS OF MERGER
---------------
2.1 Charter. The Articles of Incorporation of DI in effect immediately
-------
prior to the Effective Time shall be the Articles of Incorporation of the
Surviving Corporation until otherwise amended or repealed.
2.2 Bylaws. The Bylaws of DI in effect immediately prior to the
------
Effective Time shall be the Bylaws of the Surviving Corporation until
otherwise amended or repealed.
2.3 Tax-Free Reorganization. The parties intend this Agreement to be a
-----------------------
tax-free plan of reorganization under Section 368(a) of the Internal Revenue
Code.
ARTICLE III
MANNER OF CONVERTING SHARES
---------------------------
3.1 Conversion of Shares. Subject to the provisions of this Article
--------------------
III, at the Effective Time, by virtue of the Merger and without any action on
the part of the Parties or the shareholders of any of the Parties, the shares
of the constituent corporations of the Merger shall be converted as follows:
(a) Each share of S&W Common Stock (excluding treasury shares, excluding
shares held by shareholders who perfect their statutory dissenters' rights as
provided in Section 3.4 of this Agreement and shares converted pursuant to
Section 3.1(a) above) issued and outstanding at the Effective Time, and each
such share to be issued under S&W's Supplemental Executive Retirement Plan in
accordance with Section 8.16, shall cease to be outstanding and shall be
converted into and exchanged for: (i) the right to receive that number of
shares of PSS Common Stock obtained by dividing the Common Stock Per Share
Purchase Price by the Base Period Trading Price, and (ii) a contingent right
to receive that portion of the Escrow Shares, that are attributable to each
such share of S&W Common Stock, that are deposited into escrow by PSS pursuant
to Section 4.3 of this Agreement. The sum of clause (i) and (ii) of the
preceding sentence is the "Common Stock Exchange Ratio." The Base Period
Trading Price is defined to mean the average of the daily closing prices for
the shares of PSS Common Stock for the ten (10) consecutive trading days on
which such shares are actually traded as over-the-counter securities and
quoted on the Nasdaq National Market System (as reported by The Wall Street
Journal or, if not reported thereby, any other authoritative source) ending at
the close of trading on the second trading day immediately prior to the
Closing Date; provided, that for purposes of this calculation, the Base Period
Trading Price shall be deemed to equal (i) $14.9644 in the event the Base
Period Trading Price is greater than $14.9644 and (ii) $12.2436 in the event
the Base Period Trading Price is less than $12.2436 (collectively, $14.9644
and $12.2436 are referred to as the "Base Period Trading Price Limitations").
(b) Subject to adjustment as set forth below, the Aggregate Purchase
Price shall equal $26,000,000, minus any expenses incurred by S&W or on S&W's
-----
behalf in connection with the transactions contemplated hereunder in excess of
$350,000, determined in accordance with Section 11.2 hereof; provided, that
such adjustment shall not exceed $200,000.
3.2 Anti-Dilution Provisions. In the event S&W or PSS changes the number
------------------------
of shares of S&W Common Stock or PSS Common Stock, respectively, issued and
outstanding prior to the Effective Time as a result of a stock split, stock
dividend, combination of shares or similar recapitalization with respect to
such stock (an "Anti-Dilution Event") and the record date therefor (in the
case of a stock dividend) or the effective date thereof (in the case of a
stock split, share exchange or similar recapitalization for which a record
date is not established) shall be prior to the Effective Time, the Common
Stock Exchange Ratio shall be proportionately adjusted to insure that holders
of S&W Common Stock shall receive PSS Common Stock having the same value as
they would have received prior to the Anti-Dilution Event. In the event PSS
has an Anti-Dilution Event and the record date therefor (in the
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<PAGE>
case of a stock dividend) or the effective date thereof (in the case of a
stock split, share combination, share exchange or similar recapitalization for
which a record date is not established) shall be prior to the Effective Time,
the Base Period Trading Price shall be adjusted to appropriately adjust the
ratio under which shares of S&W Common Stock will be converted into shares of
PSS Common Stock pursuant to Section 3.1(b) of this Agreement to insure that
holders of S&W Common Stock shall receive PSS Common Stock having the same
value as they would have received prior to the Anti-Dilution Event.
3.3 Shares Held by S&W. Each share of S&W Common Stock held in treasury
------------------
by S&W, shall be canceled and retired at the Effective Time and no
consideration shall be issued in exchange therefor.
3.4 Dissenting Shareholders. Any holder of shares of S&W Capital Stock
-----------------------
who perfects his or her dissenters' rights in accordance with and as
contemplated by Sections 623 and 910, et. seq., of the NYBCL shall be entitled
to receive the value of such shares in cash from S&W after the Effective Time
as determined pursuant to such provision of Law; provided, that no such
payment shall be made to any dissenting shareholder unless and until such
dissenting shareholder has complied with the applicable provisions of the
NYBCL and surrendered to S&W the certificate or certificates representing the
shares for which payment is being made. In the event that a dissenting
shareholder of S&W fails to perfect, or effectively withdraws or loses, its
right to appraisal and of payment for its shares, PSS shall issue and deliver
the consideration to which such holder of shares of S&W Capital Stock is
entitled under this Article 3 (without interest) upon surrender by such holder
of the certificate or certificates representing such shares held by such
holder.
3.5 Fractional Shares. No certificates representing fractional shares
-----------------
of PSS Common Stock will be issued as a result of the Merger. Each holder of
shares of S&W Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of PSS Common
Stock shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of PSS Common Stock multiplied by the
Base Period Trading Price. No such holder will be entitled to dividends,
voting rights, or any other rights as a shareholder in respect of any
fractional shares.
ARTICLE IV
EXCHANGE OF SHARES
------------------
4.1 Exchange Procedures. On the Closing Date, PSS shall mail to the
-------------------
former holders of S&W Common Stock appropriate transmittal materials (which
shall specify that delivery shall be effected, and risk of loss and title to
the certificates theretofore representing shares of S&W Common Stock shall
pass, only upon proper delivery of such certificates to PSS). After the
Effective Time, each holder of shares of S&W Common Stock (other than shares
cancelled pursuant to Sections 3.3 and 3.4 of this Agreement) issued and
outstanding at the Effective Time shall surrender the certificate or
certificates representing such shares to PSS and shall promptly upon surrender
thereof receive in exchange therefor the consideration provided in Section 3.1
of this Agreement. PSS shall not be obligated to deliver the consideration to
which any former holder of S&W Common Stock is entitled as a result of the
Merger until such holder surrenders his certificate or certificates
representing the shares of S&W Common Stock for exchange as provided in this
Section 4.1 or such holder provides an appropriate affidavit regarding loss of
such certificate and an indemnification for loss in favor of PSS. The
certificate or certificates of S&W Common Stock so surrendered shall be duly
endorsed as PSS may require.
4.2 Rights of Former S&W Shareholders. At the Effective Time, the stock
---------------------------------
transfer books of S&W shall be closed and no transfer of S&W Common Stock by
any such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 4.1 of this Agreement,
each certificate theretofore representing shares of S&W Common Stock (other
than shares to be canceled pursuant to Sections 3.3 and 3.4 of this Agreement)
shall from and after the Effective Time represent for all purposes only the
right to receive the consideration provided in Sections 3.1 and 3.5 of
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<PAGE>
this Agreement in exchange therefor. To the extent permitted by Law, former
shareholders of record of S&W shall be entitled to vote after the Effective
Time at any meeting of PSS shareholders the number of whole shares of PSS
Common Stock into which their respective shares of S&W Common Stock are
converted, regardless of whether such holders have exchanged their
certificates representing S&W Common Stock for certificates representing PSS
Common Stock in accordance with the provisions of this Agreement. Whenever a
dividend or other distribution is declared by PSS on the PSS Common Stock, the
record date for which is at or after the Effective Time, the declaration shall
include dividends or other distributions on all shares issuable pursuant to
this Agreement, but no dividend or other distribution payable to the holders
of record of PSS Common Stock as of any time subsequent to the Effective Time
shall be delivered to the holder of any certificate representing shares of S&W
Common Stock issued and outstanding at the Effective Time until such holder
surrenders such certificate for exchange as provided in Section 4.1 of this
Agreement. However, upon surrender of such certificate, both the PSS Common
Stock certificate (together with all such undelivered dividends or other
distributions without interest) and any undelivered cash payments to be paid
for fractional share interests (without interest) shall be delivered and paid
with respect to each share represented by such certificate.
4.3 Escrow Shares. At the Effective Time, and pursuant to the terms of
--------------
the Escrow Agreement attached hereto as Exhibit 4.3, PSS shall issue an
-----------
aggregate number of shares of PSS Common Stock equal to the sum of (A) with
respect to the specific indemnity, (i) $1,000,000, the amount of the
Receivables Claim, (ii) $5,000, the amount of the Escrow Agent Expenses, and
(iii) $10,000, the amount of the Representative Expenses; and (B) five percent
(5%) of the Aggregate Purchase Price ((A) and (B) collectively, the "Escrow
Dollar Amount"); the sum of which is divided by the Base Period Trading Price.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF S&W
-------------------------------------
S&W hereby represents and warrants to PSS and DI as follows:
5.1 Organization, Standing, and Power. S&W is a corporation duly
---------------------------------
organized, validly existing, and in good standing under the Laws of the State
of New York, and has the corporate power and authority to carry on its
business as it has been and is now being conducted and to own, lease and
operate its Assets. S&W is duly qualified or licensed to transact business as
a foreign corporation and is in good standing in all jurisdictions where the
character of its Assets or the nature or conduct of its business requires it
to be so qualified or licensed, except for such jurisdictions in which the
failure to be so qualified or licensed will not have, in the aggregate, a
Material Adverse Effect on S&W. Copies of the articles of incorporation and
all amendments thereto of S&W and the bylaws, as amended, of S&W and copies of
the corporate minutes (or resolutions adopted by the shareholders or Board of
Directors) of S&W, which have been made available to PSS for review, are true
and complete, in all Material respects, as in effect on the date of this
Agreement, and accurately reflect all proceedings of the shareholders and
Board of Directors of S&W. The stock record books of S&W, which have been
made available to PSS for review, contain true and complete records of the
stock ownership of S&W and all prior transfers of the shares of its capital
stock.
5.2 Authorization of Agreement; No Breach. The execution, delivery and
-------------------------------------
performance of this Agreement has been duly authorized by all necessary
corporate action of S&W. This Agreement constitutes, and all agreements and
other instruments and documents to be executed and delivered by S&W pursuant
to this Agreement will constitute, legal, valid and binding obligations of S&W
enforceable against S&W in accordance with their respective terms. The
execution, delivery and performance of this Agreement and the agreements and
other documents and instruments to be executed and delivered by S&W pursuant
to this Agreement and the consummation of the transactions contemplated hereby
and thereby will not, subject to obtaining the consents identified herein, (i)
violate or result in a breach of or Default under the certificate of
incorporation or bylaws of S&W or any other Material instrument or agreement
to which S&W is a party or is bound; (ii) to the knowledge of S&W, violate any
Law,
A-4
<PAGE>
administrative decision or award of any court, arbitrator, mediator,
tribunal, administrative agency or governmental body applicable to or binding
upon S&W or upon its securities, property or business; (iii) except as set
forth on Schedule 5.2 or 5.16 conflict with or constitute a Default under any
------------ ----
Material Contract to which S&W is a party or by which S&W is bound; or (iv)
create a Lien upon the securities, property or business of S&W.
5.3 Capital Stock. The authorized capital stock of S&W consists of
-------------
500,000 shares of S&W Common Stock, of which 259,574 shares are issued and
outstanding as of the date of this Agreement and none of which are issued and
held as treasury shares. All of such shares are duly and validly issued and
outstanding, are fully paid and non-assessable, and were issued pursuant to a
valid exemption from registration under the 1933 Act and all applicable state
securities laws. Except as set forth on Schedule 5.3, there are no
-------------
outstanding warrants, options, rights (including outstanding rights to demand
registration or to sell in connection with a registration by S&W under the
1933 Act), calls or other commitments of any nature relating to the S&W Common
Stock, and there are no outstanding securities of S&W convertible into or
exchangeable for shares of S&W Common Stock or any other capital stock. S&W
is not obligated to issue or repurchase any shares of its capital stock for
any purpose, and to the knowledge of S&W no person or entity has entered into
any Contract or option or any right or privilege (whether preemptive or
contractual) capable of becoming a Contract or option for the purchase,
subscription or issuance of any unissued shares, or other securities of S&W.
S&W's Fully Diluted Common Equivalents represent 263,583 shares of S&W Common
Stock.
5.4 S&W Subsidiaries. S&W has no Subsidiaries.
----------------
5.5 Financial Statements. (a) Schedule 5.5 contains true and correct
-------------------- ------------
copies of the balance sheets of S&W as of March 31, 1996 and 1997, and the
statements of income for the fiscal years ended March 31, 1995, 1996 and 1997
(the "Financial Statements"), which Financial Statements have been audited for
the period ended March 31, 1997.
(b) The Financial Statements (i) are in accordance with the books and
records of S&W, which books and records have been maintained in accordance
with reasonable business practices; (ii) present fairly the consolidated
financial condition, assets and liabilities of S&W as of the respective dates
indicated and the results of operations and cash flows for the respective
periods indicated; (iii) have been consistently prepared throughout the
periods involved; and (iv) reflect adequate reserves for all known Material
Liabilities and reasonably anticipated losses. The Financial Statements
contain no untrue statements of any Material fact nor omit to state any
Material fact required to be stated to make the Financial Statements as a
whole not misleading.
5.6 Absence of Undisclosed Liabilities. Except as disclosed on Schedule
---------------------------------- --------
5.6, as of the date hereof, S&W does not have any Undisclosed Liabilities
---
except for unpaid liabilities and obligations incurred since March 31, 1997,
in the ordinary course of business and not involving Funded Debt.
5.7 Absence of Changes. Except as disclosed on Schedule 5.7, since
------------------- ------------
March 31, 1997 there has not been any Material transaction or Material
occurrence (or, in the case of subparagraphs (i), (l) and (m) below, any
transaction or occurrence) in which S&W has:
(a) issued or delivered or agreed to issue or deliver any capital stock
or other securities (whether stock, bonds, debentures or other corporate
securities) or granted or agreed to grant any options or rights to purchase
any securities or borrowed or agreed to incur any Funded Debt;
(b) knowingly incurred or become subject to, or agreed to incur or
become subject to, any Material Liability other than in the ordinary course of
business;
(c) discharged or satisfied any Lien or paid any Material Liability
other than (i) current liabilities shown on the balance sheet as of March 31,
1997 included in the Financial Statements, (ii)
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<PAGE>
current liabilities incurred since that date in the ordinary course of
business, or (iii) Funded Debt shown on such balance sheet or incurred since
March 31, 1997;
(d) except as permitted elsewhere in this Agreement or disclosed in
Schedule 5.7, declared, set aside or made, or agreed to declare, set aside or
------------
make any payments or dividends or any distribution to shareholders or
purchased, redeemed or otherwise acquired, directly or indirectly, or agreed
to purchase, redeem or acquire, any shares of its capital stock or other
securities;
(e) mortgaged, pledged, subjected or agreed to subject any of its
assets, tangible or intangible, to any Lien, except for any liens regarding
current real and personal property taxes not yet due and payable;
(f) sold, assigned or transferred (or agreed so to do) any of its
tangible assets, or canceled or agreed to cancel any debts or claims, except,
in each case, in the ordinary course of business;
(g) sold, assigned or transferred any patents, trademarks, trade names,
copyrights or other intangible assets;
(h) suffered any Material damage, destruction or loss, whether or not
covered by insurance, which would have a Material Adverse Effect on the
properties or business thereof, or suffered any extraordinary losses or waived
any rights of substantial value, whether or not in the ordinary course of
business;
(i) increased the rate of compensation payable or to become payable by
it to any of its officers, directors, employees or agents over the rate being
paid to them at March 31, 1997, or agreed so to do, except general hourly rate
increases and normal merit increases for employees other than officers;
(j) terminated or amended any Material Contract, License or other
instrument to which it is a party or suffered any loss or termination or
threatened loss or termination, of any existing business arrangement or
Material supplier, the termination or loss of which would have a Material
Adverse Effect on S&W;
(k) through negotiation or otherwise, made any commitment or incurred
any Liability, whether or not enforceable, to any labor organization;
(l) except as specifically provided elsewhere in this Agreement and
except for any year-end compensation bonuses to be paid consistent with past
practice, if any, made or agreed to make any accrual or arrangement for or
payment of any bonus or special compensation of any kind to any officer,
director, employee or agent;
(m) directly or indirectly paid or entered into a Contract to pay any
severance or termination pay to any officer, director, employee or agent;
(n) changed any of the accounting principles followed by it or the
methods of applying such principles;
(o) reclassified its shares of capital stock into a different number of
shares;
(p) except in the ordinary course of business or as otherwise disclosed
in writing to PSS, offered or extended more favorable prices, discounts or
other allowances than were offered or extended regularly on and prior to March
31, 1997;
(q) made or approved the making of any capital expenditure exceeding the
amount of $25,000;
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<PAGE>
(r) except in the ordinary course of business, loaned funds to or
increased the aggregate amount of existing loans to any Person;
(s) suffered or experienced any other event or condition that would have
a Material Adverse Effect on the business, operations, assets, properties or
condition of S&W, financial or otherwise.
5.8 Indebtedness. Schedule 5.8 lists all Funded Debt of S&W as of the
------------ ------------
date hereof, setting forth the principal amounts outstanding, per annum
interest rates and maturity dates for all such indebtedness. All of the
indebtedness (including Funded Debt) of S&W as of the respective dates of the
Financial Statements and as of the date of this Agreement is accurately
reflected in the Financial Statements, and with respect to any Funded Debt,
S&W is not in breach or Default under any of the terms or conditions set forth
in the loan documents or any other document or instrument related thereto.
Except as disclosed on Schedule 5.8, all of the Funded Debt of S&W is
------------
prepayable at any time without penalty or premium at the option of S&W.
Except as disclosed on Schedule 5.8, (i) the transactions contemplated in this
------------
Agreement will not result in any penalty or incurrence of any additional
obligation or change of any terms with respect to any such indebtedness, and
(ii) S&W has no obligations, Liabilities or indebtedness to any Affiliate.
