<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
----------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 23, 1997
PHYSICIAN SALES AND SERVICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 0-23832 59-2280364
(STATE OR OTHER (COMMISSION (I.R.S. EMPLOYER
JURISDICTION FILE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
4345 SOUTHPOINT BOULEVARD, JACKSONVILLE, FLORIDA 32216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (904) 332-3000
N/A
--------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
On October 7, 1997, Physician Sales & Service, Inc. (the "Company" or "PSS")
closed its previously announced private offering of $125 million aggregate
principal amount of 8 1/2% Senior Subordinated Notes due 2007 (the "Notes").
In connection with such transaction, the Company and its domestic subsidiaries
are required to file a registration statement on Form S-4 (the "Exchange Offer
Registration Statement") with respect to an offer to exchange the Notes for
senior subordinated notes of the Company with identical terms to the Notes
(the "Exchange Notes") (except that the Exchange Notes will not contain terms
with respect to transfer restrictions). As part of such Exchange Offer
Registration Statement, the Company is required to file consolidated financial
statements to reflect its recent acquisition of S&W X-Ray, Inc. ("S&W") in a
pooling-of-interests transaction. S&W does not meet the definition of
"significant subsidiary" as set forth in Regulation S-X promulgated by the
Securities and Exchange Commission. The following consolidated financial
statements as well as a restated Management's Discussion and Analysis of
Financial Condition and Results of Operation are being filed herewith so that
they each may be incorporated by reference into the Company's current and
future registration statements.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c)Exhibits
23.1 Consent of Arthur Andersen LLP.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated financial
condition and consolidated results of operations of PSS should be read in
conjunction with the more detailed information contained in the Consolidated
Financial Statements and Notes thereto included elsewhere in this Current
Report on Form 8-K.
COMPANY OVERVIEW
PSS is a specialty marketer and distributor of medical products to
physicians, other alternate-site providers and hospitals. PSS is the leading
distributor of medical supplies, equipment and pharmaceuticals to office-based
physicians in the United States based on revenues, serving over 104,000
physician offices (representing approximately 54% of all physician offices) in
all 50 states. The Company, which entered the imaging-supply market in
November 1996, has grown to be the largest distributor of imaging supplies and
equipment in the United States based on revenues, serving over 12,000 customer
sites in 21 states. PSS also distributes medical products to office-based
physicians and hospitals in five European countries.
COMPANY GROWTH
PSS has grown rapidly in recent years through mergers and acquisitions,
same-center growth and new-center development. From the end of fiscal year
1993 through the end of fiscal year 1997, the Company's net sales, excluding
the pre-acquisition revenues of Taylor and X-ray Georgia, grew at a compound
annual rate of approximately 53.5%, and including pre-acquisition revenues of
Taylor and X-ray Georgia, the Company's net sales grew at a compound annual
rate of approximately 26.7%. The number of company service centers has grown
from two at the end of fiscal year 1984 to 89 currently, including 61
Physician Supply Business service centers, 25 Imaging Business service centers
and three International Business service centers. In order of priority, the
Company's growth has been accomplished through: (i) acquiring regional and
local Physician Supply Business medical-products distributors; (ii) acquiring
local and regional diagnostic imaging equipment and supply distributors; (iii)
increasing sales from existing service centers; and (iv) opening start-up
service centers.
The following table depicts the number of service centers, sales
representatives and states served by the Company for the periods indicated.
See "Business--Properties" for a list of the Physician Supply Business,
Imaging Business and International Business service centers.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Company:
Sales representatives............................... 339 386 481 722 817
Service centers(1).................................. 47 52 61 72 84
States served....................................... 37 44 48 50 50
Physician Supply Business:
Sales representatives............................... 315 362 455 692 720
Service centers(1).................................. 40 45 54 64 61
States served....................................... 33 44 48 50 50
Imaging Business(2):
Sales representatives............................... 24 24 26 30 73
Service specialists................................. 90 98 104 112 223
Service centers..................................... 7 7 7 8 21
States served....................................... 9 9 9 9 16
International Business:
Sales representatives............................... 24
Service centers..................................... 2
Countries served.................................... 5
</TABLE>
- --------
(1) Excludes Taylor service centers prior to their acquisition.
(2) All Imaging Business data for periods prior to November 1996 reflect pre-
merger financial data of companies acquired through pooling-of-interests
transactions.
3
<PAGE>
PSS has increased the number of its Physician Supply Business sales
representatives from 203 in fiscal 1991 to over 700 as of September 30, 1997.
The Company's sales representatives focus on a consultative and comprehensive
sales approach with an emphasis on sophisticated diagnostic products. The
Company invested approximately $2.6 million in the training and development of
its sales representatives and management in fiscal 1997.
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.
In addition to the opening of new service centers and the acquisition of
local medical-products distributors, PSS' sales growth is largely attributable
to high levels of same center sales growth. PSS quantifies same-center sales
growth by comparing the aggregate 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 Business for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------
1993(1) 1994(1) 1995(1) 1996 1997
------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Number of centers........................... 25 29 40 45 53
Same-center sales growth(2)................. 18.5% 27.7% 23.3% 26.8% 18.2%
</TABLE>
- --------
(1) Excludes Taylor service centers.
(2) Adjusted for merged centers.
This same-center sales growth rate has been accomplished by: (i) focusing on
diagnostic equipment which produces residual sales of reagents; (ii)
productivity gains of the Company's maturing sales force; (iii) pursuing
customer reach and penetration; and (iv) accessing new products not previously
distributed. Historically, the Company has had same-center sales growth in
excess of the estimates of industry growth rates. The Company experienced
rapid same-center sales growth in fiscal years 1994, 1995 and 1996 primarily
as a result of additional emphasis on new products manufactured by Abbott, F.
Hoffman-La Roche Ltd. and SmithKline Beecham not previously distributed by the
Company.
ACQUISITION PROGRAM
The Company views the acquisition of medical-products distributors as an
integral part of its growth strategy. The Physician Supply Business has grown
from one service center located in Jacksonville, Florida in 1983 to 61 service
centers currently. The Imaging Business and International Business began with
acquisitions in fiscal year 1997 and have acquired 25 and three service
centers, respectively, to date. Since fiscal year 1994 the Company has
accelerated its acquisition of medical-products distributors both in number
and in size of the operations acquired.
4
<PAGE>
The following table sets forth the number of acquisitions of the Company,
the prior revenues of the companies acquired and the aggregate consideration
paid for such acquisitions for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
----------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Number of acquisitions................ 3 4 9 11 10
Prior year revenues for acquired
companies(2)......................... $8,200 $26,300 $37,600 $167,600 $241,700
Aggregate consideration paid for
acquired companies................... $1,200 $ 4,800 $ 9,700 $ 73,100 $ 83,100
</TABLE>
- --------
(1) Excludes companies previously acquired by companies subsequently acquired
by PSS.
(2) Reflects twelve-month trailing revenues for companies prior to their
acquisition by PSS and is not necessarily reflective of the revenues of
continued operations following their acquisition.
SALES MIX
The following table sets forth information regarding the Company's net sales
by business and significant product category for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
NET SALES
Total Company:
Physician Supply Business...................... $ 366,285 $ 483,294 $ 601,310
Imaging Business............................... 105,700 105,826 146,037
International Business......................... -- -- 15,707
--------- --------- ---------
Company total................................ $ 471,985 $ 589,120 $ 763,054
========= ========= =========
Physician Supply Business(1):
Medical Supplies............................... $ 151,588 $ 297,058 $ 404,859
Equipment...................................... 51,127 76,144 125,994
Pharmaceuticals................................ 29,836 43,708 66,427
Service and other.............................. 3,637 3,845 4,030
Taylor......................................... 130,097 62,539 --
--------- --------- ---------
Physician Supply Business total.............. $ 366,285 $ 483,294 $ 601,310
========= ========= =========
Imaging Business................................ $ 105,700 $ 105,826 $ 146,037
========= ========= =========
International Business.......................... $ 15,707
=========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
PERCENTAGE OF NET SALES
Total Company:
Physician Supply Business................................ 77.6% 82.0% 78.8%
Imaging Business......................................... 22.4 18.0 19.1
International Business................................... -- -- 2.1
----- ----- -----
Company total.......................................... 100.0% 100.0% 100.0%
===== ===== =====
Physician Supply Business(1):
Medical Supplies......................................... 64.2% 70.6% 67.3%
Equipment................................................ 21.7 18.1 21.0
Pharmaceuticals.......................................... 12.6 10.4 11.0
Service and other........................................ 1.5 0.9 0.7
----- ----- -----
Physician Supply Business Total........................ 100.0% 100.0% 100.0%
===== ===== =====
</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.
The Company recently completed the second year of a Distributorship
Agreement (the "Abbott Agreement") with Abbott providing for the exclusive
distribution of certain Abbott diagnostic products. Gross profits for products
previously sold by Abbott are generally substantially less than standard PSS
margins. The average gross profit on sales of Abbott products by the Company's
Physician Supply Business improved to 18.0% and 22.2% for fiscal years 1996
and 1997, respectively. Gross profits on these products have gradually
improved over the term of the relationship.
With respect to the Imaging Business, while gross margins are lower than
those of the Physician Supply Business, general and administrative expenses
are also lower than those in the Physician Supply Business due in part to
fewer products distributed, larger average order sizes, less frequent
deliveries and fewer personnel. PSS is focusing its sales efforts on higher-
margin accounts and on sales of equipment that involve ongoing sales of
higher-margin diagnostic reagents. The following table sets forth certain
gross margin trends of the Company for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
GROSS MARGIN TRENDS
Physician Supply Business(1):
Medical Supplies...................................... 33.3% 30.8% 29.8%
Equipment............................................. 26.8 25.3 24.8
Pharmaceuticals....................................... 26.6 27.0 27.4
Service and other..................................... 28.2 32.3 37.9
Taylor................................................ 30.5 29.4 --
Physician Supply Business weighted average........... 30.8 29.4 28.6
Imaging Business....................................... 18.3 19.5 21.2
International Business................................. 40.7
Company weighted average(1).......................... 28.0 27.6 27.4
</TABLE>
- --------
(1) Excludes fiscal year 1997 Physician Supply Business operating write-offs
of inventory of branches involved in mergers of approximately $4.1
million.
6
<PAGE>
The following table sets forth certain operating trends of the Company for
the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Operating Trends:
Days Sales Outstanding................................ 55 55 56
Average Inventory Turnover............................ 8.7 8.4 8.2
</TABLE>
Accounts receivable, net of allowances, were $130.4 million and $151.0
million at March 28, 1997 and September 30, 1997, respectively. In March 1997,
the Company acquired an imaging company with accounts receivable of $3.3
million. Excluding this increase in accounts receivable, the average days
sales outstanding were 55 days for the year ended March 28, 1997.
Inventories were $75.2 million and $79.1 million as of March 28, 1997 and
September 30, 1997, 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 8.4 times for the year
ended March 28, 1997.
EXCLUSIVE DISTRIBUTION AGREEMENTS
As manufacturers search for means to reduce selling and marketing expenses,
PSS has used its expertise and market reach to capitalize upon such
manufacturers' strategic initiatives as evidenced by PSS' increase in sales of
diagnostic equipment and pharmaceuticals.
The Abbott Agreement has positioned PSS as the sole distributor to physician
offices with 24 or fewer physicians for, among other products, the CELL DYN
1400, 1600 and 1700 hematology products, Abbott Vision blood chemistry
analyzers and reagents, AXyM and IMx immunoassay analyzers and reagents, and
the Abbott Testpack line of rapid tests and has also enabled the Company to
cross-sell its other products to Abbott customers.
The Company has entered into other exclusive and semi-exclusive distribution
agreements for certain products manufactured by Siemens AG, Hologic, Inc., C.
R. Bard, Inc., HumaScan, Inc. and F. Hoffman-La Roche Ltd. These strategic
alliances should continue to broaden the Company's medical product offerings.
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
PlusSM, 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.
In order to lower product-acquisition and inventory-carrying costs, PSS has
implemented a new Penny Saver product line. The Penny Saver products are those
most frequently used by PSS customers. This product line provides 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.