5.9 Tax Matters. (a) S&W has filed all federal and state income tax
-----------
returns for all periods prior to the date hereof which were required to be
filed, and, except as described on Schedule 5.9, no audit has been conducted
------------
by the IRS or any state agency with respect to any such period since 1990.
Except as listed on Schedule 5.9, S&W has not received notice of any Material
------------
Tax claims being asserted or any proposed assessment by any taxing authority
and no Tax returns thereof have been audited by the IRS or the appropriate
state agencies for any fiscal year or period ended prior to the date hereof
for which the applicable statute of limitations period has not expired, and
S&W is not presently under, nor has it received notice of any contemplated,
investigation or audit by the IRS or any state agency concerning any fiscal
year or period ended prior to the date hereof for which the applicable statute
of limitations period has not expired. Except as listed on Schedule 5.9, S&W
------------
has not executed any extension or waivers of any statute of limitations on the
assessment or collection of any Tax due that is currently in effect.
(b) As of the date hereof, S&W has filed all Tax returns required to be
filed at this date, taking into account any extensions of the filing deadlines
which have been validly granted to it, and such returns are true and correct
in all Material respects and properly reflect the Tax Liabilities of S&W for
the periods, property or events covered thereby, and S&W has paid all Taxes
(including penalties and interest in respect thereof, if any) that have become
or are due with respect to any period through the date hereof whether shown on
such returns or not.
(c) Adequate provision has been made in the Financial Statements in
accordance with GAAP as of March 31, 1997, for all Tax Liabilities not
required to be paid prior to such date and for all current and deferred Taxes.
(d) S&W and its predecessors have withheld or collected from each
payment made to each of their employees the amount of all Taxes required to be
withheld or collected therefrom and has paid the same to the proper tax
depositories or collecting authorities.
(e) All ad valorem property taxes for years prior to 1996 imposed on S&W
or its Predecessors have been paid in full or adequately reserved in the
Financial Statements, as appropriate.
(f) Neither S&W nor to the knowledge of S&W, its Predecessors, has ever
made an election under Section 341(f) of the Internal Revenue Code and no such
entity is a United States real property holding corporation as defined in
Section 897 of the Internal Revenue Code.
5.10 Real Property. (a) Schedule 5.10 identifies all real property
------------- -------------
owned by S&W and describes generally all structures located thereon. Except
as shown on Schedule 5.10, S&W has good and
-------------
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<PAGE>
marketable title to all real property owned by it, free and clear of all Liens
and other imperfections of title, other than easements which do not materially
and adversely affect the ownership or use of such real property. True and
correct copies of all documents evidencing the Liens upon the real property
described on Schedule 5.10 and copies of all title insurance policies relating
-------------
thereto have been provided or made available to PSS.
(b) True and correct copies of all real property leases of S&W have been
provided or made available to PSS. Each of such leases is in full force and
effect on the date hereof, except as the validity of such leases may be
affected by actions, events or conditions involving only the other party
thereto, none of which actions, events or conditions have occurred or exist to
the knowledge of S&W. No Default under any of the terms or conditions set
forth in any of the foregoing leases or any other documents or instruments
related thereto has occurred or been asserted by any party. Except as
disclosed on Schedule 5.10, the continuation, validity and effectiveness of
-------------
the terms and conditions of such leases will not be affected in any way by the
transactions contemplated by this Agreement.
(c) To the knowledge of S&W, all improvements on the real estate owned
by, leased to or used by S&W conform in all Material respects to all
applicable state and local laws.
(d) Each of the buildings, structures, improvements and leased premises
is in satisfactory condition and repair consistent with the uses to which they
are being put.
(e) No proceedings for the taking of any of such real property by
eminent domain by any governmental authority are pending or, to the knowledge
of S&W, threatened.
5.11 Personal Property. (a) True and correct copies of all leases for
-----------------
personal property (except miscellaneous leases of office machinery, medical
equipment, or any leases having future minimum lease payments of less than
$5,000) used or employed by S&W have been provided or made available to PSS.
Each of such leases is in full force and effect on the date hereof, except as
the validity of such leases may be affected by actions, events or conditions
affecting the other party thereto, none of which actions, events or conditions
exists of has occurred to the knowledge of S&W. No Default under any of the
terms or conditions set forth in any of the foregoing leases or any document
or instrument related thereto has occurred or been asserted by any party.
Except as disclosed on Schedule 5.11, the continuation, validity and
-------------
effectiveness of such leases will not be affected in any way by the
transactions contemplated by this Agreement. Except as disclosed on Schedule
--------
5.11, S&W does not lease any personal property as lessor.
----
(b) All Material items of personal property and leasehold improvements
owned or leased by S&W are shown on or reflected in the audited balance sheet
of S&W as of March 31, 1997, included in the Financial Statements, are in
satisfactory operating condition and in a state of reasonable maintenance and
repair, consistent in all Material respects with the uses to which they are
being put, and all such personal property, and leasehold improvements are
considered adequate and usable for the continued operation of the business of
S&W as the same is presently being conducted and are physically located either
at one of the principal places of business of S&W or at S&W's principal
business office.
5.12 Intellectual Property. (a) Schedule 5.12 contains a true and
--------------------- -------------
complete list of all Intellectual Property owned by, registered in the name
of, or used by S&W in its businesses on the date hereof, or for which
application has been made. All such Intellectual Property rights are in full
force and effect and constitute legal, valid and binding obligations of S&W
and to S&W's knowledge, of the other parties thereto; and there have not been,
and to the knowledge of S&W, there currently are not any Defaults thereunder
by any party. S&W owns or is a valid licensee of all such Intellectual
Property rights free and clear of all Liens or claims of infringement.
Neither S&W or, to the knowledge of S&W, its Predecessors have knowingly
infringed the Intellectual Property rights of others and none of the
Intellectual Property rights as used in the business conducted by any such
entity infringes upon or otherwise violates the rights of others, nor has any
person asserted a claim of such infringement. S&W is
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not obligated to pay any royalties to any person or entity with respect to any
such Intellectual Property. S&W owns or has the valid right to use all of the
Intellectual Property rights which it is presently using, or in connection
with the performance of any Material contract or proposal to which it is a
party.
(b) To the knowledge of S&W, except as described on Schedule 5.12, no
-------------
officer, director or employee of S&W has entered into any Contract which
requires such officer, director or employee to assign any interest in any
Intellectual Property or keep confidential any trade secrets, proprietary
data, customer lists or other business information or which restricts or
prohibits such officer, director or employee from engaging in activities
competitive with S&W.
5.13 Accounts Receivable. Except as set forth on Schedule 5.13, the
------------------- -------------
accounts receivable and receivables from Affiliates of S&W as of March 31,
1997, as reflected in the Financial Statements (net of reserves reflected in
such Financial Statements), to the extent uncollected on the date hereof, and
the accounts receivable and receivables from Affiliates reflected on the books
of S&W on the date hereof, are validly existing and represent monies due for
goods sold and delivered or services performed, and the value of such accounts
receivable as shown in the Financial Statements are, in the aggregate, net of
adequate reserves (based on past experience) for doubtful and uncollectible
accounts as determined in accordance with GAAP. Except as set forth in
Schedule 5.13 and except for returns in the ordinary course of business, there
-------------
are no refunds, discounts or other adjustments payable with respect to any
such accounts receivable and receivables from Affiliates, and, to S&W's
knowledge, there are no defenses, rights of set-off, assignments,
restrictions, encumbrances, or conditions enforceable by third parties on or
affecting any of the foregoing.
5.14 Inventories. All items of inventory of S&W reflected on the March
-----------
31, 1997 audited balance sheet contained in the Financial Statements
consisted, and all such items on hand on the date of this Agreement consist,
of items of a quality and quantity usable and saleable in the ordinary course
of business and conform to generally accepted standards in the industry in
which S&W is a part. The inventory of S&W as reflected in the Financial
Statements is net of adequate reserves for damaged, excess, slow moving,
obsolete and unsalable items as determined in accordance with GAAP. Except as
set forth on Schedule 5.14, purchase commitments are not materially in excess
-------------
of normal requirements, and none of such purchase commitments is at a price in
excess of the prevailing market prices at the time of the commitment. Except
as set forth on Schedule 5.14, since March 31, 1997, no inventory items have
-------------
been sold or disposed of, except through sales in the ordinary course of
business, and in no event at prices less than the book value of such inventory
items as of March 31, 1997 to S&W.
5.15 Insurance. All of the properties and business of S&W of an
---------
insurable nature and of a character usually insured by companies of similar
size and in similar businesses are insured in such amounts and against such
losses, casualties or risks as is usual in such companies and for such
properties and business. A complete and accurate list of all insurance
policies held by S&W or its Subsidiaries and now in force (including, without
limitation, property damage, public liability, worker's compensation, fidelity
bonds, errors and omissions, theft, forgery and other coverage) is attached
hereto as Schedule 5.15, and true and correct copies of all such insurance
-------------
policies have been provided or made available to PSS. All such policies are
in full force and effect and the premiums due thereon have been timely paid.
S&W is not now in Default regarding the provisions of any such policy, nor has
it failed to give any notice or present any Material claim thereunder in due
and timely fashion. The consummation of the transactions contemplated by this
Agreement will not constitute a Default under, or otherwise affect the
coverage under, any such insurance policies.
5.16 Compliance with Laws. (a) To the best of its knowledge, S&W has in
--------------------
effect all Permits necessary for it to own, lease or operate its Assets and to
carry on its business as now conducted, except for those Permits the absence
of which are not reasonably likely to have, individually or in the aggregate,
a Material Adverse Effect on S&W. S&W is not in violation of any Laws, Orders
or Permits applicable to its business or employees conducting its business,
except for violations which are not reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on S&W. No notice or warning from
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any Regulatory Authority with respect to any failure or alleged failure of S&W
to comply with any Law has been received, nor, to S&W's knowledge, is any such
notice or warning proposed or threatened.
(b) Except as set forth on Schedule 5.16, no consent or approval of,
-------------
prior filing with or notice to, or other action by, any Regulatory Authority
or any other third party is required in connection with the execution and
delivery of this Agreement or any assignment, agreement or other instrument to
be executed and delivered pursuant to this Agreement by S&W or the
consummation of the transactions provided for herein or therein except for
such consents and approvals that have been obtained and filings, notices and
other actions that have been taken or made.
(c) To the knowledge of S&W, there are no Material capital expenditures
that S&W anticipates will be required to be made in connection with the
business of S&W as now conducted in order to comply with any existing Laws or
other governmental requirements applicable to the business of S&W as now
conducted, including, without limitation, requirements relating to
occupational health and safety and protection of the environment. "Capital
Expenditures" shall have the same meaning as it has in the Financial
Statements if and to the extent that the treatment thereof is in accordance
with GAAP.
(d) Neither S&W nor, to the knowledge of S&W, any officer, director,
employee, agent or other representative thereof acting or purporting to act on
behalf of any such entity or any business enterprise with which S&W has been
associated or affiliated, has, directly or indirectly, made or authorized any
payment, contribution or gift of money, property, or services, in violation of
applicable Law (i) as a kickback or bribe to any person, or (ii) to any
political organization or the holder of, or any aspirant to, any elective or
appointive office of any nation, state, political subdivision thereof, or
other governmental body or instrumentality.
5.17 Environmental Matters. (a) Except as set forth on Schedule 5.17,
--------------------- -------------
there are no claims, actions, suits, proceedings or investigations related to
Environmental Laws with respect to the ownership, use, condition or operation
of any of the assets held for use or sale by S&W or, to the knowledge of S&W,
any of its Predecessors in any court or before or by any federal, state or
other governmental agency or private arbitration tribunal (hereinafter
collectively referred to as "Environmental Litigation"). Except as set forth
on Schedule 5.17, there are no existing Material violations of federal, state
-------------
or local Environmental Laws related to Environmental Matters by S&W with
respect to the ownership, use, condition, lease or operation of any Assets
thereof or, to the knowledge of S&W, any property formerly held for use or
sale by any of its Predecessors. Neither S&W nor, to the knowledge of S&W,
any of its Predecessors has used any of its assets or premises for the
handling, treatment, storage, or disposal of any Hazardous Substances except
in Material compliance with all applicable Environmental Laws. Except as set
forth on Schedule 5.17, no written or oral notice, or other communication from
-------------
any court or governmental agency, official or instrumentality, of any alleged
violation of any Environmental Law related to Environmental Matters has been
filed or communicated to S&W or, to the knowledge of S&W, any of its
Predecessors with respect to the use, ownership, condition, operation, or
disposal of any of the Assets of S&W or any property formerly held for use or
sale by S&W or, to the knowledge of S&W, any of its Predecessors. To the
knowledge of S&W, no basis exists for the allegation of any such violations;
(b) Except as set forth on Schedule 5.17, no Material release, discharge,
-------------
spillage or disposal of any Hazardous Substances in violation of any Law has
occurred or is occurring at any assets or premises of S&W or, to the knowledge
of S&W, any of its Predecessors while or before such premises were owned
leased, operated, or managed, directly or indirectly, by any such entity;
(c) Except as set forth on Schedule 5.17, no soil or water in, under or
-------------
adjacent to any of the premises of S&W or property formerly held for use or
sale by S&W or, to the knowledge of S&W, its Predecessors, has been
contaminated by any Hazardous Substance while or, to the knowledge of S&W,
before such assets or premises were owned, leased, operated or managed,
directly or indirectly, by S&W or any of its Predecessors;
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(d) Except as set forth on Schedule 5.17, all waste containing any
-------------
Hazardous Substances generated, used, handled, stored, treated or disposed of
(directly or indirectly) by S&W or, to the knowledge of S&W, any of its
Predecessors. has been released or disposed of in compliance with all
applicable reporting requirements under CERCLA and RCRA and other applicable
legal requirements;
(e) S&W and, to the knowledge of S&W, its Predecessors have complied
with all applicable reporting requirements under CERCLA and RCRA concerning
the disposal or release of Hazardous Substances, and except as set forth on
Schedule 5.17, neither S&W, nor to the knowledge of S&W, its Predecessors, has
-------------
made a report concerning any of their premises, operations or activities;
(f) Except as set forth on Schedule 5.17, to the knowledge of S&W, no
-------------
building or other improvement or any premises owned, leased, operated or
managed by S&W contains any asbestos-containing materials; and
(g) Copies of any environmental audits or environmental surveys of any
real estate owned or leased by S&W are attached to Schedule 5.17.
-------------
5.18 Litigation and Claims. There are no outstanding Court Orders or
---------------------
administrative decisions to which S&W is subject, and, except as disclosed on
Schedule 5.18, there is no Litigation pending or threatened against or
-------------
relating to S&W or its Assets or businesses, and to the knowledge of S&W,
there is no specific event which has occurred for which any such action or
any state of facts or occurrence of any event which might give rise to the
foregoing. Except as disclosed on Schedule 5.18, S&W has not been advised by
-------------
any attorney representing any such entity that there are any "loss
contingencies" (as defined in Statement of Financing Accounting Standards No.
5 issued by the Financial Accounting Standards Board in March 1975 ("FASB
5")), which would be required by FASB 5 to be disclosed or accrued in the
financial statements of S&W.
5.19 Contracts and Commitments. (a) Schedule 5.19 sets forth a true,
------------------------- -------------
correct and complete list of Contracts to which S&W is a party or by which
their assets are bound, and which involve payment by or the receipt of payment
by S&W of any amounts in excess of $25,000, all of which, to the extent they
are in writing, have been made available to PSS for review:
(i) any Contract for the employment of any officer, director,
employee or consultant;
(ii) any Contract for the purchase, sale, production or supply,
whether on a continuing basis or otherwise, of goods or services of any type
except those made in the ordinary course of business;
(iii) any distributor, sales agency or vendor Contract or sub-
contract or any license agreement, except those made in the ordinary course of
business;
(iv) any Contract not made in the ordinary course of business,
including but not limited to any covenants not to compete;
(v) any continuing Contract for the purchase of materials,
supplies, equipment or services in excess of normal operating requirements;
(vi) any Contracts that are, in the reasonable opinion of S&W,
materially adverse, onerous or otherwise harmful to any of S&W's businesses,
properties, operations or assets;
(vii) any Contract pursuant to which such entity receives a
management fee or a billings and collections fee; or
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<PAGE>
(viii) any Contracts, leases, quotas, restrictions or trade
conditions upon which the business, rights or assets, or condition, financial
or otherwise, of S&W depends or is or would be Materially affected.
(b) Except as set forth on Schedule 5.19 or as to Contracts that are
-------------
cancelable at will or upon 30 days' notice or less, (i) each of the Contracts
described in this Section 5.19 is in full force and effect on the date hereof,
except as the validity of such Contracts may be affected by actions, events or
conditions involving only the other party thereto, none of which actions,
events or conditions have occurred or exist to the knowledge of S&W, (ii) no
Default under any of the terms or conditions set forth in any of the Contracts
to which S&W is a party or any document or instrument related thereto has
occurred or been asserted by any party, and (iii) the continuation, validity
and effectiveness of such Contracts, and all other Material terms thereof,
will not be affected by the transactions contemplated by this Agreement.
(c) Except as set forth on Schedule 5.19, S&W is not a party to any
-------------
covenant not to compete or other agreement which restricts the ability of S&W
or Affiliates to engage in any business.
5.20 Powers of Attorney. Except as disclosed on Schedule 5.20, S&W has
------------------ -------------
not given or granted any power of attorney, whether limited or general, to any
Person that is continuing in effect.