7
<PAGE>
IMAGING BUSINESS
The Company's Imaging Business distributes over 3,500 medical diagnostic
imaging supplies, chemicals and equipment and provides technical service to
physician offices, other alternate-site providers and hospitals. This business
began operations in November 1996 with the acquisition of eight service
centers, 24 sales representatives and 75 service specialists. Currently, the
Imaging Business provides service to approximately 12,000 physician offices,
other alternate-site providers and hospitals through 25 service centers, with
over 95 sales representatives and over 300 service specialists as of September
30, 1997.
INTERNATIONAL BUSINESS
The Company also distributes medical products to office-based physicians and
hospitals in Belgium, France, Germany, Luxembourg and the Netherlands through
its WorldMed International, Inc. subsidiary. The International Business began
operations in April 1996 with the acquisition of its service center in Leuven,
Belgium. The Company currently has three International Business service
centers employing approximately 30 sales representatives.
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, X-ray Georgia, and S&W.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................. 100.0% 100.0% 100.0%
Gross profit(4)....................................... 28.0 27.6 27.4
General and administrative expenses................... 16.3 15.2 15.7
Selling expenses...................................... 9.4 8.8 8.8
Restructuring charges(1).............................. 0.9 -- --
Merger costs and expenses(2).......................... -- 2.7 1.6
Net income............................................ -- 0.4 0.6
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)(3)... 0.5 2.0 1.9
</TABLE>
- --------
(1) Restructuring charges reflect charges taken by a company that merged with
the Company pursuant to a pooling-of-interests transaction, prior to its
date of merger. The fiscal year 1995 restructuring charge reflects
assessment of former management of such merged company 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 pooling-of-interests
transactions.
(3) Fiscal year 1997 other operating charges represent write-offs of inventory
and accounts receivable at branches involved in mergers.
(4) Excludes fiscal year 1997 Physician Supply Business operating write-offs
of inventory of branches involved in mergers of approximately $4.1
million.
8
<PAGE>
FISCAL YEAR ENDED MARCH 28, 1997 VERSUS FISCAL YEAR ENDED MARCH 29, 1996
Net Sales. Net sales increased $174.0 million, or 29.5%, to $763.1 million
for fiscal year 1997 compared to fiscal year 1996 net sales of $589.1 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 Business centers and
International Business centers acquired during fiscal year 1997; and (v) net
sales from the acquisitions of the imaging companies during fiscal year 1997.
The net sales increase was slowed by the Company's efforts in the last six
months of fiscal year 1997 to reduce low gross margin sales of the Physician
Supply Business. Physician Supply Business same store sales growth
approximated 18% for fiscal year 1997.
Fiscal year 1997 net sales resulting from the acquisitions of the Imaging
Business totaled $146.0 million, an increase of $40.2 million over the fiscal
year 1996 Imaging Business revenues of $105.8 million. Fiscal year 1997 net
sales resulting from the acquisition of two Physician Supply Business medical
supply companies and three International Business medical supply companies
totaled approximately $25.5 million and $15.7 million, respectively.
Gross Profit. Gross profit increased $42.3 million, or 26.0%, for fiscal
year 1997 compared to fiscal year 1996. The increase in gross profit dollars
is attributable to the sales growth described above. Gross profit as a
percentage of net sales was 26.9% and 27.6% for fiscal years 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) the
increase in gross profit contribution of the Imaging Business as a percentage
of the combined gross profit, which is lower as a percentage of sales than the
Physician Supply Business gross profit margin; and (iii) the continued
penetration by the Company's Physician Supply Business into larger physician
group practices that require more competitive pricing but entail lower selling
and servicing costs.
Vendor performance incentives earned by PSS through the achievement of
certain predetermined Company purchase and sales levels also impacted gross
profits. These performance incentives totaled $3.1 million and $6.4 million
for fiscal years 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 $30.6 million, or 34.2%, for fiscal year 1997 compared to fiscal
year 1996. General and administrative expenses as a percentage of net sales,
increased to 15.7% for fiscal year 1997 from 15.2% for fiscal year 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 costs of
mature service center operations.
Selling Expenses. Selling expenses increased $15.7 million, or 30.4%, for
fiscal year 1997 compared to fiscal year 1996 as a result of an increase in
net sales. Selling expense as a percentage of net sales was 8.8% for both
fiscal years 1997 and 1996, respectively. The Company utilizes a variable
commission plan, which pays commissions based on gross profit as a percentage
of net sales.
Merger Costs and Expenses. During fiscal year 1997, the Company recorded
merger costs and expenses of $12.1 million incurred in connection 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.
Nonrecurring ESOP Cost of Acquired Company. Prior to the acquisition of S&W
by the Company, S&W sponsored a leveraged ESOP plan. As shares are released
from collateral, the Company reports compensation
9
<PAGE>
expense equal to the current market price of the shares released. Fiscal year
1997 expense approximated $1.4 million, an increase of 70.2% over fiscal year
1996 expense of approximately $0.8 million, due to an increase in the number
of shares released and an increase in the per share fair value of the related
stock. Prior to consumation of the acquisition, but after March 28, 1997, the
remaining S&W ESOP shares were released, at an expense of $2.5 million. As of
September 30, 1997, there were no remaining unallocated S&W ESOP shares and
there will be no related expense subsequent to September 30, 1997.
Operating Income. Operating income decreased $1.0 million, or 20.1%, for
fiscal year 1997 compared to fiscal year 1996. As a percentage of net sales,
operating income for fiscal year 1997 decreased to 0.5% from 0.8% for fiscal
year 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, nonrecurring ESOP cost of
acquired company, 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 fiscal year 1997 would have increased to $22.0
million from $21.4 million for fiscal year 1996.
Interest Expense. Interest expense for fiscal year 1997 decreased
approximately $2.4 million, or 66.7%, compared to fiscal year 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 year 1997
primarily results from the debt of the pooled Imaging Business operations.
Interest and Investment Income. Interest and investment income for fiscal
year 1997 increased approximately $1.2 million, or 103.7%, compared to fiscal
year 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 year 1996 and recorded an unrealized gain of $0.5 million on equity
securities.
Other Income. Other income slightly decreased for fiscal year 1997 compared
to fiscal year 1996.
Provision for Income Taxes. Provision for income taxes increased $0.3
million, or 15.1%, for fiscal year 1997 compared to fiscal year 1996 due to
higher pretax income of $6.6 million in fiscal year 1997 compared to $4.1
million in fiscal year 1996 as a result of the factors discussed above and was
also affected by higher nontaxable investment income of $0.7 million in fiscal
year 1997 compared to $0.2 million in fiscal year 1996 and lower nondeductible
merger costs and expenses of $0.7 million in fiscal year 1997 compared to $2.2
million in fiscal year 1996. The effective income tax rate was 33.4% in fiscal
year 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 $2.3 million for fiscal year 1997 compared
to fiscal year 1996 for the reasons discussed above. As a percentage of net
sales, net income increased to 0.6% for fiscal year 1997 from 0.4% for fiscal
year 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, nonrecurring ESOP cost of acquired company, 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 21.7% to $14.5 million for fiscal year 1997 compared to $11.9
million for fiscal year 1996.
FISCAL YEAR ENDED MARCH 29, 1996 VERSUS FISCAL YEAR ENDED MARCH 30, 1995
Net Sales. Net sales increased $117.1 million to $589.1 million, or 24.8%,
for fiscal year 1996 compared to fiscal year 1995 net sales of $472.0 million.
The increase in net sales was attributable to: (i) internal sales growth of
centers operating at least two years; (ii) incremental net sales generated in
connection with the Abbott Agreement; (iii) net sales of centers acquired
during fiscal year 1996; and (iv) net sales of fiscal year 1996 Company start-
up service centers.
Physician Supply Business same-center 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
10
<PAGE>
in incremental net sales of Abbott products during fiscal year 1996. Excluding
Taylor, X-ray of Georgia, and S&W, 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 $30.3 million, or 22.9%, for fiscal
year 1996 compared to fiscal year 1995. The increase in gross profit dollars
is attributable to the sales growth described above. Gross profit as a
percentage of net sales was 27.6% and 28.0% for fiscal years 1996 and 1995,
respectively. The decrease in gross profit as a percentage of net sales is
attributable to the penetration by the Company's Physician Supply Business
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 fiscal year 1996, the Company sold approximately $75.1 million of Abbott
products with a gross profit percentage of 18.0%. In addition, 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 for fiscal
years 1996 and 1995, respectively. These vendor incentives effectively raised
the gross profit percentage by 1.1% and 1.3% 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 $12.5 million, or 16.3%, for fiscal year 1996 compared to fiscal
year 1995. General and administrative expenses as a percentage of net sales,
however, decreased to 15.2% for fiscal year 1996 from 16.3% for fiscal year
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 Business service centers' fixed general and administrative
expenses through increased sales volume; (ii) reduced overhead from the sale
of assets by Taylor in fiscal year 1995 and decreased depreciation expense
associated with the assets sold; and (iii) reduced amortization relating to
intangible assets written off by Taylor during fiscal year 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 Business service centers.
Selling Expenses. Selling expenses increased $7.2 million, or 16.2%, for
fiscal year 1996 compared to fiscal year 1995. Selling expense as a percentage
of net sales was 8.8% and 9.4% for fiscal years 1996 and 1995, respectively.
The decrease in selling expense as a percentage of net sales is due to i)
improved leveraging of existing Physician Supply Business 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, ii) 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, and iii) the increased contribution of the Imaging Business as a
percentage of the combined operations, which incurs lower selling expenses as
a percentage of sales than the Physician Supply Business.
11
<PAGE>
Merger Costs and Expenses. During fiscal year 1996, the Company recorded
merger costs and expenses of $15.7 million associated with the merger of PSS
and Taylor and the other acquisitions accounted for under the pooling of
interests method of accounting. 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 14.7%, for
fiscal year 1996 compared to 1995. As a percentage of net sales, operating
income for fiscal year 1996 decreased to 0.8% from 1.2% for fiscal year 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 year
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, and the nonrecurring ESOP cost of acquired company in both fiscal
year 1996 and 1995 operating income for fiscal year 1996 would have increased
96.5% to $21.4 million from $10.9 million for fiscal year 1995 due to the
factors discussed above.
Interest Expense. Interest expense for fiscal year 1996 decreased
approximately $0.9 million, or 20.8%, compared to fiscal year 1995. Interest
expense decreased as a result of the decrease in average indebtedness and the
refinancing at a more favorable rate of debt assumed by PSS through
acquisition. 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 year 1996.
Other Income. Other income decreased approximately $0.3 million, or 17.1%,
for fiscal year 1996 compared to fiscal year 1995. Other income decreased due
to a net gain on sale of assets by Taylor recorded during fiscal year 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 36.6%, for fiscal year 1996 compared to fiscal year 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 $2.1 million for fiscal year 1996 compared
to fiscal year 1995 for the reasons discussed above. As a percentage of net
sales, net income increased for fiscal year 1996 to 0.4% from 0.0% for fiscal
year 1995. Excluding the effect of merger costs and expenses in fiscal year
1996, the restructuring charge in fiscal year 1995, and nonrecurring ESOP cost
of acquired company, pro forma net income would have increased 140.4% to $11.9
million for fiscal year 1996 compared to $5.0 million for fiscal year 1995.
The increase in pro forma net income is primarily attributable to the
increasing profitability of maturing Physician Supply Business 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. 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 Supplemental Consolidated Financial Statements of the
Company and notes thereto included elsewhere herein. 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
12
<PAGE>
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 YEAR 1996 FISCAL YEAR 1997
------------------------------------ ------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $130,792 $146,450 $152,411 $159,467 $169,257 $190,326 $198,435 $205,036
Gross profit............ 36,628 39,082 42,487 44,393 45,529 51,099 55,476 52,786
Merger costs and
expenses............... -- 12,095 3,484 153 6,934 -- 317 4,877
Net income (loss)....... $ 1,507 $ (7,046) $ 1,761 $ 5,907 $ (1,368) $ 4,128 $ 4,433 $ (2,766)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
share.................. $ 0.05 $ (0.26) $ 0.05 $ 0.16 $ (0.04) $ 0.11 $ 0.12 $ (0.07)
Pro forma net income,
excluding merger costs
and expenses........... $ 1,634 $ 2,337 $ 3,704 $ 4,707 $ 3,288 $ 4,062 $ 4,657 $ 122
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income per
share, excluding merger
costs and expenses..... $ 0.06 $ 0.09 $ 0.11 $ 0.12 $ 0.09 $ 0.11 $ 0.12 $ 0.00
</TABLE>
The fourth quarter of fiscal year 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.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital requirements
will also continue to increase as a result of the need to finance acquisitions
and anticipated growth of the Company's operations. This growth will be funded
through a combination of cash flow from operations, revolving credit
borrowings and proceeds from the offering and any future public offerings.