5.21 Benefit Plans. (a) Schedule 5.21.1 lists (i) every pension,
------------- ---------------
retirement, profit-sharing, deferred compensation, stock option, employee
stock ownership, severance pay, vacation, bonus or other incentive plan, any
other written or unwritten employee program, arrangement, agreement or
understanding, whether arrived at through collective bargaining or otherwise;
(ii) any medical, vision, dental or other health plan, any life insurance
plan; or (iii) any other employee benefit plan or fringe benefit plan,
including, without limitation, any "employee benefit plan," as that term is
defined in Section 3(3) of ERISA, currently or expected to be adopted,
maintained by, sponsored in whole or in part by, or contributed to by S&W
under Internal Revenue Code Sections 414(b) or 414(c) for the benefit of
employees, former employees, retirees, directors, independent contractors,
spouses or dependents of any of the foregoing or any other beneficiaries and
under which such employees, retirees, dependents, spouses, directors,
independent contractors, or other beneficiaries are eligible to participate
(collectively, the "Benefit Plans"). Any Benefit Plan that is an "employee
pension benefit plan," as that term is defined in Section 3(2) of ERISA, or an
"employee welfare benefit plan" as that term is defined in Section 3(1) of
ERISA, is referred to herein as an "ERISA Plan." On or after September 26,
1980, neither S&W nor any entity aggregated therewith under Internal Revenue
Code Section 414(b) or 414(c) has had an "obligation to contribute" (as
defined in ERISA Section 4212) to a "multiemployer plan" (as defined in ERISA
Sections 4001(a)(3) and 3(37)(A)) ("Multiemployer Plan"). S&W has not
incurred, nor is reasonably expected to incur prior to the Closing Date, any
liability under Title I or Title IV of ERISA or under Internal Revenue Code
Section 412 other than routine funding obligations and routine claims for
benefits. Except as described on Schedule 5.21.2, all Liabilities arising out
---------------
of or related to Benefit Plans and ERISA Plans of S&W are reflected in the
Financial Statements in accordance with GAAP. Neither S&W nor any entity
aggregated therewith under Internal Revenue Code Sections 414(b), (c), (m),
and (o) have at any time sponsored, maintained, contributed to or been
obligated to contribute to a defined benefit plan as that term is defined in
Internal Revenue Code Section 414(j) and ERISA Section 3(35).
(b) True, correct and complete copies of all written Benefit Plans, as
currently in effect (or as otherwise requested by PSS), listed on Schedule
--------
5.21.1 and all trust agreements or other funding arrangements, including
------
insurance contracts, all amendments thereto and, where applicable, with
respect to any such plans or plan amendments, the most recent determination
letters issued by the IRS, all advisory opinions issued by the United States
Department of Labor after December 31, 1974, the annual reports or returns,
audited or unaudited financial statements, actuarial valuations, and summary
annual reports for the most recent three plan years, the most recent summary
plan descriptions and any Material modifications thereto have been provided or
made available to PSS.
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<PAGE>
(c) Except as listed on Schedule 5.21.2, all the Benefit Plans and the
---------------
related trusts subject to ERISA comply with and have been administered in all
Material respects in compliance with, the provisions of ERISA, all provisions
of the Internal Revenue Code relating to qualification and tax exemption under
Internal Revenue Code Section 401(a) and 501(a) or otherwise applicable to
secure intended tax consequences, and all other applicable laws, rules and
regulations and collective bargaining agreements in all Material respects.
Except as listed on Schedule 5.21.2, all governmental approvals for the
---------------
Benefit Plans have been obtained (to the extent such approvals may be
obtained), including, but not limited to, timely determination letters on the
qualification of the ERISA Plans that are "employee benefit plans," as defined
in Section 3(2) of ERISA, and tax exemption of related trusts, as applicable
under the Internal Revenue Code, and all such governmental approvals continue
in full force and effect. Neither S&W nor, to the knowledge of S&W, any
administrator or fiduciary of any such Benefit Plan (or agent of any of the
foregoing) has engaged in any transaction or acted or failed to act in any
manner which could subject any such entity to any direct or indirect liability
(by indemnity or otherwise) for a breach of any fiduciary, co-fiduciary or
other duty under ERISA. No oral or written representation or communication
with respect to any aspect of the Benefit Plans has been made by S&W or its
management to employees of S&W or any of its predecessors prior to or on the
Closing Date that is not in accordance with the written or otherwise
preexisting terms and provisions of such Benefit Plans in effect immediately
prior to the Closing Date. There are no unresolved claims or disputes under
the terms of, or in connection with, the Benefit Plans and no action, legal or
otherwise, has been commenced with respect to any claim other than processing
of claims in the ordinary course of business.
(d) Except as described on Schedule 5.21.2, all annual reports or
---------------
returns, audited or unaudited financial statements, actuarial valuations,
summary annual reports and summary plan descriptions issued with respect to
the Benefit Plans are correct and accurate in all Material respects.
(e) Since December 31, 1974, no "party in interest" (as defined in
Section 3(14) of ERISA) or "disqualified person" (as defined in Section
4975(e)(2) of the Internal Revenue Code) of any ERISA Plan has engaged in any
"prohibited transaction" (within the meaning of Section 4975(c) of the
Internal Revenue Code or Section 406 of ERISA) unless exempt under Section
4975(d) of the Internal Revenue Code or Section 407 of ERISA.
(f) Except as set forth in the Financial Statements, no Liability exists
and no event that could result in a Liability has occurred with respect to any
Benefit Plan that individually or in the aggregate could have a Material
Adverse Effect on S&W.
(g) S&W has not maintained and does not currently maintain a Benefit
Plan providing welfare benefits (as defined in ERISA Section 3(1)) to
employees after retirement or other separation of service except to the extent
required under Part 6 of Title I of ERISA and Internal Revenue Code Section
4980B(f).
(h) Except as set forth on Schedule 5.21.3, the consummation of the
---------------
transactions contemplated by this Agreement will not entitle any current or
former employee of S&W or any of its predecessors whose employment is not
terminated as a result of such transactions, to severance pay, unemployment
compensation or any similar payment, and will not accelerate the time of
payment or vesting, or increase the amount, of compensation due any such
employee or former employee.
(i) All Benefit Plans subject to Section 4980B of the Internal Revenue
Code or Part 6 of Title I of ERISA, or both, have been maintained in
compliance in all Material respects with the requirements of such laws and any
regulations (proposed or otherwise) issued thereunder.
(j) S&W represents that based on current compensation levels for
participants in the S&W X-Ray, Inc. Employee Stock Ownership Plan ("ESOP"),
sufficient compensation has been earned by participants through the plan year
ended March 31, 1997 and is projected to be earned by participants through the
plan year ending March 31, 1998 such that S&W may fully repay the ESOP
indebtedness as
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described in Section 8.1 of this Agreement and nevertheless satisfy Internal
Revenue Code Sections 404 and 415 (measured as of March 31, 1997 and March 31,
1998, respectively).
5.22 Remuneration. Schedule 5.22 contains a complete and accurate
------------ -------------
schedule of the direct compensation (including wages, salaries and actual or
anticipated bonuses), plus a description of other annual benefits not made
available to the other employees generally, paid in fiscal 1997 and to be paid
in the current fiscal year to (i) all of the officers and directors of S&W;
and (ii) all of the employees of S&W who received or will be receiving in
excess of $25,000 base salary during such year. No unpaid salary, other than
for the immediately preceding pay period and other than pursuant to the
existing deferred compensation plans of S&W, is now payable to any of such
officers, directors or employees.
5.23 Union and Employment Agreements. Except as set forth on Schedule
------------------------------- --------
5.23, S&W is not a party to any union agreement, nor does S&W have any
----
written or oral agreement that is not terminable by it at will with any of its
officers, directors, employees, consultants, agents, or any other person
performing services therefor, relating to their employment by or performance
of services for S&W or their compensation therefor. To S&W's knowledge, no
union attempts to organize the employees of S&W have been made nor are any
such attempts now threatened. Except as set forth on Schedule 5.23, S&W has
-------------
not received notice that any of the officers or directors of S&W will
terminate or contemplates terminating his or her employment currently or at
any time within sixty (60) days of the Closing Date.
5.24 Interested Transactions. (a) Except as set forth on Schedule 5.24,
----------------------- -------------
S&W is not currently a party to any Contract, loan or other transaction with
any of the following persons, or in which any of the following persons have
any direct or indirect interest (other than as a shareholder or employee of
S&W):
(i) Any director, officer, employee of S&W or any of the
shareholders of S&W;
(ii) Any of the spouses, parents, siblings, children, aunts,
uncles, nieces, nephews, in-laws and grandparents of any of the persons
described in clause (i); or
(iii) Any corporation, trust, partnership or other entity in which
any of the persons described in clauses (i) or (ii) has a beneficial interest
(other than in a corporation whose shares are publicly traded and in which
such persons own beneficially in the aggregate no more than 5% of the equity
interest).
(b) Except as set forth on Schedule 5.24, none of the shareholders of
-------------
S&W is an employee, consultant, partner, principal, director or shareholder of
any business entity which is engaged in a business which competes with or is
similar to the business of S&W.
5.25 Brokers and Finders. No broker, agent, finder or consultant (other
-------------------
than Stephen C. Cook of Fieldstone Partners, Inc.) or other person has been
retained by or on behalf of S&W (other than legal or accounting advisors), or
is entitled to be paid based upon any agreements or understandings made by S&W
in connection with the transactions contemplated hereby. Neither PSS nor S&W
shall have any Liability for any broker's fee, finder's fee, consultant's fee
or similar third party remuneration by reason of any action of S&W.
5.26 Statements True and Correct. No statement, certificate, instrument,
---------------------------
or other writing furnished or to be furnished by S&W to PSS pursuant to this
Agreement or any other document, agreement, or instrument referred to herein
furnished by S&W contains or will contain any untrue statement of Material
fact or will omit to state a Material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the information supplied by or to be supplied by S&W or
any Affiliate thereof for inclusion in the Registration Statement to be filed
by PSS with the SEC will, when the Registration Statement becomes effective,
be false or misleading with respect to any Material fact, or omit to state any
Material fact necessary to make the statements therein not misleading. None
of the information supplied or to be supplied by S&W or any Affiliates thereof
for
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<PAGE>
inclusion in the Proxy Statement-Prospectus to be mailed to S&W's shareholders
in connection with the Shareholders' Meeting, and any other documents to be
filed by S&W with the SEC or any other Regulatory Authority in connection with
the transactions contemplated hereby, will, at the respective time such
documents are filed, and with respect to the Proxy Statement-Prospectus, when
first mailed to the shareholders of S&W, be false or misleading with respect
to any Material fact, or omit to state any Material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or in the case of the Proxy Statement-Prospectus or any
amendment thereof or supplement thereto, at the time of the Shareholders'
Meeting, be false or misleading with respect to any Material fact, or omit to
state any Material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that S&W is responsible for filing with
any Regulatory Authority in connection with the transactions contemplated
hereby will comply as to form in all Material respects with the provisions of
applicable Law.
5.27 Accounting, Tax and Regulatory Matters. Other than actions
--------------------------------------
permitted or required to be taken under the terms of this Agreement, neither
S&W nor any Affiliate thereof has taken any action or has any knowledge of any
fact or circumstance that is reasonably likely to (i) prevent the transactions
contemplated hereby, including the Merger, from qualifying for pooling-of-
interests accounting treatment or as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, or (ii) materially impede or
delay receipt of any Consents of Regulatory Authorities.
5.28 Schedules. All Schedules attached hereto are true, correct and
---------
complete as of the date of this Agreement. Matters disclosed on each Schedule
shall be deemed disclosed only for purposes of the matters to be disclosed on
such Schedule and shall not be deemed to be disclosed for any other purpose
unless expressly provided therein.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PSS
-------------------------------------
PSS hereby represents and warrants to S&W as follows:
6.1 Organization, Standing, and Power. Each of PSS and its Subsidiaries
---------------------------------
is a corporation duly organized, validly existing, and in good standing under
the Laws of the state of its incorporation, and has the power and authority to
carry on its business as it has been and is now being conducted and to own,
lease and operate its Assets. Each of PSS and its Subsidiaries is duly
qualified or licensed to transact business as a foreign corporation and is in
good standing in all jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed is not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on PSS or such Subsidiary.
6.2 Authorization of Agreement; No Breach. The execution, delivery and
-------------------------------------
performance of this Agreement has been duly authorized by all necessary
corporate action of PSS. This Agreement constitutes, and all agreements and
other instruments and documents to be executed and delivered by PSS pursuant
to this Agreement will constitute, legal, valid and binding obligations of PSS
enforceable against PSS in accordance with their respective terms. The
execution, delivery and performance of this Agreement and the agreements and
other documents and instruments to be executed and delivered by PSS pursuant
to this Agreement and the consummation of the transactions contemplated hereby
and thereby will not, subject to obtaining the consents identified herein, (i)
violate or result in a breach of or Default under the articles or certificate
of incorporation or bylaws of PSS or any of its Subsidiaries or any other
Material instrument or agreement to which PSS or any of its Subsidiaries is a
party or is bound; (ii) to the knowledge of PSS and its Subsidiaries, violate
any Law, administrative decision or award of any court, arbitrator, mediator,
tribunal, administrative agency or governmental body applicable to or binding
upon PSS or its Subsidiaries or upon their respective securities, property or
business; (iii) conflict with or constitute a Default under any Material
Contract to which PSS or any of its Subsidiaries is a party or by
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<PAGE>
which PSS or any of its Subsidiaries is bound; or (iv) create a Lien upon the
securities, property or business of PSS or any of its Subsidiaries.
6.3 PSS Capital Stock. The authorized capital stock of PSS consists of
-----------------
(i) 60,000,000 shares of Common Stock, approximately 37,061,615 of which
shares were issued and outstanding as of March 28, 1997, and none of which are
issued and held as treasury shares, and (ii) 1,000,000 shares of Preferred
Stock, none of which shares are issued and outstanding as of the date of this
Agreement and none of which are issued and held as treasury shares. All of
such shares are duly and validly issued and outstanding, and are fully paid
and non-assessable and were issued pursuant to an effective registration
statement under the 1933 Act and all applicable state securities laws or
pursuant to an exemption from registration under the 1933 Act and all
applicable state securities laws. Except as set forth on Schedule 6.3 and as
------------
contemplated by this Agreement, there are no outstanding warrants, options,
rights (including outstanding rights to demand registration or to sell in
connection with a registration by PSS under the 1933 Act), calls or other
commitments of any nature relating to the PSS Common Stock or any other
capital stock of PSS, and there are no outstanding securities of PSS
convertible into or exchangeable for shares of PSS Common Stock or any other
capital stock of PSS. PSS and its Subsidiaries have no knowledge of any
voting agreements or voting trusts between or among any Person or Persons
relating to PSS, the PSS Common Stock or any of its Subsidiaries (if not
wholly owned by PSS). Except as set forth on Schedule 6.3, PSS is not
------------
obligated to issue or repurchase any shares of its capital stock for any
purpose, and no person or entity has entered into any Contract or option or
any right or privilege (whether preemptive or contractual) capable of becoming
a Contract or option for the purchase, subscription or issuance of any
unissued shares, or other securities of PSS.
6.4 PSS Subsidiaries. Schedule 6.4 attached hereto is a true and
---------------- ------------
correct list of each Subsidiary of PSS. All of the outstanding shares of
capital stock of each such Subsidiary are duly and validly issued and
outstanding, are fully paid and non-assessable, and were issued pursuant to a
valid exemption from registration under the 1933 Act, and all applicable state
securities laws, and, except as set forth on Schedule 6.4, are owned of record
------------
and beneficially by PSS, free and clear of any and all Liens. No shares of
capital stock of any Subsidiary are reserved for issuance and there are no
outstanding options, warrants, rights, subscriptions, claims of any character,
Contracts, obligations, convertible or exchangeable securities or other
commitments, contingent or otherwise, relating to the capital stock of any
Subsidiary, pursuant to which any Subsidiary is or may become obligated to
issue or exchange any share of capital stock. Neither PSS nor any Subsidiary
owns, directly or indirectly, any capital stock or other equity or ownership
or proprietary interest in any corporation, partnership, or other entity,
except as set forth on Schedule 6.4.
------------
6.5 PSS Documents. PSS has heretofore furnished the following documents
-------------
to S&W:
(a) its final Prospectus, dated November 13, 1995, contained in its
Registration Statement on Form S-3 (Registration No. 33-97524);
(b) its Annual Report on Form 10-K for the fiscal year ended March 28,
1997; and
(c) its Proxy Statement dated June 27, 1997.
Documents (a) - (c) above are collectively referred to herein as the "PSS
Documents." As of their respective dates, the PSS Documents complied in all
Material respects with all applicable Laws. Since May 5, 1994, PSS has filed
all reports and statements, together with any amendments required to be made
with respect thereto, that it was required to file with the SEC, including,
but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K, and proxy statements.
The PSS Documents did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date
of such filing) contain any untrue statement of a Material fact or omit to
state a Material fact required to be stated in such PSS Document, in light of
the circumstances under which they were made, not misleading. The
consolidated financial statements (including, in each case, any related notes)
contained in the PSS
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<PAGE>
Documents, complied as to form in all material respects with the applicable
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as may be indicated
in the notes to such financial statements or, in the case of unaudited
statements, as permitted by the published rules and regulations of the SEC
with respect thereto) and fairly presented the consolidated financial position
of PSS and its Subsidiaries, taken as a whole, at the respective dates and the
consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements do not
include notes and are subject to normal year end adjustments which will not,
in the aggregate, be Material. There have been no changes in PSS' accounting
policies and practices between the dates of the PSS Documents and the date
hereof that have had or are likely to have a Material Adverse Effect on the
present or future financial performance of PSS, and no such change is
contemplated as of the date hereof.
6.6 Absence of Undisclosed Liabilities. Except as disclosed on Schedule
---------------------------------- --------
6.6, as of the date hereof neither PSS nor any of its Subsidiaries has any
---
Undisclosed Liabilities in excess of $1,000,000 in the aggregate, except for
unpaid liabilities and obligations incurred since March 28, 1997, in the
ordinary course of business and not involving Funded Debt.
6.7 Absence of Certain Changes or Events. Since March 28, 1997, except
------------------------------------
as disclosed on Schedule 6.7, (i) there have been no events, changes or
------------
occurrences which have had, or are reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on PSS or its Subsidiaries taken
as a whole, and (ii) neither PSS nor any of its Subsidiaries has taken any
action, or failed to take any action, prior to the date of this Agreement,
which action or failure, if taken after the date of this Agreement, would
represent or result in a Material breach or violation of any of the covenants
and agreements of PSS or its Subsidiaries provided in Article 8 of this
Agreement.
6.8 Legal Proceedings. There are no outstanding Court Orders or
-----------------
administrative decisions to which PSS or any of its Subsidiaries is subject,
and there is no Litigation pending or threatened against or relating to PSS or
any of its Subsidiaries or their respective assets or businesses, which if
resolved adversely to PSS would have a Material Adverse Effect on PSS and its
Subsidiaries, taken as a whole. Neither PSS nor any of its Subsidiaries have
been advised by any attorney representing any such entity that there are any
"loss contingencies" as defined in FASB 5, which would be required by FASB 5
to be disclosed or accrued in the consolidated financial statements of PSS and
which are not so disclosed or accrued.
6.9 Brokers and Finders. No broker, agent, finder or consultant or
-------------------
other person has been retained by or on behalf of PSS (other than legal or
accounting advisors), or is entitled to be paid based upon any agreements or
understandings made by PSS in connection with the transactions contemplated
hereby. Neither S&W nor PSS shall have any Liability for any broker's fee,
finder's fee, consultant's fee or similar third party remuneration by reason
of any action of PSS or DI
6.10 Statements True and Correct. No statement, certificate, instrument
---------------------------
or other writing furnished or to be furnished by PSS or any Affiliate thereof
to S&W pursuant to this Agreement or any other document, agreement or
instrument referred to herein contains or will contain any untrue statement of
Material fact or will omit to state a Material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information supplied by or to be supplied by PSS
or any Affiliate thereof for inclusion in the Registration Statement to be
filed by PSS with the SEC will, when the Registration Statement becomes
effective, be false or misleading with respect to any Material fact, or omit
to state any Material fact necessary to make the statements therein not
misleading. None of the information supplied or to be supplied by PSS or any
Affiliate thereof for inclusion in the Proxy Statement-Prospectus to be mailed
to S&W's shareholders in connection with the Shareholders' Meeting, and any
other documents to be filed by PSS or any Affiliate thereof with the SEC or
any other Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed,
and with respect to the Proxy Statement-Prospectus, when first
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mailed to the shareholders of S&W, be false or misleading with respect to any
Material fact, or omit to state any Material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or in the case of the Proxy Statement-Prospectus or any
amendment thereof or supplement thereto, at the time of the Shareholders'
Meeting, be false or misleading with respect to any Material fact, or omit to
state any Material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that S&W is responsible for filing with
any Regulatory Authority in connection with the transactions contemplated
hereby will comply as to form in all Material respects with the provisions of
applicable Law.
6.11 Authority of DI DI is a corporation duly organized, validly
---------------
existing and in good standing under the Laws of the State of Florida as a
wholly owned Subsidiary of PSS. The authorized capital stock of DI consists
of 1,000 shares of DI Common Stock, 100 shares of which are validly issued and
outstanding, fully paid and nonassessable. DI has the corporate power and
authority necessary to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein, including the Merger, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of DI. This Agreement represents a legal, valid, and binding obligation
of DI, enforceable against DI in accordance with its terms.
6.12 Schedules. All Schedules attached hereto are true, correct and
---------
complete as of the date of this Agreement. Matters disclosed on each Schedule
shall be deemed disclosed only for purposes of the matters to be disclosed on
such Schedule and shall not be deemed to be disclosed for any other purpose
unless expressly provided therein.
ARTICLE VII
CONDUCT OF BUSINESS PENDING CONSUMMATION
----------------------------------------
7.1 Conduct of S&W Business. Except as set forth on Schedule 7.1, prior
----------------------- ------------
to the Closing Date, except with the prior written consent of PSS, and except
as necessary to effect the transactions contemplated in this Agreement, S&W
shall:
(a) conduct its business in substantially the same manner as
presently being conducted and refrain from entering into any transaction or
Contract other than in the ordinary course of business, and not make any
Material change in its methods of management, marketing, accounting, or
operations;
(b) consult with PSS prior to undertaking any Material new business
opportunity outside the ordinary course of business and not undertake such new
business opportunity without the prior written consent of PSS, which consent
will not be unreasonably withheld;
(c) confer on a regular basis with one or more designated
representatives of PSS to report Material operational matters and to report
the general status of ongoing business operations;
(d) notify PSS of any unexpected Material change in the normal
course of business or in the operation of its properties, and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings or
submissions involving any Material property, and S&W agrees to keep PSS fully
informed of such events and permit PSS's representatives prompt access to all
materials prepared in connection therewith;
(e) Except as set forth on Schedule 7.1, not enter into any new
------------
employment Contract or, except in the ordinary course of business, any
commitment to employees (including any commitment to pay retirement or other
benefits);
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<PAGE>
(f) not increase the compensation (including fringe benefits)
payable or to become payable to any officer, director, employee, agent or
independent contractor of either such company, except general hourly rate
increases and normal merit increases for employees other than officers made in
the ordinary course of business and consistent with past practice;
(g) except in the ordinary course of business, not (i) create or
incur any indebtedness, (ii) enter into (other than renewals of) or terminate
any lease of real estate, or (iii) release or create any Liens of any nature
whatsoever;
(h) except in the ordinary course of business and, even if in the
ordinary course of business, then not in an amount to exceed $50,000 in the
aggregate, make or commit to make any capital expenditure, or enter into any
lease of capital equipment as lessee or lessor;
(i) not sell any Material asset or make any Material commitment
relating to its assets other than in the ordinary course of business;
(j) not amend the Certificate of Incorporation, Bylaws or other
governing instruments of S&W, or
(k) not make any changes in its accounting methods or practices,
except for changes in its tax accounting methods or practices that may be
necessitated by changes in generally accepted accounting principles or
applicable tax laws;
(l) except for this Agreement and the issuance of 4,009 shares of
S&W Common Stock under the S&W Supplemental Executive Retirement Plan
simultaneously with the Closing of the Merger, issue, sell, pledge, encumber,
authorize the issuance of, enter into any Contract to issue, sell, pledge,
encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional shares of S&W Capital Stock, or any stock
appreciation rights, or any option, warrant, conversion, or other right to
acquire any such stock, or any security convertible into any such stock, or
pay or declare or agree to pay or declare any dividend with respect to any S&W
Capital Stock;
(m) other than in the ordinary course of business, not take any
action, or omit to take any action, which would cause the representations and
warranties contained in Article V to be untrue or incorrect;
(n) not make any loan to any Person or increase the aggregate
amount of any loan currently outstanding to any Person, except for usual and
customary advances to employees made in the ordinary course of business; and
(o) not make any agreement or commitment which will result in or
cause to occur a violation of any of the items contained in paragraphs (a)
through (n).
7.2 Conduct of PSS Business. PSS agrees that from the date hereof to
------------------------
the Effective Time, except to the extent that S&W shall otherwise consent by
an instrument in writing signed on behalf of S&W by its President:
(a) Operation of Business. It will operate its business
----------------------
substantially as presently operated and only in the ordinary course, except
that any business acquisition by PSS or the incurrence of additional debt or
the issuance or sale of equity securities shall be deemed to be in the
ordinary course.
(b) No Amendments; Corporate Existence. Except as previously
-----------------------------------
disclosed in writing by PSS to S&W, it will not, and it will not permit DI to,
amend its Articles of Incorporation or By-Laws; and it will maintain its
corporate existence and corporate powers.
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<PAGE>
7.3 Adverse Changes in Condition. Each Party agrees to give written
----------------------------
notice promptly to the other Party upon becoming aware of the occurrence or
impending occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on it, or (ii) would cause or constitute
a Material breach of any of its representations, warranties, or covenants
contained herein, and to use its reasonable efforts to prevent or promptly to
remedy the same.
7.4 Reports. Each Party and its Subsidiaries shall file all reports
-------
required to be filed by it with Regulatory Authorities between the date of
this Agreement and the Effective Time and shall deliver to the other Party
copies of all such reports promptly after the same are filed. If financial
statements are contained in any such reports filed with the SEC, such
financial statements will fairly present the consolidated financial position
of the entity filing such statements as of the dates indicated and the
consolidated results of operations, changes in shareholders' equity, and cash
flows for the periods then ended in accordance with GAAP (subject in the case
of interim financial statements to normal recurring year-end adjustments that
are not Material). As of their respective dates, such reports filed with the
SEC will comply in all Material respects with the Securities Laws and will not
contain any untrue statement of a Material fact or omit to state a Material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Any financial statements contained in any other reports to
another Regulatory Authority shall be prepared in accordance with Laws
applicable to such reports.
ARTICLE VIII
ADDITIONAL AGREEMENTS
---------------------
8.1 Contributions to ESOP and Repayment of Indebtedness. Prior to the
---------------------------------------------------
Closing Date, in addition to amounts previously accrued and not yet paid, S&W
shall contribute an additional amount of approximately $358,000 for the Plan
Year ending March 31, 1997 to its Employee Stock Ownership Plan ("ESOP") for
the repayment of indebtedness of the ESOP. In addition, prior to the Closing
Date, S&W shall make the maximum contribution to the ESOP permitted under
Sections 404 and 415 of the Internal Revenue Code for the repayment of
indebtedness of the ESOP for the period between April 1, 1997 and March 31,
1998. Immediately prior to the Effective Time, all remaining indebtedness of
the ESOP shall be paid. Furthermore, immediately prior to the Effective Time,
S&W shall fully repay all remaining indebtedness to Fleet Bank of New York,
the proceeds of which were loaned by S&W to the ESOP for the ESOP to acquire
stock of S&W.
8.2 Applications; Antitrust Notification. PSS shall promptly prepare
------------------------------------
and file, and S&W shall cooperate in the preparation and, where appropriate,
filing of, applications with all Regulatory Authorities having jurisdiction
over the transactions contemplated by this Agreement seeking the requisite
Consents necessary to consummate the transactions contemplated by this
Agreement. Each of the Parties will promptly file with the United States
Federal Trade Commission and the United States Department of Justice the
notification and report form required for the transactions contemplated hereby
and any supplemental or additional information which may reasonably be
requested in connection therewith pursuant to the HSR Act and will comply in
all Material respects with the requirement of the HSR Act.
8.3 Filings with State Offices. Upon the terms and subject to the
--------------------------
conditions of this Agreement, S&W and DI shall execute and file the Articles
of Merger with the Secretary of State of the State of Florida and a
Certificate of Merger with the Secretary of State of the State of New York in
connection with the Closing.
8.4 Agreement as to Efforts to Consummate. Subject to the terms and
-------------------------------------
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary,
proper, or advisable under applicable Laws to consummate and make effective,
as soon as practicable after the date of this
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<PAGE>
Agreement, the transactions contemplated by this Agreement, including using
its reasonable best efforts to lift or rescind any Order adversely affecting
its legal ability to consummate the transactions contemplated herein and to
cause to be satisfied the conditions referred to in Article IX of this
Agreement; provided, that nothing herein shall preclude either Party from
exercising its rights under this Agreement. Each Party shall use, and shall
cause each of its Subsidiaries to use, its reasonable efforts to obtain all
Consents necessary or desirable for the consummation of the transactions
contemplated by this Agreement.
8.5 Investigation and Confidentiality.
---------------------------------
(a) Prior to the Effective Time, each party shall keep the other
party advised of all Material developments relevant to its business and to
consummation of the Merger. S&W shall provide PSS open and exclusive access
to S&W, its records and employees in order for PSS to make or cause to be made
such investigation of the business and properties of S&W and its Subsidiaries
and of its financial and legal condition as PSS reasonably requests, provided
that such investigation shall not interfere unnecessarily with normal
operations. No investigation by a Party shall affect the representations and
warranties of the other Party.
(b) Each Party shall, and shall cause its advisers and agents to,
maintain the confidentiality of all confidential information not otherwise in
the public domain furnished to it by the other Party concerning its and its
Subsidiaries' businesses, operations, customers and financial positions and
shall not use such information for any purpose except in furtherance of the
transactions contemplated by this Agreement. If this Agreement is terminated
prior to the Effective Time, each Party shall promptly return or certify the
destruction of all documents and copies thereof, and all work papers
containing confidential information received from the other Party.
(c) Each Party agrees to give the other Party notice as soon as
practicable after any determination by it of any fact or occurrence relating
to the other Party which it has discovered through the course of its
investigation and which represents, or is reasonably likely to represent,
either a Material breach of any representation, warranty, covenant or
agreement of the other Party herein or in an agreement or certificate
delivered pursuant hereto, or which has had or is reasonably likely to have a
Material Adverse Effect on the other Party.
8.6 Press Releases. Prior to the Effective Time, S&W and PSS shall
--------------
consult with each other as to the form and substance of any press release or
other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.6
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's
disclosure obligations imposed by Law.
8.7 No Shopping. Until the termination of this Agreement pursuant to
-----------
Article X, except with respect to this Agreement and the transactions
contemplated hereby, neither S&W nor any of its Affiliates, nor any
Representatives thereof shall directly or indirectly solicit or respond (other
than to say that it has entered into a definitive agreement with another
party) to any Acquisition Proposal by any Person. None of S&W or any
Affiliate or Representative thereof shall furnish any non-public information,
negotiate with respect to, or enter into any Contract with respect to, any
Acquisition Proposal. S&W shall promptly notify PSS orally and in writing in
the event that it receives any inquiry or proposal relating to any such
transaction. S&W shall (i) immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any Persons conducted
heretofore with respect to any of the foregoing, and (ii) direct and use its
reasonable best efforts to cause all of its Representatives not to engage in
any of the foregoing.
8.8 Accounting and Tax Treatment. Each of the Parties undertakes and
----------------------------
agrees to use its reasonable efforts to cause the Merger, and to take no
action which would cause the Merger not, to qualify for pooling-of-interests
accounting treatment and treatment as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code for federal income tax purposes.
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<PAGE>
8.9 Investment Agreement. S&W shall use its reasonable best efforts to
--------------------
cause each Person whom it reasonably believes is an "affiliate" of S&W for
purposes of Rule 145 under the 1933 Act, as disclosed on Schedule 8.9 hereto,
------------
to deliver to PSS not later than 10 days prior to the Effective Time, a
written agreement, substantially in the form of Exhibit 8.9, providing that
-----------
such Person will not sell, pledge, transfer, or otherwise dispose of the
shares of S&W Common Stock held by such Person except as contemplated by such
agreement or by this Agreement and will not sell, pledge, transfer, or
otherwise dispose of the shares of PSS Common Stock to be received by such
Person upon consummation of the Merger except in compliance with applicable
provisions of the 1933 Act and the rules and regulations thereunder and until
such time as financial results covering at least 30 days of combined
operations of PSS and S&W have been published within the meaning of Section
201.01 of the SEC's Codification of Financial Reporting Policies. If the
Merger will qualify for pooling-of-interests accounting treatment, shares of
PSS Common Stock issued to such affiliates of S&W in exchange for shares of
S&W Common Stock shall not be transferable until such time as financial
results covering at least 30 days of combined operations of PSS and S&W have
been published within the meaning of Section 201.01 of the SEC's Codification
of Financial Reporting Policies, regardless of whether each such person has
provided the written agreement referred to in this Section 8.9 (and PSS shall
be entitled to place restrictive legends upon certificates for shares of PSS
Common Stock issued to affiliates of S&W pursuant to this Agreement to enforce
the provisions of this Section 8.9). PSS shall not be required to maintain
the effectiveness of the Registration Statement under the 1933 Act for the
purposes of resale of PSS Common Stock by such affiliates.
8.10 Conditional Releases. Simultaneously with the execution and delivery
--------------------
of this Agreement, each officer and director of S&W has executed and delivered
a Conditional Release, in the form of Exhibit 8.10 to this Agreement, to be
------------
effective only if the Effective Time occurs.
8.11 Registration Statement; Proxy Statement; Shareholder Approval. As
-------------------------------------------------------------
soon as practicable after execution of this Agreement, PSS shall file the
Registration Statement with the SEC, and shall use its commercially reasonable
best efforts to cause the Registration Statement to become effective under the
1933 Act and take any action required to be taken under the applicable state
Blue Sky or Securities Laws in connection with the issuance of the shares of
PSS Common Stock upon consummation of the Merger. The information supplied by
PSS and S&W for inclusion in the Registration Statement shall not at the time
the Registration Statement is declared effective by the SEC contain any untrue
statement of material fact or omit to state any material fact required to be
stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in the light of the circumstances
under which they were made, not misleading. S&W shall cooperate with PSS and
furnish PSS with all information concerning it and the holders of its capital
stock as PSS may reasonably request in connection with such action. S&W shall
call a Shareholders' Meeting (or vote by written consent), to be held as soon
as practicable after the Registration Statement is declared effective by the
SEC, for the purpose of voting upon approval of this Agreement, the
appointment of the "Representatives," as such term is defined in the Escrow
Agreement, and such other related matters as it deems appropriate. In
connection with the Shareholders' Meeting, (i) S&W and PSS shall prepare and
file with the SEC a Proxy Statement-Prospectus and mail such Proxy Statement-
Prospectus to the shareholders of S&W, (ii) the Parties shall furnish to each
other all information concerning them as they may reasonably request in
connection with such Proxy Statement-Prospectus, (iii) unless this Agreement
is terminated in accordance with its terms, the Board of Directors of S&W
shall recommend to its shareholders the approval of this Agreement, and (iv)
unless this Agreement is terminated in accordance with its terms, the Board of
Directors and officers of S&W shall use its reasonable efforts to obtain such
shareholders' approval.
8.12 Repayment of Indebtedness. PSS agrees to repay on the Closing Date
-------------------------
notes and bank and long-term debt of S&W in the aggregate amount of
approximately $7,000,000, together with accrued interest and such additional
principal outstanding through the Closing Date (other than a payment owed by
reason of a default or penalty under the loan documents), such final amount
subject to the approval and satisfaction of PSS.
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8.13 ESOP Termination. As soon as appropriate approvals have been
----------------
received from the Internal Revenue Service, the ESOP shall be terminated and
ESOP accounts shall be distributed in accordance with the ESOP and applicable
legal requirements and PSS shall adopt all resolutions and take all such
actions as are required to properly effect such termination.