Net cash used in operating activities was $8.4 million, $22.0 million, and
$0.7 million in fiscal years 1995, 1996, and 1997, respectively. In fiscal
year 1997, a significant portion of operating cash flow was used for the
closing of duplicate service center locations, realigning regional and
corporate functions, consolidating information systems and reducing personnel
in conjunction with acquisitions.
Net cash used in investing activities was $1.5 million, $31.1 million, and
$10.6 million in fiscal years 1995, 1996, and 1997, 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 provided by (used in) financing activities was $9.9 million, $117.4
million, and $(25.3) million for fiscal years 1995, 1996, and 1997,
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 year
1996 to pay off debt assumed through fiscal year 1997 acquisitions.
The Company had working capital of $171.6 million and $177.3 million as of
March 28, 1997 and March 29, 1996, respectively. Accounts receivable, net of
allowances, were $130.4 million and $105.6 million at March 28, 1997 and March
29, 1996, respectively. The average number of days sales in accounts
receivable outstanding was approximately 56 and 55 days for the years ended
March 28, 1997 and March 29, 1996, respectively.
Inventories were $75.2 million and $60.8 million as of March 28, 1997 and
March 29, 1996, respectively. The Company had annualized inventory turnover of
8.2 and 8.4 times for the years ended March 28, 1997 and March 29, 1996.
Inventory financing historically has been achieved through negotiating
extended payment terms from suppliers.
13
<PAGE>
The Company has made forty, nine, and four acquisitions since fiscal year
1989 in its Physician Supply Business, Imaging Business, and International
Business, respectively. Recently, the Company acquired General X-ray and S&W,
which had approximately $147.6 million in revenues, collectively, for the
twelve months ended March 31, 1997. After consummating a merger or
acquisition, the Company begins an intensive process of converting the
acquired company to PSS' business model through information systems
conversion, personnel development and training, and service and product
expansion. The Company intends to continue to acquire local, regional, and
other distributors in new and existing markets where PSS can leverage its
distribution infrastructure, expand its geographic coverage and gain market
share.
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. In May 1994, the Company completed an
initial public offering of Common Stock resulting in proceeds, after deducting
issuance costs, of approximately $15.8 million. The Company used all of the
net proceeds to reduce outstanding debt. Also, in the third quarter of fiscal
year 1995, the Company amended and restated its Credit Facility, thereby
increasing the maximum availability under the Credit Facility to $60.0 million
with the option, on the part of the Company, to increase such availability to
$75.0 million.
In November 1995, the Company completed a secondary offering of 11.5 million
shares of common stock at $17.00 per share, 8.8 million of which were offered
by the Company. The Company used approximately $58.2 million and $26.9 million
of the total net proceeds of $142.9 million to repay Company debt and debt
assumed through acquisitions in fiscal years 1996 and 1997, respectively.
Management used approximately $50.0 million in connection with acquisitions
for the Imaging Business, Physician Supply Business and International
Business, and general corporate purposes, including capital expenditures
during fiscal year 1997. Management has used substantially all of the net
proceeds and intends to use the remaining net proceeds of the secondary
offering for general corporate purposes, including future acquisitions. The
Company expects that the remaining net proceeds will be substantially utilized
by recent acquisitions.
The Company believes that the expected cash flows from operations, bank
borrowings, the net proceeds of this offering, and capital markets should be
adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments of interest on its debts
(including the Notes) for the foreseeable future. As of March 28, 1997, the
Company had no outstanding debt under its Credit Facility.
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following:
the availability of sufficient capital to finance the Company's business plans
on terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigation
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the
date made.
14
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants...................... F-2
Consolidated Balance Sheets--March 28, 1997 and March 29, 1996.......... F-3
Consolidated Statements of Income for the Years Ended March 28, 1997,
March 29, 1996, and March 30, 1995..................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
March 28, 1997, March 29, 1996, and March 30, 1995..................... F-5
Consolidated Statements of Cash Flows for the Years Ended March 28,
1997, March 29, 1996, and March 30, 1995............................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<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 income,
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 consolidated 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.
Arthur Andersen LLP
Jacksonville, Florida
December 18, 1997
F-2
<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........................ $ 29,075,157 $ 65,681,342
Marketable securities............................ 15,045,482 20,767,600
Accounts receivable, net......................... 130,426,326 105,627,598
Inventories...................................... 75,185,728 60,831,680
Prepaid expenses and other....................... 24,120,998 10,275,156
------------ ------------
Total current assets........................... 273,853,691 263,183,376
Property and equipment, net........................ 20,202,967 15,871,899
Other Assets:
Intangibles, net................................. 22,083,560 14,384,322
Other............................................ 5,129,048 2,430,391
------------ ------------
Total assets................................... $321,269,266 $295,869,988
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 69,011,247 $ 61,121,011
Accrued expenses................................. 20,012,856 7,293,684
Current maturities of long-term debt and capital
lease obligations............................... 8,099,064 11,317,621
Other............................................ 5,131,051 6,187,997
------------ ------------
Total current liabilities...................... 102,254,218 85,920,313
Long-term debt and capital lease obligations, net
of current portion................................ 3,825,333 3,265,662
Other.............................................. 4,634,291 3,552,968
------------ ------------
Total liabilities.............................. 110,713,842 92,738,943
------------ ------------
Commitments and contingencies (Notes 1, 3, 4, 9,
10, 12, 13, and 16)
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, 38,799,073 and 36,859,944 shares
issued and outstanding at March 28, 1997 and
March 29, 1996, respectively.................... 387,991 368,600
Additional paid-in capital....................... 207,675,161 200,186,483
Retained earnings................................ 3,767,240 5,091,891
Cumulative foreign currency translation
adjustment...................................... 92,688 --
------------ ------------
211,923,080 205,646,974