8.14 COBRA Requirements. S&W shall, at all times through the Closing
------------------
Date, comply in all Material respects with the applicable requirements for its
ERISA Plans as set forth in the Internal Revenue Code and ERISA, including,
without limitation, Section 4980B of the Code (as well as its predecessor
provision, Section 162(k) of the Code) and Sections 601 through 608,
inclusive, of ERISA. Employees of S&W who become employees of PSS or DI shall
be entitled to participate in PSS' welfare, qualified retirement and benefit
plans on the same terms as PSS' current employees, and such S&W employees
shall receive credit for their full periods of service with S&W, and, to the
extent allowed by PSS' insurance company, all preexisting condition
requirements shall be waived for such employees. S&W maintains a fully insured
medical plan ("Medical Plan"). To the extent permitted by the insurance
carrier to such Medical Plan and to the extent permitted by law, PSS will
continue the Medical Plan through March 31, 1998 for S&W employees, former
employees and their dependents, each of whom is covered by the Medical Plan as
of the Closing Date.
8.15 Conditions to Closing. S&W and PSS agree to use their commercially
---------------------
reasonable efforts to satisfy the closing conditions set forth in Article IX
of this Agreement by August 31, 1997, and if not by such time, as soon
thereafter as possible.
8.16 Retirement Plan Interests. Simultaneous with the Closing of the
-------------------------
Merger, S&W shall issue 4,009 shares of its Common Stock in exchange for full
cancellation of all rights of the participants in the S&W Supplemental
Executive Retirement Plan, which shares have been represented in the Fully
Diluted Common Equivalents.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
-------------------------------------------------
9.1 Conditions to Obligations of Each Party. The respective
---------------------------------------
obligations of each Party to perform this Agreement and consummate the Merger
and the other transactions contemplated hereby are subject to the satisfaction
of the following conditions, unless waived by both Parties pursuant to Section
11.6 of this Agreement:
(a) Regulatory Approvals. All Consents of, filings and
--------------------
registrations with, and notifications to, all Regulatory Authorities required
for consummation of the Merger shall have been obtained or made and shall be
in full force and effect and all waiting periods required by Law shall have
expired. No Consent so obtained which is necessary to consummate the
transactions contemplated hereby shall be conditioned or restricted in a
manner which in the reasonable judgment of the Board of Directors of PSS or
S&W would so materially adversely impact the economic or business benefits of
the transactions contemplated by this Agreement so as to render inadvisable
the consummation of the Merger.
(b) Consents and Approvals. Except as set forth on Schedule 9.1,
---------------------- ------------
each Party shall have obtained any and all Consents required for consummation
of the Merger or for the preventing of any Default under any Contract or
Permit of such Party which, if not obtained or made, is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on such
Party. Except as set forth on Schedule 9.1, no Consent so obtained which is
------------
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner which in the reasonable judgment of the
Board of Directors of PSS would so materially adversely impact the economic or
business benefits of the transactions contemplated by this Agreement so as to
render inadvisable the consummation of the Merger.
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<PAGE>
(c) Legal Proceedings. No court or governmental or regulatory
-----------------
authority of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any Law or Order (whether temporary, preliminary or
permanent) or taken any other action which prohibits, restricts or makes
illegal consummation of the transactions contemplated by this Agreement.
(d) Payoff of Long-Term Debt. At the Closing, PSS shall have paid
------------------------
by wire transfer the balance of the outstanding principal and accrued interest
as set forth in Section 8.12 hereof.
(e) Shareholder Approval. The shareholders of S&W shall have
--------------------
approved this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, and the appointment of the "Representatives" as
defined in the Escrow Agreement, as and to the extent required by Law or by
the provisions of any governing instruments.
(f) Registration Statement. The Registration Statement shall be
----------------------
effective under the 1933 Act, no stop orders suspending the effectiveness of
the Registration Statement shall have been issued, no action, suit, proceeding
or investigation by the SEC to suspend the effectiveness thereof shall have
been initiated and be continuing, and all necessary approvals under state
securities Laws or the 1933 Act or 1934 Act relating to the issuance or
trading of the shares of PSS Common Stock issuable pursuant to the Merger
shall have been received.
9.2 Conditions to Obligations of PSS. The obligations of PSS to perform
--------------------------------
this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following
conditions, unless waived by PSS pursuant to Section 11.6(a) of this
Agreement:
(a) Representations and Warranties. The representations and
------------------------------
warranties of S&W set forth or referred to in this Agreement shall be true and
correct in all Material respects (except that those representations and
warranties which are qualified as to materiality shall be true and correct in
all respects) as of the date of this Agreement and as of the Effective Time
with the same effect as though all such representations and warranties had
been made on and as of the Effective Time (provided that representations and
warranties which are confined to a specified date shall speak only as of such
date).
(b) Performance of Agreements and Covenants. Each and all of the
---------------------------------------
agreements and covenants of S&W to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
Material respects.
(c) Certificates. S&W shall have delivered to PSS (i) a
------------
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that
the conditions of its obligations set forth in Section 9.2(a) and 9.2(b) of
this Agreement have been satisfied, and (ii) certified copies of resolutions
duly adopted by S&W's Board of Directors and shareholders evidencing the
taking of all corporate action necessary to authorize the execution, delivery
and performance of this Agreement, and the consummation of the transactions
contemplated hereby, all in such reasonable detail as PSS and its counsel
shall request.
(d) Investment Agreements. PSS shall have received from each
---------------------
shareholder of S&W listed on Schedule 8.9 the investment agreement referred to
----------------------
in Section 8.9 of this Agreement, to the extent necessary to assure in the
reasonable judgment of PSS that the transactions contemplated hereby will
qualify for pooling-of-interests accounting treatment.
(e) Pooling Letters. PSS shall have received a letter, dated as of
---------------
the Effective Time, in form and substance reasonably acceptable to PSS, from
Arthur Andersen to the effect that the Merger will qualify for pooling-of-
interests accounting treatment. PSS and Arthur Andersen also shall have
received a letter, dated within two weeks of the date hereof and as of the
Effective Time, in form and substance
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<PAGE>
reasonably acceptable to such Party, from May, Robinson, Gordon & Penta, P.C.
to the effect that S&W qualifies for pooling-of-interests accounting
treatment.
(f) Cold Comfort Letters. PSS shall have received from Arthur
--------------------
Andersen LLP letters dated not more than five days prior to (i) the date of
the Proxy Statement-Prospectus and (ii) the Effective Time, with respect to
certain financial information of PSS contained in or incorporated by reference
into the Proxy Statement-Prospectus, in form and substance reasonably
satisfactory to PSS, which letters shall be based upon customary specified
procedures undertaken by such firm in accordance with Statement of Auditing
Standard No. 72. PSS shall have received from May, Robinson, Gordon & Penta,
P.C. letters dated not more than five days prior to (i) the date of the Proxy
Statement-Prospectus and (ii) the Effective Time, with respect to certain
financial information of S&W contained in the Proxy Statement-Prospectus, in
form and substance reasonably satisfactory to PSS, which letters shall be
based upon customary specified procedures undertaken by such firm in
accordance with Statement of Auditing Standards No. 72.
(g) Noncompetition Agreements. Joseph E. Miller, Jr., Bruce P.
-------------------------
Ashby, George Privatera and Ron Cronin shall have entered into noncompetition
agreements in substantially the form of Exhibits 9.2(g)(i), (ii), (iii) and
-----------------------------------
(iv), respectively.
----
(h) Retention of Sales Force. At the Effective Time, S&W shall
------------------------
have retained at least eighteen (18) full-time sales persons and seventy (70)
full-time service technicians, which persons shall have entered into
employment and noncompetition agreements with PSS, in substantially the form
of Exhibit 9.2(h) hereto.
--------------
(i) Delivery of Documents. S&W shall have delivered all of its
---------------------
books and records to PSS including, but not limited to, (i) all corporate and
other records of S&W and its Predecessors, including the minute books, stock
books, stock transfer registers, books of account, leases and Contracts, deeds
and title documents, and Financial Statements; and (ii) such other documents
or certificates as shall be reasonably requested by PSS.
(j) Resignation of S&W Directors. S&W shall have delivered to PSS
----------------------------
evidence satisfactory to PSS of the resignation of the directors of S&W
effective as of the Closing Date.
(k) Statements for Services Rendered. S&W shall have received
--------------------------------
final statements for all legal, accounting and advisory fees for which it is
responsible for payment in connection with the transactions contemplated by
this Agreement (through the Closing), together with an acknowledgment by each
such legal counsel, accountant or advisor that such statement represents its
final bill for all services rendered to S&W through the Closing in connection
with the transactions contemplated by this Agreement, and that any statement
for follow-up services shall not exceed $2,000.
(l) No Material Adverse Change. There shall not have been any
---------------------------
Material adverse change in the business, assets, Liabilities, financial
condition, or results of operations of S&W and its Subsidiaries, taken as a
whole, between March 31, 1997 and the Closing Date, and S&W shall have
delivered to PSS a certificate, dated as of the Closing Date, signed by its
chief executive officer and chief financial officer certifying to such effect.
(m) Consent of Lender. PSS shall have received from NationsBank,
------------------
as agent bank under PSS' senior credit facility, its written consent to the
consummation of the Merger and the other transactions contemplated by this
Agreement.
(n) Escrow Agreement. The Escrow Agreement shall have been
-----------------
executed and delivered by S&W and a national bank as the Escrow Agent in
substantially the form of Exhibit 4.3 hereto, with the specific escrow items
-----------
included in form and substance satisfactory to PSS.
A-25
<PAGE>
(o) Satisfactory Due Diligence. PSS shall in all aspects be
--------------------------
satisfied in its reasonable discretion with its due diligence investigation of
S&W, including its continuing review of matters contained or not contained in
the schedules.
(p) Repayment of Indebtedness. PSS shall have received evidence
-------------------------
satisfactory to it of the repayment of all outstanding indebtedness of the
ESOP as provided in Section 8.1 hereof.
9.3 Conditions to Obligations of S&W. The obligations of S&W to perform
--------------------------------
this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following
conditions, unless waived by S&W pursuant to Section 11.6(b) of this
Agreement:
(a) Representations and Warranties. The representations and
------------------------------
warranties of PSS set forth or referred to in this Agreement shall be true and
correct in all Material respects (except that those representations and
warranties which are qualified as to materiality shall be true and correct in
all respects) as of the date of this Agreement and as of the Effective Time
with the same effect as though all such representations and warranties had
been made on and as of the Effective Time (provided that representations and
warranties which are confined to a specified date shall speak only as of such
date).
(b) Performance of Agreements and Covenants. Each and all of the
---------------------------------------
agreements and covenants of PSS to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with.
(c) Certificates. PSS shall have delivered to S&W (i) a
------------
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that
the conditions of its obligations set forth in Section 9.3(a) and 9.3(b) of
this Agreement have been satisfied, and (ii) certified copies of resolutions
duly adopted by PSS's Board of Directors and DI's Board of Directors and sole
shareholder evidencing the taking of all corporate action necessary to
authorize the execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, all in such reasonable
detail as S&W and its counsel shall request.
(d) No Material Adverse Change. There shall not have been any
---------------------------
Material adverse change in the business, assets, Liabilities, financial
condition, or results of operations of PSS and its Subsidiaries, taken as a
whole, between March 31, 1997 and the Closing Date, and PSS shall have
delivered to S&W a certificate, dated as of the Closing Date, signed by its
chief executive officer and chief financial officer certifying to such effect.
(e) Escrow Agreement. The Escrow Agreement shall have been
-----------------
executed and delivered by PSS and a national bank as the Escrow Agent in
substantially the form of Exhibit 4.3 hereto, with the specific escrow items
-----------
included in form and substance satisfactory to S&W.
(f) Employment and Noncompetition Agreements. PSS shall have
----------------------------------------
entered into the employment and noncompetition agreements described in Section
9.2(h). PSS and DI shall have agreed to employ all S&W sales representatives
and service technicians that become PSS or DI employees, on an at-will basis,
under the same compensation, commission and other incentive terms as are
currently in effect for such employees through August 31, 1998 and PSS and DI
shall have agreed to employ the S&W employees that become PSS and DI
employees, including George Privatera and Ron Cronin, on an at-will basis,
under the same salary terms as are currently in effect for such employees
through August 31, 1998.
(g) Noncompetition Agreements. PSS shall have entered into
-------------------------
noncompetition agreements with Joseph E. Miller, Jr., Bruce P. Ashby, George
Privatera and Ron Cronin in substantially the form of Exhibits 9.2(g)(i),
(ii), (iii) and (iv), respectively.
A-26
<PAGE>
ARTICLE X
TERMINATION
-----------
10.1 Termination. Notwithstanding any other provision of this
-----------
Agreement, this Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time:
(a) By mutual consent of the Board of Directors of PSS and the
Board of Directors of S&W; or
(b) By the Board of Directors of either Party (provided that the
terminating Party is not then in Material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the
event of a breach by the other Party of any representation or warranty
contained in this Agreement which cannot be or has not been cured within 30
days after the giving of written notice to the breaching Party of such breach
and which breach is reasonably likely, in the reasonable opinion of the non-
breaching Party, to have, individually or in the aggregate, a Material Adverse
Effect on the breaching Party; or
(c) By the Board of Directors of either Party (provided that the
terminating Party is not then in Material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the
event of a Material breach by the other Party of any covenant or agreement
contained in this Agreement which cannot be or has not been cured within 30
days after the giving of written notice to the breaching Party of such breach;
or
(d) By the Board of Directors of either Party (provided that the
terminating Party is not then in Material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the
event any Consent of any Regulatory Authority required for consummation of the
Merger and the other transactions contemplated hereby shall have been denied
by final nonappealable action of such authority or if any action taken by such
authority is not appealed within the time limit for appeal; or
(e) By the Board of Directors of either Party in the event that
the Merger shall not have been consummated by October 31, 1997, if the failure
to consummate the transactions contemplated hereby on or before such date is
not caused by any breach of this Agreement by the Party electing to terminate
pursuant to this Section 10.1(e); or
(f) By the Board of Directors of either Party in the event that
the Merger shall not have been consummated by November 30, 1997; or
(g) By the Board of Directors of either Party if any of the
conditions precedent to the obligations of such person to consummate the
Merger cannot be satisfied or fulfilled, if such failure is not caused by the
party electing to terminate; or
(h) By the Board of Directors of either Party if the Base Period
Trading Price is less than $10.8832 or greater than $16.3248 (in each case,
calculated without regard to the Base Period Trading Price Limitations); or
(i) By the Board of Directors of PSS if the sum of all
adjustments to the Aggregate Purchase Price as set forth in Section 3.1(b)
hereof would result in a reduction by more than $200,000, but for the proviso
at the end of Section 3.1(b).
10.2 Effect of Termination. In the event of the termination and
---------------------
abandonment of this Agreement pursuant to Section 10.1 of this Agreement, this
Agreement shall become void and have no effect, except that (i) the provisions
of this Section 10.2 and Section 8.5(b) of this Agreement shall survive any
such termination and abandonment, and (ii) a termination of this Agreement
shall not relieve a
A-27
<PAGE>
breaching Party from Liability for an uncured willful breach of a
representation, warranty, covenant, or agreement giving rise to such
termination.
10.3 Non-Survival of Representations and Covenants. The respective
---------------------------------------------
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except Articles 2, 3, 4 and 11
and Sections 8.5(b), 8.8, 8.11, 10.2 and 10.3 this Agreement, and except with
respect to the indemnification obligations in the Escrow Agreement.
ARTICLE XI
MISCELLANEOUS
-------------
11.1 Definitions.
-----------
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
"Acquisition Proposal" with respect to a Party shall mean any tender
offer or exchange offer or any proposal for a merger, acquisition of all of
the stock or assets of, or other business combination involving such Party or
any of its Subsidiaries or the acquisition of a substantial equity interest
in, or a substantial portion of the assets of, such Party or any of its
Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person directly,
or indirectly through one or more intermediaries, controlling, controlled by
or under common control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity
or voting interest of such Person; or (iii) any other Person for which a
Person described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger, including
the Exhibits and Schedules delivered pursuant hereto and incorporated herein
by reference.
"Articles of Merger" shall mean the Articles of Merger to be
executed by DI and S&W and filed with the Secretary of State of the State of
Florida relating to the Merger as contemplated by Section 1.3 of this
Agreement.
"Assets" of a Person shall mean all of the assets, properties,
businesses and rights of such Person of every kind, nature, character and
description, whether real, personal or mixed, tangible or intangible, accrued
or contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the
books and records of such Person, and whether or not owned in the name of such
Person or any Affiliate of such Person and wherever located.
"Certificate of Merger" shall mean the Certificate of Merger to be
executed by DI and S&W and filed with the Secretary of State of the State of
New York relating to the Merger as contemplated by Section 1.3 of this
Agreement.
"Common Stock Per Share Purchase Price" shall mean the quotient
obtained by dividing (i) the Aggregate Purchase Price minus the Escrow Dollar
Amount by (ii) the Fully Diluted Common Equivalents.
"Consent" shall mean any consent, approval, authorization,
clearance, exemption, waiver, or similar affirmation by any Person pursuant to
any Contract, Law, Order, or Permit.
"Contract" shall mean any Material written or oral agreement,
arrangement, authorization, commitment, contract, indenture, instrument,
lease, obligation, plan, practice, restriction,
A-28
<PAGE>
understanding or undertaking of any kind or character, or other document to
which any Person is a party or that is binding on any Person or its capital
stock, Assets or business.
"Default" shall mean (i) any breach or violation of or default under
any Contract, Order or Permit, (ii) any occurrence of any event that with the
passage of time or the giving of notice or both would constitute a breach or
violation of or default under any Contract, Order or Permit, or (iii) any
occurrence of any event that with or without the passage of time or the giving
of notice would give rise to a right to terminate or revoke, change the
current terms of, or renegotiate, or to accelerate, increase, or impose any
Liability under, any Contract, Order or Permit.
"DI Common Stock" shall mean the $0.01 par value common stock of DI.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata) and which are
administered, interpreted or enforced by the United States Environmental
Protection Agency and state and local agencies with jurisdiction over, and
including common law in respect of, pollution or protection of the
environment, including the Comprehensive Environmental Response Compensation
and Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"),
and other Laws relating to emissions, discharges, releases or threatened
releases of any Hazardous Material, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of any Hazardous Material.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Escrow Agreement" shall mean the Escrow Agreement attached to this
Agreement as Exhibit 4.3.