Unearned ESOP shares............................. (1,367,656) (2,515,929)
------------ ------------
Total shareholders' equity..................... 210,555,424 203,131,045
------------ ------------
Total liabilities and shareholders' equity..... $321,269,266 $295,869,988
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Net sales............................ $763,054,234 $589,120,271 $471,985,254
Cost of goods sold................... 558,164,047 426,529,829 339,669,816
------------ ------------ ------------
Gross profit..................... 204,890,187 162,590,442 132,315,438
General and administrative expenses.. 119,916,121 89,358,343 76,817,943
Selling expenses..................... 67,524,994 51,802,431 44,589,548
Restructuring charges................ -- -- 4,388,592
Merger costs and expenses............ 12,128,168 15,731,716 --
Nonrecurring ESOP cost of acquired
company............................. 1,446,060 849,596 832,403
------------ ------------ ------------
Income from operations........... 3,874,844 4,848,356 5,686,952
------------ ------------ ------------
Other income (expense):
Interest expense................... (1,188,582) (3,568,181) (4,505,999)
Interest and investment income..... 2,419,168 1,187,892 4,540
Other income....................... 1,537,086 1,586,028 1,912,416
------------ ------------ ------------
2,767,672 (794,261) (2,589,043)
------------ ------------ ------------
Income before provision for income
taxes............................... 6,642,516 4,054,095 3,097,909
Provision for income taxes........... 2,215,900 1,925,100 3,037,582
------------ ------------ ------------
Net income........................... $ 4,426,616 $ 2,128,995 $ 60,327
============ ============ ============
Net income per common and common
equivalent share.................... $ 0.12 $ 0.06 --
============ ============ ============
Pro forma tax adjustment on pooled S-
Corporation income.................. (357,000) (438,000) (23,000)
------------ ------------ ------------
Pro forma net income................. $ 4,069,616 $ 1,690,995 $ 37,327
============ ============ ============
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 $ 0.05 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<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 UNEARNED
------------------- PAID-IN RETAINED TRANSLATION ESOP
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SHARES TOTAL
---------- -------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1994................... 19,790,784 $197,908 $ 25,183,223 $ 2,606,265 $ -- $(3,638,335) $ 24,349,061
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)
Release of unallocated
shares to ESOP........ -- -- -- -- -- 617,410 617,410
Net income............. -- -- -- 60,327 -- -- 60,327
---------- -------- ------------ ----------- ------- ----------- ------------
Balance at March 30,
1995................... 26,509,659 265,097 49,216,976 2,150,592 -- (3,020,925) 48,611,740
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)
Release of unallocated
shares to ESOP........ -- -- -- -- -- 504,996 504,996
Net income............. -- -- -- 2,128,995 -- -- 2,128,995
Other poolings......... 290,586 2,906 8,011 1,267,304 -- -- 1,278,221
---------- -------- ------------ ----------- ------- ----------- ------------
Balance at March 29,
1996................... 36,859,944 368,600 200,186,483 5,091,891 -- (2,515,929) 203,131,045
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)
Release of unallocated
shares to ESOP........ -- -- 172,811 -- -- 1,148,273 1,321,084
Net income............. -- -- -- 4,426,616 -- -- 4,426,616
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................... 38,799,073 $387,991 $207,675,161 $ 3,767,240 $92,688 $(1,367,656) $210,555,424
========== ======== ============ =========== ======= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<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........................ $ 4,426,616 $ 2,128,995 $ 60,327
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization..... 5,985,340 4,302,646 4,393,063
Provision for doubtful accounts... 3,040,548 1,463,758 1,680,585
Merger costs and expenses......... 3,433,190 5,435,196 --
Restructuring charge.............. -- -- 4,388,592
Benefit for deferred income
taxes............................ (5,330,200) (782,900) (141,500)
Gain on sale of equipment......... -- -- (925,784)
Nonrecurring ESOP cost of
acquired company................. 1,446,060 849,596 832,403
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............................. (3,994,955) (25,402,897) (8,944,283)
Decrease (increase) in
inventories..................... 3,695,562 (19,284,103) (3,165,284)
(Increase) decrease in prepaid
expenses and other assets....... (7,647,597) (2,196,836) 438,442
Increase in other assets......... (3,228,105) (1,006,027) (1,293,573)
(Decrease) increase in accounts
payable, accruals, and other
liabilities..................... (2,072,683) 12,490,104 (5,685,126)
------------ ------------- -------------
Net cash used in operating
activities..................... (673,851) (22,002,468) (8,362,138)
------------ ------------- -------------
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..... -- -- 11,994,692
Capital expenditures.............. (6,054,156) (5,400,964) (3,476,514)
Purchases of net assets from
business acquisitions............ (6,801,092) (3,373,584) (9,010,130)
Payments on noncompete agreements. (3,980,225) (1,545,970) (1,036,957)
------------ ------------- -------------
Net cash used in investing
activities..................... (10,593,040) (31,088,118) (1,528,909)
------------ ------------- -------------
Cash Flows From Financing
Activities:
Principal payments under capital
lease obligations................ (880,166) (1,124,293) (931,949)
Proceeds from borrowings.......... 3,531,236 287,817,301 423,828,497
Repayments of borrowings.......... (29,311,994) (317,052,461) (435,974,915)
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........... (25,339,294) 117,439,522 9,903,986
------------ ------------- -------------
Net (decrease) increase in cash and
cash equivalents.................. (36,606,185) 64,348,936 12,939
Cash and cash equivalents,
beginning of year................. 65,681,342 1,332,406 1,319,467
------------ ------------- -------------
Cash and cash equivalents, end of
year.............................. $ 29,075,157 $ 65,681,342 $ 1,332,406
============ ============= =============
Supplemental Disclosures:
Interest paid..................... $ 1,034,545 $ 3,685,155 $ 4,763,651
============ ============= =============
Income taxes paid................. $ 5,096,835 $ 2,748,087 $ 3,731,425
============ ============= =============
Merger costs and expenses paid.... $ 8,694,978 $ 10,296,520 $ --
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<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. ("PSS") was incorporated in 1983 in
Jacksonville, Florida. The Company 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 service centers in
the United States distributing to approximately 103,000 physician office sites
in all 50 states.
In November 1996, PSS 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, PSS established two new subsidiaries, WorldMed International,
Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries were established
to manage and develop PSS'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.
The accompanying consolidated financial statements give retroactive effect to
the mergers (the "Mergers") with S&W X-ray, Inc. ("S&W"), Taylor Medical, Inc.