-----------
"Escrow Shares" shall mean the shares of PSS Common Stock issued
pursuant to Section 4.3 hereof.
"Exhibits" shall mean the Exhibits so marked, copies of which are
attached to this Agreement. Such Exhibits are hereby incorporated by
reference herein and made a part hereof, and may be referred to in this
Agreement and any other related instrument or document without being attached
hereto.
"FBCA" shall mean the Florida Business Corporation Act.
"Fully Diluted Common Equivalents" shall mean the sum of (i) all
issued and outstanding shares of S&W Common Stock, and (ii) all shares of S&W
Common Stock issuable upon the exercise of all outstanding S&W options and the
conversion of all other convertible securities of S&W and the issuance of all
S&W Common Stock issuable pursuant to any other rights or commitments of any
nature.
"Funded Debt" shall mean any outstanding indebtedness (including
leases required to be capitalized under GAAP) of such party or its
Subsidiaries, except Funded Debt between such parties, representing borrowing,
but excluding trade payables.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"Hazardous Material" shall mean any of the following that are
regulated under Environmental Laws: (i) any hazardous substance, hazardous
material, hazardous waste, regulated
A-29
<PAGE>
substance or toxic substance (as those terms are defined by any applicable
Environmental Laws) and (ii) any chemicals, pollutants, contaminants,
petroleum, petroleum products, or oil (and specifically shall include asbestos
requiring abatement, removal or encapsulation pursuant to the requirements of
Regulatory Authorities and any polychlorinated biphenyls).
"HSR Act" shall mean Section 7A of the Clayton Act, as added by
Title II of the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder.
"Intellectual Property" shall mean the copyrights, patents,
trademarks, service marks, service names, tradenames, applications therefor,
technology rights and licenses, computer software (including, without
limitation, any source or object codes therefor or documentation relating
thereto), trade secrets, franchises, know-how, inventions and other
intellectual property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended, and the rules and regulations promulgated thereunder.
"Law" shall mean any code, law, ordinance, regulation, reporting or
licensing requirement, rule, or statute applicable to a Person or its Assets,
Liabilities or business, including those promulgated, interpreted or enforced
by any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course
of business) of any type, whether accrued, absolute or contingent, liquidated
or unliquidated, matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not yet due
and payable and (ii) Liens which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on a Party.
"Litigation" shall mean any action, arbitration, cause of action,
claim, complaint, criminal prosecution, demand letter, governmental or other
examination or investigation, hearing, inquiry, administrative or other
proceeding, or notice (written or oral) by any Person alleging potential
Liability or requesting information relating to or affecting a Party, its
business, its Assets (including Contracts related to it), or the transactions
contemplated by this Agreement.
"Material" for purposes of this Agreement shall be determined in
light of the facts and circumstances of the matter in question; provided that
any specific monetary amount stated in this Agreement shall determine
materiality in that instance.
"Material Adverse Effect" on a Party shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a Material adverse impact on (i) the financial position,
business, or results of operations of such Party and its Subsidiaries, taken
as a whole, or (ii) the ability of such Party to perform its obligations under
this Agreement or the transactions contemplated by this Agreement, provided
that Material Adverse Effect shall not be deemed to include the impact of (x)
changes in Laws of general applicability or interpretations thereof by courts
or governmental authorities, (y) changes in generally accepted accounting
principles, and (z) the Merger and compliance with the provisions of this
Agreement on the operating performance of the Parties or actions taken
pursuant to or required by this Agreement.
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<PAGE>
"NASD" shall mean the National Association of Securities Dealers,
Inc.
"NYBCL" shall mean the New York Business Corporation Law.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local or foreign or other court, arbitrator, mediator,
tribunal, administrative agency or Regulatory Authority.
"Party" shall mean any of S&W, DI or PSS, and "Parties" shall mean
all of S&W, DI and PSS.
"Permit" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing,
franchise, license, notice, permit, or right to which any Person is a party or
that is or may be binding upon or inure to the benefit of any Person or its
securities, Assets or business.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in
a representative capacity.
"Predecessor" shall mean any entity acquired by, or substantially
all of the assets of which were acquired by, S&W or any entity merged or
consolidated with or into S&W.
"PSS Capital Stock" shall mean, collectively, the PSS Common Stock,
the PSS Preferred Stock and any other class or series of capital stock of PSS.
"PSS Common Stock" shall mean the $0.01 par value common stock of
PSS.
"PSS Preferred Stock" shall mean the $0.01 par value preferred stock
of PSS.
"Regulatory Authorities" shall mean, collectively, all federal and
state regulatory agencies having jurisdiction over the Parties and their
respective Subsidiaries, including the NASD, and the SEC.
"Representative" shall mean any investment banker, financial
advisor, attorney, accountant, consultant, or other representative of a
Person.
"S&W Common Stock" shall mean the common stock, $.04 par value per
share, of S&W.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisers Act of
1940, as amended, the Trust Indenture Act of 1939, as amended, and the rules
and regulations of any Regulatory Authority promulgated thereunder.
"Subsidiaries" shall mean all those corporations, partnerships,
associations, or other entities of which the entity in question owns or
controls 50% or more of the outstanding equity securities
A-31
<PAGE>
either directly or through an unbroken chain of entities as to each of which
50% or more of the outstanding equity securities is owned directly or
indirectly by its parent; provided, there shall not be included any such
entity acquired through foreclosure or any such entity the equity securities
of which are owned or controlled in a fiduciary capacity.
"Surviving Corporation" shall mean DI as the surviving corporation
resulting from the Merger.
"Tax" or "Taxes" shall mean any federal, state, county, local, or
foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, occupancy, and other taxes,
assessments, charges, fares, or impositions, including interest, penalties,
and additions imposed thereon or with respect thereto.
"Undisclosed Liabilities" shall mean any liability or obligation of
a Party to this Agreement, whether accrued, liquidated, unliquidated,
absolute, contingent, matured, unmatured or otherwise, as of the Closing Date,
that is not fully reflected or reserved against in their respective financial
statements or fully disclosed in a Schedule.
(b) In addition to the terms defined in Section 11.1(a) above, the terms
set forth below shall have the meanings ascribed thereto in the referenced
sections:
<TABLE>
<S> <C>
Benefit Plans - Section 5.21 Escrow Dollar Amount - Section 3.4
Capital Expenditures - Section 5.16(c) FASB 5 - Section 5.18
Closing - Section 1.2 Financial Statements - Section 5.5
Closing Date - Section 1.2 Merger - Section 1.1
Effective Time - Section 1.3 Merger Consideration - Section 3.1(b)
Environmental Litigation - Section 5.7 Multiemployer Plan - Section 5.21(a)
ERISA Plan - Section 5.21(a) PSS Documents - Section 6.5
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses. PSS shall bear and pay all direct costs and expenses
--------
incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including filing, registration and application fees,
printing fees, and fees and expenses of its own financial or other
consultants, investment bankers, accountants (including any audit or
investigation pursuant to Section 8.1), and counsel. Upon consummation of the
Merger, PSS shall bear and pay reasonable costs and expenses for fees and
expenses of S&W's counsel, consultants, financial advisors and accountants,
incurred by S&W or on S&W's behalf in connection with the transactions
contemplated hereunder in an amount not to exceed $200,000 in the aggregate.
11.3 Brokers and Finders. Each of the Parties represents and warrants
-------------------
that neither it nor any of its officers, directors, employees, or Affiliates
has employed any broker or finder or incurred any Liability for any financial
advisory fees, investment bankers' fees, brokerage fees, commissions, or
finders' fees in connection with this Agreement or the transactions
contemplated hereby, except for Stephen Cook of Fieldstone Partners, who has
been retained by S&W and for whom any unpaid fees shall be paid in accordance
with Section 11.2 and, if necessary, Section 3.1(b). In the event of a claim
by any broker or finder based upon his or its representing or being retained
by or allegedly representing or being retained by S&W or PSS, each of S&W and
PSS, as the case may be, agrees to indemnify and hold the other Party harmless
of and from any Liability in respect of any such claim.
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<PAGE>
11.4 Entire Agreement. Except as otherwise expressly provided herein,
----------------
this Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this
Agreement, expressed or implied, is intended to confer upon any Person, other
than the Parties or their respective successors, any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, other than
as provided in Section 11.11 of this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
----------
amended by a subsequent writing signed by each of the Parties upon the
approval of the Boards of Directors of each of the Parties, whether before or
after shareholder approval of this Agreement has been obtained; provided, that
after any such approval by the holders of S&W Common Stock, there shall be
made no amendment that pursuant to the NYBCL requires further approval by such
shareholders without the further approval of such shareholders.
11.6 Waivers.
-------
(a) Prior to or at the Effective Time, PSS, acting through its
Board of Directors, chief executive officer or other authorized officer, shall
have the right to waive any Default in the performance of any term of this
Agreement by S&W, to waive or extend the time for the compliance or
fulfillment by S&W of any and all of its obligations under this Agreement, and
to waive any or all of the conditions precedent to the obligations of PSS
under this Agreement, except any condition which, if not satisfied, would
result in the violation of any Law. No such waiver shall be effective unless
in writing signed by a duly authorized officer of PSS.
(b) Prior to or at the Effective Time, S&W, acting through its
Board of Directors, chief executive officer or other authorized officer, shall
have the right to waive any Default in the performance of any term of this
Agreement by PSS, to waive or extend the time for the compliance or
fulfillment by PSS of any and all of its obligations under this Agreement, and
to waive any or all of the conditions precedent to the obligations of S&W
under this Agreement, except any condition which, if not satisfied, would
result in the violation of any Law. No such waiver shall be effective unless
in writing signed by a duly authorized officer of S&W.
(c) The failure of any Party at any time or times to require
performance of any provision hereof shall in no manner affect the right of
such Party at a later time to enforce the same or any other provision of this
Agreement. No waiver of any condition or of the breach of any term contained
in this Agreement in one or more instances shall be deemed to be or construed
as a further or continuing waiver of such condition or breach or a waiver of
any other condition or of the breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither this
----------
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise)
without the prior written consent of the other Party. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of and be enforceable by the Parties and their respective successors and
assigns.
11.8 Notices. All notices or other communications which are required
-------
or permitted hereunder shall be in writing and sufficient if delivered by
hand, by facsimile transmission, by registered or certified mail, postage pre-
paid, or by courier or overnight carrier, to the persons at the addresses set
forth below (or at such other address as may be provided hereunder), and shall
be deemed to have been delivered as of the date so delivered:
A-33
<PAGE>
S&W: S&W X-Ray, Inc.
Cornerstone Center
2300 Buffalo Road
Rochester, NY 14824
Attention: Mr. Joseph E. Miller, Jr.
Copy to Counsel: Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309-4530
Telecopy Number: (404) 815-6555
Attention: Jerome F. Connell, Jr., Esq.
PSS or DI: c/o Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Telecopy Number: (904) 332-3000
Attention: Mr. David A. Smith
Copy to Counsel: Alston & Bird
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309
Telecopy Number: (404) 881-7777
Attention: J. Vaughan Curtis, Esq.
11.9 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the Laws of the State of Florida.
11.10 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
11.11 Captions. The captions contained in this Agreement are for
--------
reference purposes only and are not part of this Agreement.
11.12 Enforcement of Agreement. The Parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the Parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of
the United States or any state having jurisdiction, this being in addition to
any other remedy to which they are entitled at law or in equity.
11.13 Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
11.14 Further Assurances. Each Party covenants that at any time, and
------------------
from time to time, after the Closing Date, without additional consideration,
it will execute such additional instruments and take such actions as may be
reasonably requested by the other Parties to confirm or perfect or otherwise
to carry out the intent and purposes of this Agreement.
A-34
<PAGE>
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto on the day and year first above written.
ATTEST: S&W X-RAY, INC.
By: /s/ Joseph E. Miller, Jr.
----------------------- ------------------------------
Secretary President
[CORPORATE SEAL]
ATTEST: PHYSICIAN SALES & SERVICE, INC.
By: /s/ David A. Smith
----------------------- ------------------------------
Title: Title: Executive Vice President and
---------------- Chief Financial Officer
[CORPORATE SEAL]
ATTEST: DIAGNOSTIC IMAGING, INC.
By: /s/ Rutherford C. Deas
----------------------- ------------------------------
Title: Title: Vice President Business Development
----------------
[CORPORATE SEAL]
A-35
<PAGE>
ANNEX B
ESCROW AGREEMENT
----------------
THIS ESCROW AGREEMENT (this "Agreement") is made and entered into this
____ day of __________, 1997, by and among Physician Sales & Service, Inc.,
a Florida corporation ("PSS"), The Bank of New York, as the escrow agent
(the "Escrow Agent"), and Joseph E. Miller, Jr., Bruce P. Ashby and The S&W
X-Ray, Inc. Employee Stock Ownership Trust as representatives (the
"Representatives") appointed by the shareholders ("Shareholders") of S&W X-
Ray, Inc., a New York corporation ("S&W").
W I T N E S E T H :
- - - - - - - - -
DI ("DI") is a wholly owned subsidiary of PSS and each is a party to an
Agreement and Plan of Merger with S&W, dated of even date herewith (the
"Merger Agreement"), pursuant to which S&W has on this date merged (the
"Merger") with and into DI with DI surviving the merger and remaining a
wholly owned subsidiary of PSS. Under the Merger Agreement, the
Shareholders received contingent rights to receive, in the aggregate, shares
of common stock of PSS ("PSS Common Stock") as provided in Section 3.1(b) of
the Merger Agreement.
In accordance with the Merger Agreement, the PSS Common Stock issuable
pursuant to the contingent rights of Shareholders has been issued and will
be held by the Escrow Agent pursuant to the terms of this Agreement until
termination of this Agreement as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties agree as
follows:
ARTICLE 1
ESTABLISHMENT OF ESCROW
-----------------------
On this date, PSS has executed a stock certificate in negotiable form
representing the Escrow Shares and naming the Escrow Agent as the registered
holder for the benefit of the Shareholders. Schedule 1 to this Agreement
----------
shows for each Shareholder (i) the respective percentage interest (the
"Percentage Interest") of each such Shareholder in the General Escrow Shares
and the Specific Escrow Shares, and (ii) the corresponding aggregate maximum
number of shares of PSS Common Stock issuable to each Shareholder, subject
to the adjustments provided herein. The Escrow Agent shall hold the Escrow
Shares on behalf of, and as a convenience to PSS and the Shareholders with
the same force and effect as if such shares had been delivered by PSS to
each Shareholder and subsequently delivered by such Shareholder to the
Escrow Agent. The Escrow Agent shall hold the Escrow Shares, together with
any and all future cash dividends or cash income with respect to the Escrow
Shares (as provided in Section 5.1 hereof) ("Cash"), for the benefit of PSS,
DI and the Shareholders, as the case may be, pursuant to the terms of this
Agreement. Cash shall be held by the Escrow Agent in the Nations Fund -
Treasury Portfolio, a prospectus of which is hereby acknowledged and
received by PSS and the Representatives. PSS and the Representatives
acknowledge that Escrow Agent may receive a reasonable fee from the manager
of its money market fund for acting as sub-administrator. Any income or
interest realized from the investments made by the Escrow Agent pursuant
hereto shall be included in Cash and paid in accordance with this Agreement.
ARTICLE 2
INDEMNIFICATION
---------------
2.1 Definitions. As used in this Agreement, the following terms shall
-----------
have the following meanings:
B-1
<PAGE>
(a) "Accounts Receivable Claim" shall mean any Loss in excess of
-------------------------
$180,000 incurred by reason of the failure of PSS or DI to receive cash or
checks by __________, 1998 in payment of the accounts receivable of S&W
outstanding as of the Closing Date.
(b) "Closing Date" shall mean the date of the closing of the
------------
transactions contemplated by the Merger, which shall be the date on which
the Effective Time occurs.
(c) "Effective Time" shall mean the time that the Articles of Merger
--------------
reflecting the Merger becomes effective with the Secretary of State of the
States of New York and Florida.
(d) "Disputed Loss Notice" shall mean a Loss Notice that is disputed by
--------------------
the Representatives by delivery of a Protest Notice.
(e) "Escrow Agent Expenses" shall mean one-half of the expenses of the
---------------------
Escrow Agent which the Representatives is obligated to bear under Section
6.4 hereof, in an amount up to $5,000, incurred in connection with the
obligations of the Escrow Agent under this Agreement.
(f) "Escrow Shares" shall mean the General Escrow Shares and the
-------------
Specific Escrow Shares.
(g) "General Escrow Shares" shall mean _________ shares of PSS Common
---------------------
Stock issued and placed in Escrow.
(h) "Indemnifiable Loss" shall mean any Loss for which an Indemnitee
------------------
may be indemnified pursuant to Section 2.2 or 2.3 hereof.
(i) "Indemnitee" shall mean a party entitled to indemnification under
----------
Section 2.2 hereof.
(j) "Loss" shall mean any direct or indirect demand, claim, payment or
----
failure to receive payment, obligation, action or cause of action,
assessment, loss, liability, cost or expense, including without limitation,
penalties, interest on any amount payable to a third party as a result of
the foregoing, and any legal or other expense reasonably incurred in
connection with investigating or defending any claim or action, whether or
not resulting in any liability.
(k) "Loss Notice" shall mean a written notice, as prescribed in Section
-----------
2.4 hereof, provided by an Indemnitee to the Escrow Agent and the
Representatives setting forth in reasonable detail the nature and amount of
an Indemnifiable Loss or potential Indemnifiable Loss and the number of
Escrow Shares sought to be canceled in respect of such Indemnifiable Loss.
(l) "Representative Expenses" shall mean expenses of the
-----------------------
Representatives, in an amount up to $10,000, incurred in connection with
their obligations under this Agreement.
(m) "Protest Notice" shall mean a written notice, as prescribed in
--------------
Section 2.4 hereof, provided by the Representatives to an Indemnitee if he
disputes any Loss Notice received from an Indemnitee.
(n) "Shareholders" shall mean the former holders of the issued and
------------
outstanding shares of capital stock of S&W.
(o) "Specific Escrow Shares" shall mean _________ shares of PSS Common
----------------------
Stock issued and placed in Escrow in respect of the Accounts Receivable
Claim, the Representative Expenses, and the Escrow Agent Expenses.
(p) "Value Per Share" shall mean $___________.
---------------
B-2
<PAGE>
2.2 General Indemnity by Representatives. The Representatives, as the
------------------------------------
representatives of the Shareholders, shall, to the fullest extent permitted
by law, indemnify, defend, and hold harmless PSS, DI and S&W (an
"Indemnitee") from and against any Loss suffered or incurred by such
Indemnitee, as and when due, which arises out of or results from a breach of
any of the representations, warranties or covenants (except to the extent
such covenants are waived by PSS) and agreements of S&W set forth in the
Merger Agreement or in any document or agreement made or executed by S&W
pursuant to the Merger Agreement. The disclosure provided on Schedule
--------
5.21.2 to the Merger Agreement is for information purposes only and shall
------
not impair or otherwise affect the ability of an Indemnitee to recover for
any Loss related to such disclosure under the terms hereof.
2.3 Specific Indemnity by Representative. In addition to the
-------------------------------------
indemnification obligations in Section 2.2 above, the Representatives, as
the representatives of the Shareholders, shall, to the fullest extent
permitted by law, indemnify, defend, and hold harmless the Indemnitees from
and against any Loss suffered or incurred by such Indemnitee, as and when
due, which arises out of or results from an Accounts Receivable Claim, any
Representative Expenses and the Escrow Agent Expenses paid by an Indemnitee.
2.4 Notice of Claim. If an Indemnitee incurs an Indemnifiable Loss, or
---------------
should an Indemnitee negotiate a proposed settlement in satisfaction of a
potential Indemnifiable Loss, it shall promptly provide a Loss Notice to the
Representatives and the Escrow Agent. If the Representatives disputes the
amount sought under any such Loss Notice or otherwise disputes the right of
the Indemnitee to be indemnified hereunder, he shall provide the Indemnitee
and the Escrow Agent a Protest Notice within thirty (30) days of the date
any such Loss Notice is received by the Representative. If no Protest
Notice is received by the Indemnitee and the Escrow Agent within thirty (30)
days from the date on which any Loss Notice is received by the
Representatives, or if a Protest Notice is received and the dispute is
resolved in favor of the Indemnitee after following the procedures set forth
below, then the Escrow Agent shall cause to be delivered to PSS and PSS
shall promptly cancel and retire that number of Escrow Shares as shall equal
the number of Escrow Shares (rounded to the next highest whole number) that,
when multiplied by the Value Per Share, equals the amount sought by or
awarded to the Indemnitee. To the extent that Cash is held in escrow, and
at the option of the Indemnitee, the Escrow Agent shall pay any
Indemnifiable Loss, in whole or in part, with such Cash. In its Loss
Notice, PSS shall set forth for the Escrow Agent (i) the number of Escrow
Shares, and/or (ii) the amount of Cash, if any, to be delivered to the
Indemnitee in accordance with this paragraph. If the Indemnitee and the
Escrow Agent receive a Protest Notice within such 30-day period, the Escrow
Agent shall not deliver any Escrow Shares until receipt by it of written
instructions (i) signed by a majority of the Representatives and a duly
authorized officer of the Indemnitee; or (ii) signed by an arbitration panel
that has considered and resolved such dispute as provided in Section 2.5
below, which sets forth (i) the number of Escrow Shares, and/or (ii) the
amount of Cash, if any, to be delivered to the Indemnitee in accordance with
this paragraph. After delivery of any Escrow Shares to the Indemnitee in
accordance with this paragraph, the Escrow Agent shall be reissued a
certificate in respect of any remaining Escrow Shares.
2.5 Procedure With Respect to Disputed Indemnifiable Loss. A Disputed
-----------------------------------------------------
Loss Notice may be resolved by the agreement of a majority of the
Representatives and the Indemnitee, in which case written notice of such
agreement shall be promptly provided to the Escrow Agent, together with a
statement of the agreed upon amount to be reimbursed to the Indemnitee. If
a majority of the Representatives and the Indemnitee are unable to resolve a
Disputed Loss Notice, then such Disputed Loss Notice shall be submitted to
arbitration in accordance with the then-current commercial arbitration rules
of the American Arbitration Association. If a Disputed Loss Notice is to be
arbitrated, a majority of the Representatives shall select one arbitrator,
the Indemnitee shall select one arbitrator, and the two arbitrators so
chosen shall select a third. Any decision of the arbitration panel shall
require the vote of at least two (2) of such arbitrators and shall be deemed
conclusive and each party shall be deemed to have waived any rights to
appeal therefrom. Any resolution of a Disputed Loss Notice, whether by
agreement of the parties or by arbitration, must be made within sixty (60)
days of the date of the Protest Notice in regard to which the dispute
relates. That percentage of the reasonable legal and other expenses
incurred by the Indemnitee in the arbitration proceeding as equals the
percentage of the claim sought which is actually awarded, shall be
B-3
<PAGE>
added to the amount of the Indemnifiable Loss. If resolution of a Disputed
Loss Notice is not made within sixty (60) days of the date of the Protest
Notice as provided in this Section 2.5, then the Escrow Agent may, in its
sole discretion, either (i) continue to hold the Escrow Shares undisbursed
until such time as the disputing parties agree in writing as to a proper
disposition of such Escrow Shares, or (ii) if such agreement is not
forthcoming, the Escrow Agent shall be entitled to tender into the registry
or custody of any court of competent jurisdiction all money or property in
its hand under the terms of this Agreement, and, upon the advice of counsel,
may take such other legal action as may be appropriate or necessary,
whereupon the parties hereto agree Escrow Agent shall be discharged from all
further duties under this Agreement. The filing of any such legal
proceedings shall not deprive Escrow Agent of its compensation earned prior
to such filing.
2.6 Employment of Counsel. The Representatives may control the defense
---------------------
of any third party claim with respect to which an Indemnifiable Loss has
been asserted. Notwithstanding the foregoing, if the aggregate amount of
all such third party and general indemnity claims plus the aggregate good
faith estimates of the reasonable expenses to defend such claims exceed the
number of Escrow Shares multiplied by the Value Per Share, the Indemnitees
may control the defense of all such third party and general indemnity claims
which have been brought under this Agreement, provided that the Indemnitees
may not settle a third party claim without the approval of a majority of the
Representatives, which approval shall not be unreasonably withheld. When
the Indemnitee is in control of the defense of such a claim, the
Representatives may, at their expense, and when the Representatives are in
control of the defense of a claim, the Indemnitee may, at its expense (which
expenses shall not be treated as a Loss hereunder), participate in the
defense of any litigation or claim. The Representatives shall control the
matters relating to any Accounts Receivable Claim and the Representative
Expenses.
2.7 Exclusive Remedy. If an Indemnitee incurs an Indemnifiable Loss,
----------------
the sole and exclusive means of recovery shall be as set forth in this
Agreement and the escrow established hereunder. Any claim pursuant to
Section 2.2 or 2.3 hereof may be satisfied from either or both of the
General Escrow Shares or Specific Escrow Shares, whichever is available.
Neither the Representatives nor the Shareholders have any obligation or
liability to an Indemnitee beyond the several interest of such Shareholders
in the Escrow Shares. Each Indemnitee agrees that if it incurs any
Indemnifiable Loss it will not sue or seek recourse against the
Representatives or the Shareholders, or any of them, other than as provided
in this Agreement.
ARTICLE 3
TERM; EXPIRATION; LIMITS
------------------------
3.1 Term - General Indemnity. With respect to the indemnification
------------------------
obligations set forth in Section 2.2 hereof, the term of escrow for the
General Escrow Shares shall commence on the Closing Date of the Merger and
shall terminate upon the occurrence of (i) the first publication by PSS of
audited consolidated financial statements covering an accounting period
after the Closing Date for those items that would be expected to be
encountered in the audit process or (ii) one (1) year after the Closing Date
for all other items. PSS and the Representatives shall provide written
notice to the Escrow Agent upon expiration of the escrow for the General
Escrow Shares.
3.2 Term - Specific Indemnity. With respect to the indemnification
--------------------------
obligations set forth in Section 2.3 hereof, the term of escrow for the
Specific Escrow Shares shall commence on the Closing Date of the Merger and
shall terminate with respect to each type of claim indemnified under Section
2.3 hereof upon a final determination that S&W can incur no Indemnifiable
Loss for an Accounts Receivable Claim, Escrow Agent Expenses or
Representative Expenses, as the case may be. PSS and the Representatives
shall provide written notice to the Escrow Agent upon expiration of the
escrow for the Specific Escrow Shares. Notwithstanding the foregoing, with
respect to the Specific Escrow Shares related to the Accounts Receivable
Claim, the Representatives may elect on one occasion between six months
following the Closing Date and the expiration of the term for the Accounts
Receivable Claim, to end such term and to have delivered to the shareholders
the Specific Escrow Shares related to such Accounts Receivable
B-4
<PAGE>
Claim less that portion required to satisfy any Indemnifiable Loss related
to the Accounts Receivable Claim.
3.3 Expiration of Term - No Claim Pending. If at the expiration of an
-------------------------------------
escrow term provided in Section 3.1 or 3.2 above, either (i) no Loss Notice
has been received with respect to an Indemnifiable Loss covered by the
escrow which term is expiring; or (ii) any Loss Notice that has been
received has been resolved in accordance with this Agreement; or (iii) no
litigation or claim is pending for which an Indemnitee may be entitled to
indemnification hereunder, the Escrow Agent shall (i) deliver to the
transfer agent for PSS Common Stock for issuance to each Shareholder, a
certificate representing the number of shares of PSS Common Stock equal to
the aggregate number of the Escrow Shares subject to the escrow which term
is expiring and then remaining in escrow times the Percentage Interest for
such Shareholder, and (ii) deliver to each Shareholder, any Cash times the
Percentage Interest for such Shareholder. The Representatives and PSS shall
provide written notice to the Escrow Agent which sets forth the number of
Escrow Shares to be delivered as provided in the foregoing sentence. Any
such delivery of PSS Common Stock shall be of full shares and any fractional
portions shall be rounded to a whole number by the Escrow Agent so that the
number of shares remaining in escrow to be delivered will be fully allocated
among such Shareholders.
3.4 Expiration of Term - Claim Pending. If at the expiration of an
----------------------------------
escrow term provided in Section 3.1 or 3.2 above, any claim is pending under
Section 2.2 or Section 2.3 for which an Indemnitee would be entitled to
indemnification if such claim were resolved adversely to them, then the
Escrow Agent shall retain in such escrow that number of shares of PSS Common
Stock as shall equal the number of Escrow Shares (rounded to the next
highest whole number) that, when multiplied by the Value Per Share, equals
the amount set forth by such Indemnitee in the Loss Notice with respect to
such claims (the "Retained Shares"). The Representatives and PSS shall
provide written notice to the Escrow Agent which sets forth the Retained
Shares as determined in the foregoing sentence. The number of Escrow
Shares, less the number of Retained Shares, shall then be distributed to the
Shareholders as set forth in Section 3.3 above. Upon the resolution of any
claim for which shares were retained in escrow at the expiration of the term
of this Agreement and receipt of written notice from PSS and the
Representatives to such effect, the Escrow Agent shall cancel the
appropriate number of Retained Shares (if any) and shall distribute any
remaining Retained Shares to the Shareholders as set forth in Section 3.3
above.
3.5 Effect of Final Delivery. Notwithstanding the expiration of the
------------------------
term of the escrow, this Agreement shall continue in full force and effect
until the Escrow Agent has delivered all of the Escrow Shares pursuant to
the terms hereof. After all of such shares have been so delivered, all
rights, duties and obligations of the respective parties hereunder shall
terminate. If any cash is held in escrow at the expiration of the term of
the escrow, such cash shall be distributed pro rata with the Escrow Shares
as provided in Sections 3.3 and 3.4 above.
ARTICLE 4
ESCROW STOCK CERTIFICATES
-------------------------
The Escrow Agent may at any time request the transfer agent for PSS
Common Stock to issue new certificates representing the Escrow Shares in
such denominations as may be necessary or appropriate in carrying out the
Escrow Agent's obligations under this Agreement.
ARTICLE 5
DIVIDENDS; VOTING RIGHTS
------------------------
5.1 Cash Dividends; Voting Rights. Any and all cash dividends or other
-----------------------------
cash income with respect to the Escrow Shares shall be held in escrow with
the Escrow Shares pursuant to the terms of this Agreement. By written
notice signed by the Representatives, the Representatives shall have the
right to direct the Escrow Agent as to the exercise of voting rights with
respect to such Escrow Shares held by the
B-5
<PAGE>
Escrow Agent on behalf of the Shareholders, and the Escrow Agent shall
comply with such directions if received from the Representatives at least
five (5) days prior to the date of the meeting at which such vote is to be
taken.
5.2 Stock Splits; Stock Dividends. In the event of any stock split,
-----------------------------
stock dividend, recapitalization or similar transaction with respect to PSS
Common Stock that becomes effective during the term of this Agreement, the
additional shares so issued with respect to the Escrow Shares shall be added
to the Escrow Shares and any other references herein to a specific number of
shares of PSS Common Stock and the Value Per Share shall be adjusted
accordingly.
ARTICLE 6
THE ESCROW AGENT
----------------
6.1 Liability. In performing any of its duties under this Agreement, or
---------
upon the claimed failure to perform its duties hereunder, Escrow Agent shall
not be liable to anyone for any damages, losses or expenses which they may
incur as a result of the Escrow Agent so acting, or failing to act;
provided, however, that Escrow Agent shall be liable for damages arising out
of its willful default or gross negligence under this Agreement.
Accordingly, the Escrow Agent shall not incur any such liability with
respect to (i) any action taken or omitted to be taken in good faith upon
advice of its counsel or counsel for PSS or the Representatives given with
respect to any questions relating to the duties and responsibilities of the
Escrow Agent hereunder; or (ii) any action taken or omitted to be taken in
reliance upon any document, including any written notice or instructions
provided for in this Agreement, not only as to its due execution and to the
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which the Escrow Agent shall
in good faith believe to be genuine, to have been signed or presented by the
purported proper person or persons and to conform with the provisions of
this Agreement. Written instructions provided to Escrow Agent hereunder by
PSS and/or the Representatives shall be signed by an "Authorized
Representative" of PSS as identified on Schedule 2 attached hereto and a
----------
majority of the Representatives. The limitation of liability provisions of
this Section 6.1 shall survive the termination of this Agreement and the
resignation or removal of the Escrow Agent.
6.2 Indemnification of Escrow Agent. PSS and the Representatives (on
-------------------------------
behalf of the Shareholders, but not personally) hereby, jointly and
severally, agrees to indemnify and hold harmless the Escrow Agent against
any and all losses, claims, damages, liabilities and expenses, including,
without limitation, reasonable costs of investigation and counsel fees and
disbursements (both at the trial and appellate levels) which may be imposed
on Escrow Agent or incurred by it in connection with its acceptance of this
appointment as Escrow Agent hereunder or the performance of its duties
hereunder (except in connection with the willful default or gross negligence
of the Escrow Agent hereunder), including, without limitation, any
litigation arising from this Escrow Agreement, or involving the subject
matter thereof. The indemnity provisions of this Section 6.2 shall survive
the termination of this Agreement and the resignation or removal of the
Escrow Agent.
6.3 Resignation. The Escrow Agent may resign at any time from its
-----------
obligations under this Agreement by providing written notice to the parties
hereto. Such resignation shall be effective not later than sixty (60) days
after such written notice has been given. The Escrow Agent shall have no
responsibility for the appointment of a successor escrow agent. If a
successor escrow agent is not selected within sixty (60) days of the
resignation of Escrow Agent, the Escrow Agent shall have the right to
institute a Bill of Interpleader or other appropriate judicial proceeding in
any court of competent jurisdiction, and shall be entitled to tender into
the registry or custody of any court of competent jurisdiction all money or
property in its hand under the terms of this Agreement, whereupon the
parties hereto agree Escrow Agent shall be discharged from all further
duties under this Agreement. The filing of any such legal proceedings shall
not deprive Escrow Agent of its compensation earned prior to such filing.
The Escrow Agent may be removed for cause by PSS or the Representatives.
The removal of the Escrow Agent shall not deprive the Escrow Agent of its
compensation earned prior to such removal.
B-6
<PAGE>
6.4 Expenses of Escrow Agent. The Representatives (on behalf of the
------------------------
Shareholders and out of the Escrow Shares, but not personally) and PSS shall
share equally the expenses of the Escrow Agent in an amount up to $5,000
each, and thereafter any remaining expenses of the Escrow Agent shall be
borne by PSS. Escrow Agent's fees and expenses are set forth on Schedule 3
----------
attached hereto and made a part hereof and Escrow Agent shall bill PSS for
the amount of such fees and expenses. PSS shall pay the amount of its fees
and expenses to Escrow Agent, and the Escrow Agent Expenses. The Escrow
Agent Expenses shall constitute an Indemnifiable Loss pursuant to Section
2.3 hereof. As security for such Escrow Agent Expenses, Escrow Agent is
hereby given a lien upon all assets held by Escrow Agent hereunder, which
lien shall be prior to all other liens or claims against such assets.
ARTICLE 7
REPRESENTATIVES
---------------
7.1 Power and Authority. The Representatives shall have full power and
-------------------
authority to represent the Shareholders and their successors with respect to
all matters arising under this Agreement, and all action taken by the
Representatives hereunder shall be binding upon such Shareholders and their
successors as if expressly ratified and confirmed in writing by each of
them. Without limiting the generality of the foregoing, the Representatives
shall have full power and authority, on behalf of all the Shareholders and
their successors, to interpret all the terms and provisions of this
Agreement, to dispute or fail to dispute any claim of Indemnifiable Loss
against the Escrow Shares made by an Indemnitee, to negotiate and compromise
any dispute which may arise under this Agreement, to sign any releases or
other documents with respect to any such dispute, and to authorize payments
to be made with respect thereto. Any action or notice hereunder may be
taken or given by a majority of the Representatives.
7.2 Resignation; Successors. A Representative, or any successor
-----------------------
hereafter appointed, may resign and shall be discharged of his duties
hereunder upon the appointment of a successor Representative as hereinafter
provided. In case of such resignation, or in the event of the death or
inability to act of a Representative, a successor shall be named from among
the Shareholders by a majority of the members of the Board of Directors of
S&W who served on such board prior to the Merger. Each such successor
Representative shall have all the power, authority, rights and privileges
hereby conferred upon the original Representative, and the term
"Representative" as used herein shall be deemed to include such successor
Representative.