("Taylor") and X-ray of Georgia ("X-ray Georgia"). 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 Georgia. X-ray Georgia distributed
radiology and imaging equipment, chemicals and supplies, and provided technical
service to the acute and alternate site markets. On September 23, 1997, PSS
issued 1,737,438 shares of its common stock in exchange for all of the
outstanding equity interest of S&W. S&W distributes radiology and imaging
equipment, chemicals and supplies, and provides technical service to the acute
and alternate site markets through five locations in four states in the
northern region. 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, S&W, Taylor
and X-ray Georgia had operated as one entity since inception. Certain items
have been reclassified to conform to the current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company 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.
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.
F-7
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 allowances for
doubtful accounts of approximately $4,234,000 and $2,318,000 as of the end of
fiscal years 1997 and 1996, respectively. Provisions for doubtful accounts were
approximately $3,041,000, $1,464,000, and $1,681,000 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.
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
F-8
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 fifteen 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 net tax effect of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income 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.
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 year 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 year 1997, the
Company merged with one 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.
F-9
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Per Common and Common Equivalent Share
Net income 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 38,015,000, 32,870,000, and 25,101,000
for fiscal years 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 years 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 year
1997. The Company also acquired 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 year
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.
F-10
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Lines of credit................................ $ -- $ 3,100,000
Other notes.................................... 774,794 262,961
Long-term debt of acquired company............. 10,692,479 9,960,929
Capital lease obligations...................... 457,124 1,259,393
----------- -----------
11,924,397 14,583,283
Less current maturities........................ 8,099,064 11,317,621
----------- -----------
$ 3,825,333 $ 3,265,662
=========== ===========
</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 $30,000,000 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
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
F-11
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
restrictions on mergers, acquisitions, investments, capital expenditures,
intangible assets, indebtedness, and stock transactions, among other things.
Other Notes
X-ray Georgia maintained various other notes which were repaid by the Company
in fiscal year 1997 in conjunction with the merger.
Long-term Debt of Acquired Company
S&W has available three line of credit agreements which provide for
borrowings of up to $10,000,000 for working capital, bulk inventory purchases,
and equipment purchases. As collateral for the lines of credit, the bank has a
security interest in S&W's accounts receivable, equipment, and inventory, along
with the personal guarantee of one of S&W's shareholders.
The primary line of credit is available up to $3,500,000 and bears interest
at the prime rate minus 0.25% or the LIBOR rate plus 2% (7.56% at March 28,
1997). The secondary credit line is available up to $6,000,000 and bears
interest at the prime rate (8.5% at March 28, 1997). The equipment line of
credit is available up to $500,000 and bears interest at the prime rate plus
1.25% (9.75% at March 28, 1997). These lines of credit were repaid in
conjunction with the merger (Notes 1 and 11).
As of March 28, 1997, S&W has an Employee Stock Ownership Trust note payable
due to a bank in minimum monthly principal installments of $20,555 plus
interest at the LIBOR rate plus 1.5% (7.06% at March 28, 1997), through
February 1, 2001, at which time all remaining principal is due. This note
payable was repaid in conjunction with the merger (Notes 1, 10, and 11).
S&W has a note payable due to a bank in monthly principal installments of
$33,333 plus interest at the LIBOR rate plus 2.25% (7.81% at March 28, 1997),
through November 31, 2001. This note payable was repaid in conjunction with the
merger (Notes 1 and 11).
S&W has a mortgage note payable to a bank due in monthly principal
installments of $3,125 plus interest at the prime rate plus 1% (9.5% at March
28, 1997). This note was repaid in conjunction with the merger (Notes 1 and
11).
Long-term debt, excluding capital lease obligations, outstanding at March 28,
1997 was approximately $3,768,000. As of March 28, 1997, future minimum
payments of long-term debt, by fiscal year and in the aggregate, are
approximately as follows:
<TABLE>
<S> <C>
Fiscal Year:
1998........................................................... $ 7,699,000
1999........................................................... 868,000
2000........................................................... 737,000
2001........................................................... 1,758,000
2002........................................................... 289,000
Thereafter..................................................... 116,000
-----------
Total........................................................ $11,467,000
===========
</TABLE>
F-12
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
<S> <C>
Fiscal Year:
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>
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 $6,634,000, $5,691,000, and $5,542,000 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>
<S> <C>
Fiscal Year:
1998........................................................... $ 9,038,000
1999........................................................... 5,905,000
2000........................................................... 4,351,000
2001........................................................... 2,924,000
2002........................................................... 1,627,000
Thereafter..................................................... 993,000
-----------
Total........................................................ $24,838,000
===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land............................................. $ 383,312 $ 271,524
Building......................................... 2,842,764 1,875,426
Equipment........................................ 24,861,392 19,999,027
Furniture, fixtures and leasehold improvements... 6,962,170 3,936,950
------------ ------------
35,049,638 26,082,927
Accumulated depreciation......................... (14,846,671) (10,211,028)
------------ ------------
$ 20,202,967 $ 15,871,899
============ ============
</TABLE>
F-13
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $3,481,000, $2,412,000, and $2,396,000 for
1997, 1996, and 1995, respectively, and is included in general and
administrative expenses.