7.3 Liability. In performing any of his duties under this Agreement, or
---------
upon the claimed failure to perform his duties hereunder, the
Representatives shall not be liable to the Shareholders or anyone else for
any damages, losses or expenses which they may incur as a result of any act,
or failure to act under this Agreement; provided, however, that the
Representatives shall be liable for damages arising out of actions or
omissions that both (i) were taken or omitted not in good faith and (ii)
constituted willful default or gross negligence under this Agreement.
Accordingly, the Representatives shall not incur any such liability with
respect to (i) any action taken or omitted to be taken in good faith upon
advice of his counsel given with respect to any questions relating to the
duties and responsibilities of the Representatives hereunder; or (ii) any
action taken or omitted to be taken in reliance upon any document, including
any written notice or instructions provided for in this Agreement, not only
as to its due execution and to the validity and effectiveness of its
provisions, but also as to the truth and accuracy of any information
contained therein, which the Representatives shall in good faith believe to
be genuine, to have been signed or presented by the purported proper person
or persons and to conform with the provisions of this Agreement. The
limitation of liability provisions of this Section 7.3 shall survive the
termination of this Agreement and the resignation of any or all of the
Representatives.
7.4 Representative Expenses. PSS shall pay any Representative Expenses
-----------------------
in amount up to $10,000, which amounts shall constitute an Indemnifiable
Loss pursuant to Section 2.3 hereof. Any expenses of the Representatives in
excess of $10,000 shall be the borne by the Representatives and the
Shareholders as agreed to among themselves.
B-7
<PAGE>
ARTICLE 8
MISCELLANEOUS
-------------
8.1 Transferability. The contingent right to receive Escrow Shares
---------------
shall not be transferable by the Shareholders otherwise than by will or by
the laws of descent and distribution.
8.2 Notices. Each party shall keep each of the other parties hereto
-------
advised in writing of all transactions pursuant to this Agreement. Any
notices or other communications required or permitted under this Agreement
shall be in writing and shall be sufficiently given if sent by registered or
certified mail, postage prepaid, addressed as follows, or if sent by
facsimile to the facsimile numbers identified below:
If to PSS or DI:
Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Attn: Mr. David A. Smith
Tel: (904) 332-3000
Facsimile: (904) 332-3210
with a copy to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attn: J. Vaughan Curtis, Esq.
Tel: (404) 881-7397
Facsimile: (404) 881-7777
If to Representatives:
c/o Joseph E. Miller, Jr.
----------------------------------
----------------------------------
Tel:
------------------------------
Fax:
------------------------------
With a copy to:
----------------------------------
----------------------------------
----------------------------------
Tel:
------------------------------
Fax:
------------------------------
B-8
<PAGE>
If to Escrow Agent:
The Bank of New York
Corporate Trust Department
101 Barclay Street, 12E
New York, New York 10286
Attn: Thomas Hacker
Tel: (212) 815-7182
Fax: (212) 815-7181
or such other person or address as shall be furnished in writing by any of
the parties and any such notice or communication shall be deemed to have
been given as of the date so mailed.
8.3 Construction. The validity, enforcement and construction of this
------------
Agreement shall be governed by the laws of the State of Florida, regardless
of the laws that might otherwise govern under applicable principles of
conflicts of laws thereof.
8.4 Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the parties hereto and their respective heirs, legatees,
assigns and transferees, as the case may be. Escrow Agent shall be bound
only by the terms of this Agreement and shall not be bound by or incur
liability with respect to the Merger Agreement or any other agreement or
understanding between PSS and the Shareholders. The Escrow Agent shall not
be charged with notice or knowledge of any such ancillary document, fact or
information not specifically set forth herein. The Escrow Agent shall
undertake to perform only such duties as are expressly set forth herein and
no additional or implied duties or obligations shall be read into this
Agreement against the Escrow Agent.
8.5 Separability. If any provision or section of this Agreement is
------------
determined to be void or otherwise unenforceable, it shall not affect the
validity or enforceability of any other provisions of this Agreement which
shall remain enforceable in accordance with their terms.
8.6 Headings. The headings and subheadings contained in this Agreement
--------
are for reference only and for the benefit of the parties and shall not be
considered in the interpretation or construction of this Agreement.
8.7 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute one and the same instrument.
8.8 Amendments. This Agreement may be amended from time to time but
----------
only by written agreement signed by all of the parties hereto.
8.9 Third-Party Beneficiaries. S&W, DI and the former shareholders of
-------------------------
S&W are expressly intended to be third-party beneficiaries of the
indemnities and obligations of the Representatives as if they were parties
to this Agreement.
B-9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of
the day and year first above written.
PHYSICIAN SALES & SERVICE, INC.
By:
-------------------------------------
Title:
----------------------------------
"ESCROW AGENT"
THE BANK OF NEW YORK
By:
-------------------------------------
"REPRESENTATIVES"
----------------------------------------
Joseph E. Miller, Jr.
----------------------------------------
Bruce P. Ashby
By:
-------------------------------------
George R. Privatera, Trustee
The S&W X-Ray, Inc. Employee Stock Ownership Trust
B-10
<PAGE>
ANNEX C
SECTIONS 623 AND 910 OF THE
NEW YORK BUSINESS CORPORATION LAW
RELATING TO APPRAISAL RIGHTS
MCKINNEY'S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
BUSINESS CORPORATION LAW
CHAPTER 4 OF THE CONSOLIDATED LAWS
ARTICLE 6--SHAREHOLDERS
(S)623. Procedure to enforce shareholder's right to receive payment for
shares
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) within ten days after the shareholders, authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed-to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has
C-1
<PAGE>
been completed, in lieu thereof, at the election of the corporation, the fair
value thereof in cash as determined by the board as of the time of such
expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters, rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements-were previously furnished, nor if in
connection with obtaining the shareholders, authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign corporation
C-2
<PAGE>
without an office in this state, such proceeding shall be brought in the county
where the office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting shareholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders, authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) within sixty days after final determination of the proceeding,
the corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented by
certificates.
C-3
<PAGE>
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if
it is liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under-this section shall be given in the
manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
C-4
<PAGE>
MCKINNEY'S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
BUSINESS CORPORATION LAW
CHAPTER 4 OF THE CONSOLIDATED LAWS
ARTICLE 9--MERGER OR CONSOLIDATION; GUARANTEE;
DISPOSITION OF ASSETS; SHARE EXCHANGES
(S)910. Right of shareholder to receive payment for shares upon merger or
consolidation, or sale, lease, exchange or other disposition of assets, or share
exchange
(a) A shareholder of a domestic corporation shall, subject to and by
complying with section 623 (Procedure to enforce shareholder's right to receive
payment for shares), have the right to receive payment of the fair value of his
shares and the other rights and benefits provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to the
taking of an action specified in subparagraphs (A), (B) and C.
(A) Any plan of merger or consolidation to which the
corporation is a party; except that the right to receive payment of the fair
value of his shares shall not be available:
(i) To a shareholder of the parent corporation in a
merger authorized by section 905 (Merger of parent and subsidiary corporations),
or paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations); and
(ii) To a shareholder of the surviving corporation in a
merger authorized by this article, other than a merger specified in subparagraph
(i), unless such merger effects one or more of the changes specified in
subparagraph (b)(6) of section 806 (Provisions as to certain proceedings) in the
rights of the shares held by such shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires shareholder
approval under section 909 (Sale, lease, exchange or other disposition of
assets) other than a transaction wholly for cash where the shareholders,
approval thereof is conditioned upon the dissolution of the corporation and the
distribution of substantially all of its net assets to the shareholders in
accordance with their respective interests within one year after the date of
such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the right to
receive payment of the fair value of his shares shall not be available to a
shareholder whose shares have not been acquired in the exchange.
(2) Any shareholder of the subsidiary corporation in a merger
authorized by section 905 or paragraph (c) of section 907, or in a share
exchange authorized by paragraph (g) of section 913, who files with the
corporation a written notice of election to dissent as provided in paragraph (c)
of section 623.
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Amended and Restated Articles of Incorporation and the Amended
and Restated Bylaws of the Registrant set forth the extent to which the
Registrant's directors and officers may be indemnified against liabilities
they may incur while serving in such capacities. Such indemnification will be
provided to the fullest extent allowed by the Florida Business Corporation
Act, as amended from time to time, and judicial or administrative decisions.
Under these indemnification provisions, the Registrant is required to
indemnify any of its directors and officers against any reasonable expenses
(including attorneys' fees) incurred by him in the defense of any action, suit
or proceeding, whether civil, criminal, administrative or investigative, to
which he was made a party, or in defense of any claim, issue or matter
therein, by reason of the fact that he is or was a director or officer of the
Registrant or who, while a director or officer of the Registrant, is or was
serving at the Registrant's request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise to the extent that such director or
officer has been successful, on the merits or otherwise, in such defense. The
Registrant also may indemnify any of its directors or officers against any
liability incurred in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Registrant, in
which event, additional determinations must be made before indemnification is
provided) by reason of the fact that he is or was a director or officer of the
Registrant who, while a director or officer of the Registrant, is or was
serving at the Registrant's request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, if such director or officer acted
in good faith and in a manner he believed to be in, or not opposed to, the
best interests of the Registrant, and with respect to any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. The Registrant
may also provide advancement of expenses incurred by a director or officer in
defending any such action, suit or proceeding upon receipt of a written
affirmation of such officer or director that he has met certain standards of
conduct and an understanding by or on behalf of such officer or director to
repay such advances unless it is ultimately determined that he is entitled to
indemnification by the Registrant. Notwithstanding the foregoing, the Amended
and Restated Bylaws of the Registrant provide that the Registrant shall not be
required to indemnify any of its directors or officers in connection with a
proceeding initiated by such person unless such authorization for such
proceeding was not denied by the Board of Directors of the Registrant prior to
sixty (60) days after receipt of notice thereof from such person stating his
or her intent to initiate such proceeding and only upon such terms and
conditions as the Board of Directors may deem appropriate.
The Florida Business Corporation Act contains a provision which
limits the personal liability for monetary damages to the corporation or any
other person for any statement, vote, decision, or failure to act, regarding
corporate management or policy, by a director, unless the director breached or
failed to perform his duties as a director and such breach constitutes (i) a
violation of criminal law, unless the director has reasonable cause to believe
his conduct was unlawful; (ii) a transaction from which the director received
an improper personal benefit; (iii) an unlawful distribution under Florida
law, (iv) in a proceeding by or in the right of a corporation to procure a
judgment in its favor or by or in the right of a shareholder, conscious
disregard for the best interest of the corporation, or willful misconduct; or
(v) in a proceeding by or in the right of someone other that the corporation
or a shareholder, recklessness or an act or omission which was committed in
bad faith or with malicious purpose or in a manner exhibiting wanton or
willful disregard of human rights, safety or property. The Registrant
maintains an insurance policy insuring the Registrant and directors and
officers of the Registrant against certain liabilities, including liabilities
under the Securities Act of 1933.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits (See Exhibit Index immediately preceding the exhibits for the
page number where each exhibit can be found)
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 - Agreement and Plan of Merger, dated as of August 12, 1997, among
PSS, DI and S&W (included in Annex A to the Proxy Statement-
Prospectus and incorporated by reference herein (schedules omitted
-- the Registrant agrees to furnish a copy of any schedule to the
Commission upon request)).
2.2 - Form of Escrow Agreement among PSS, S&W and the Stockholder
Representatives (included in Annex B to the Proxy Statement-
Prospectus and incorporated by reference herein).
5.1 - Opinion of Fred Elefant, P.A., including consent.
23.1 - Consent of Fred Elefant, P.A. (contained in Exhibit 5.1).
23.2 - Consent of Arthur Andersen LLP.
23.3 - Consent of May, Robinson, Gordon & Penta, P.C.
24.1 - Powers of Attorney (see the signature pages to this Registration
Statement on Form S-4).
99.1 - Form of Proxy of S&W.
(b) Financial Statement Schedules
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
financial statements or notes thereto.
II-2
<PAGE>
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers for sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13
or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the Registrant's Certificate of
Incorporation or Bylaws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefor, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment for the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and
will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
II-3
<PAGE>
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(g) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Jacksonville, State of Florida, on August 12, 1997.
PHYSICIAN SALES & SERVICE, INC.
By: /s/ Patrick C. Kelly
--------------------------------------
Patrick C. Kelly
Chairman of the Board and
Chief Executive Officer
II-5
<PAGE>
POWER OF ATTORNEY
We the undersigned officers and directors of Physician Sales & Service,
Inc., do hereby constitute and appoint Patrick C. Kelly and David A. Smith,
and each of them, our true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments or
supplements to this Registration Statement, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby, ratifying and confirming all that each of said attorneys-in-
fact and agents, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on August 12, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Patrick C. Kelly Chairman of the Board and Chief Executive
-------------------------- Officer (principal executive officer)
Patrick C. Kelly
/s/ John F. Sasen President and Director
--------------------------
John F. Sasen, Sr.
/s/ David A. Smith Executive Vice President, Chief Financial
-------------------------- Officer and Assistant Secretary and Director
David A. Smith (principal financial and accounting officer)
Director
--------------------------
Delmer W. Dallas
/s/ William C. Mason Director
--------------------------
William C. Mason
/s/ T. O'Neal Douglas Director
--------------------------
T. O'Neal Douglas
/s/ Fred Elefant Director
--------------------------
Fred Elefant
/s/ Delores Kesler Director
--------------------------
Delores Kesler
/s/ James L.L. Tullis Director
--------------------------
James L.L. Tullis
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Page
- ------- ----------------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of August 12, 1997,
among PSS, DI and S&W (included in Annex A to the Proxy
Statement-Prospectus and incorporated by reference herein
(schedules omitted -- the registrant agrees to furnish a copy
of any schedule to the Commission upon request))
2.2 Form of Escrow Agreement among PSS, S&W and the Stockholder
Representatives (included in Annex B to the Proxy Statement-
Prospectus and incorporated by reference herein).
5.1 Opinion of Fred Elefant, P.A., including consent.
23.1 Consent of Fred Elefant, P.A. (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP
23.3 Consent of May, Robinson, Gordon & Penta, P.C.
24.1 Powers of Attorney (see the signature pages to this
Registration Statement on Form S-4).
99.1 Form of Proxy of S&W.
</TABLE>
<PAGE>
Exhibit 5.1
FRED ELEFANT, P.A.
1650 Prudential Drive, Suite 105
Jacksonville, Florida 32207
August 12, 1997
Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Ladies and Gentlemen:
This opinion is given in connection with the filing by Physician Sales &
Service, Inc., a corporation organized and existing under the laws of the
State of Florida (the "Company"), of a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") with respect to the registration under the Securities Act of
1933, as amended, of up to 2,123,558 shares of the Company's common stock,
$.01 par value per share (the "Shares") to be issued in connection with the
proposed merger of S&W X-Ray, Inc. with and into Diagnostic Imaging, Inc., a
wholly owned subsidiary of the Company.
In the capacity described above, I have considered such matters of law
and of fact, including the examination of originals or copies, certified or
otherwise identified to my satisfaction, of such records and documents of the
Company, certificates of public officials and such other documents as I have
deemed appropriate as a basis for the opinions hereinafter set forth. In
conducting my examination, I have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to me as originals, the conformity to original documents of all
documents submitted to me as certified or photostatic copies, and the
authenticity of the originals of such documents. The opinions set forth
herein are limited to the laws of the State of Florida.
Based upon the foregoing, it is my opinion that the Shares have been duly
authorized and are validly issued, fully paid, and non-assessable by the
Company under the Business Corporation Act of the State of Florida as in
effect on the date hereof.
This opinion is provided to you for your benefit and for the benefit of
the Commission, in each case, solely with regard to the Registration
Statement, may be relied upon by you and the Commission only in connection
with the Registration Statement, and may not be relied upon by any other
person or for any other purpose without my prior written consent.
I consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference made to my firm under the caption "Legal
Matters" in the Prospectus constituting part of the Registration Statement.
FRED ELEFANT, P.A.
By: /s/ Fred Elefant
-----------------
Fred Elefant
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our report (and to all references to our Firm) included in or made a part of
this registration statement.
/s/ Arthur Andersen LLP
Jacksonville, Florida
August 12, 1997
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our report (and to all references to our Firm) included in or made a part of
this registration statement.
/s/ May, Robinson, Gordon & Penta, P.C.
Rochester, New York
August 11, 1997
<PAGE>
Exhibit 99.1
S&W X-RAY, INC.
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Joseph E. Miller, Jr. and George R.
Privitera as Proxies, each with the power to appoint his substitute, and
hereby authorizes either one or both of them to represent and to vote, as
designated below, all the shares of Common Stock of S&W X-Ray, Inc. held of
record by the undersigned on August 10, 1997, at the Special Meeting of
Stockholders to be held on _______, 1997.
1. PROPOSAL TO: (i) approve the Agreement and Plan of Merger, dated as
of August 12, 1997 (the "Merger Agreement"), by and among S&W X-Ray,
Inc. ("S&W"), Physician Sales & Service, Inc. ("PSS"), and Diagnostic
Imaging, Inc., a wholly owned subsidiary of PSS ("DI"), pursuant to
which, among other matters, (a) S&W will merge with and into DI (the
"Merger") and (b) each outstanding share of S&W Common Stock will be
converted into the right to receive and the contingent right to receive
shares of common stock of PSS; (ii) approve the Escrow Agreement (the
"Escrow Agreement") by and between PSS and the Stockholder
Representative; and (iii) appoint Joseph E. Miller, Jr., Bruce P. Ashby
and the S&W X-Ray, Inc. Employee Stock Ownership Trust as the
Stockholder Representatives in accordance with the Escrow Agreement, all
as more fully described in the accompanying Proxy Statement-Prospectus.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
-------------------------------------------------
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1 ABOVE.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such.
If a corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.
DATED: , 1997
--------------------
-----------------------------------
Signature
-----------------------------------
Signature if held jointly