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........................................... 12,370,204 7,441,804
Noncompete agreements.............................. 11,921,251 7,146,913
----------- -----------
27,519,560 18,055,002
Accumulated amortization........................... (5,436,000) (3,670,680)
----------- -----------
$22,083,560 $14,384,322
=========== ===========
</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 $2,504,000, $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............................... $ 6,105,000 $2,171,000 $2,554,000
State................................. 1,442,000 537,000 626,000
----------- ---------- ----------
Total current....................... 7,547,000 2,708,000 3,180,000
----------- ---------- ----------
Deferred tax benefit:
Federal............................... (4,305,000) (638,000) (107,000)
State................................. (1,026,000) (145,000) (35,000)
----------- ---------- ----------
Total deferred...................... (5,331,000) (783,000) (142,000)
=========== ========== ==========
Total income tax provision.......... $ 2,216,000 $1,925,000 $3,038,000
=========== ========== ==========
</TABLE>
F-14
<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.......... $6,643,000 $4,054,000 $3,098,000
========== ========== ==========
Tax provision at the statutory rate........ 2,259,000 1,378,000 1,053,000
---------- ---------- ----------
(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. 389,000 424,000 172,000
Write-off of intangibles................. -- -- 583,000
Meals and entertainment.................. 180,000 167,000 162,000
Goodwill amortization.................... 15,000 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............................... 348,000 9,000 30,000
Income of S-corporation.................. (319,000) (392,000) (21,000)
---------- ---------- ----------
Total (decrease) increase in taxes..... (43,000) 547,000 1,985,000
---------- ---------- ----------
Total income tax provision............. $2,216,000 $1,925,000 $3,038,000
========== ========== ==========
Effective tax rate......................... 33.4% 47.5% 98.1%
========== ========== ==========
</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.. 1,620,000 757,000
Intangibles........................................ 674,000 681,000
Inventory uniform cost capitalization.............. 1,007,000 513,000
Net operating loss carryforwards................... 1,738,000 219,000
Accrued expenses................................... 801,000 399,000
Reserve for inventory obsolescence................. 39,000 105,000
Long-term incentive plan........................... 174,000 --
Other.............................................. 219,000 197,000
----------- -----------
Gross deferred tax assets........................ 7,727,000 3,075,000
----------- -----------
Deferred tax liabilities:
Excess of tax depreciation and amortization over
book depreciation and amortization................ (1,541,000) (1,184,000)
Other.............................................. -- (136,000)
----------- -----------
Gross deferred tax liabilities................... (1,541,000) (1,320,000)
----------- -----------
6,186,000 1,755,000
Valuation allowance.............................. -- (900,000)
----------- -----------
Net deferred tax asset........................... $ 6,186,000 $ 855,000
=========== ===========
</TABLE>
F-15
<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 years 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.
S&W has a demand note payable outstanding to S&W shareholders and other
related parties that bears interest at the prime rate plus 1% (9.5% at March
28, 1997). Payments to S&W related parties were approximately $1,174,000,
$791,000, and $1,275,000 for the years ended March 28, 1997, March 29, 1996,
and March 30, 1995, respectively. This note payable was repaid in conjunction
with the merger (Notes 1, 3, and 11).
Subsequent to year-end, the Company loaned its Chairman of the Board and
Chief Executive Officer of the Company approximately $3.2 million to refinance
debt incurred in connection with previous purchases of Common Stock. The loans
are unsecured and bear interest at 6.55% and are payable on demand and
expected to be repaid over a 10-year period.
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.
F-16
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information regarding this plan is summarized below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES 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>
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>
F-17
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-18
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
F-19
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<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>
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
------ -------
<S> <C> <C>
Net income (loss):
As reported............................................... $4,427 $ 2,129
Pro forma................................................. $2,653 $(1,525)
Net income (loss) per share:
As reported............................................... $ 0.12 $ 0.06
Pro forma................................................. $ 0.07 $ (0.05)
</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
</TABLE>
F-20
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
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.
S&W sponsors a leveraged employee stock ownership plan ("S&W ESOP") that
covers all employees with one year of service. Contributions to the plan 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 the earnings-per-share (EPS) computation.
At March 28, 1997, March 29, 1996, and March 30, 1995, 561,496 shares of the
Company's common stock were held by the Employee Stock Ownership Trust (the
"Trust"), which was established to fund the plan. The Trust purchased these
shares with the proceeds of a $3,700,000 loan from S&W. S&W, in turn, obtained
a $3,700,000 loan from a bank.
The S&W ESOP shares were as follows:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996 MARCH 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Allocated shares................... 278,490 202,052 123,946
Shares released for allocation..... 120,237 76,438 78,106
Unreleased shares.................. 162,769 283,006 359,444
---------- ---------- ----------
Total ESOP shares................ 561,496 561,496 561,496
========== ========== ==========
Fair value of unreleased shares.... $1,512,495 $2,392,661 $2,885,589
========== ========== ==========
</TABLE>
Subsequent to March 28, 1997, the Company committed to release the remaining
shares to the S&W ESOP participants and it is management's intention to
terminate this plan. Accordingly, approximately $2.5 million of related
expense was recognized subsequent to year-end.
11. BUSINESS ACQUISITIONS
Pooling With S&W
On September 23, 1997, the Company acquired S&W in a merger pursuant to
which the Company issued 1,737,458 shares of common stock to the former
shareholders of S&W (of which 154,700 shares are being held in escrow) in
exchange for all of the outstanding shares of capital stock of S&W valued at
$26.0 million at the time of the merger. 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 S&W
for all periods prior to the merger.
F-21
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Separate net sales, net income, and other changes in shareholders' equity of
the merged entities prior to the merger are presented in the following table:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996 MARCH 30, 1995
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales
PSS, Taylor, and X-ray of Geogia
combined....................... $691,020 $529,024 $413,301
S&W............................. 72,034 60,096 58,684
-------- -------- --------
Total......................... $763,054 $589,120 $471,985
======== ======== ========
Net income (loss)
PSS, Taylor, and X-ray of Geogia
combined....................... $ 4,373 $ 1,339 $ (847)
S&W............................. 54 790 907
-------- -------- --------
Total......................... $ 4,427 $ 2,129 $ 60
======== ======== ========
Other changes in shareholders' eq-
uity
PSS, Taylor, and X-ray of Geor-
gia combined................... $ 1,677 $151,885 $ 23,585
S&W............................. 1,321 505 617
-------- -------- --------
Total......................... $ 2,998 $152,390 $ 24,202
======== ======== ========
</TABLE>
Pooling With X-ray Georgia
On December 20, 1996, the Company acquired X-ray Georgia in a merger
pursuant to which the Company issued 593,672 shares of common stock to the
former shareholders of X-ray Georgia (of which 52,675 shares are being held in
escrow as of March 28, 1997) in exchange for all of the outstanding shares of
capital stock of X-ray Georgia valued at $11.0 million at the time of the
merger. The 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 Georgia for all
periods prior to the merger.
X-ray Georgia was an S-Corporation for income tax purposes, and therefore,
did not pay U.S. federal income taxes. X-ray Georgia will be included in the
Company's U.S. federal income tax return subsequent to the date of
acquisition. Separate net sales, net income (loss) and related per share
amounts of merged entities are presented in the following table. In addition,
the table includes pro forma net income (loss) and net income (loss) per share
amounts which reflect pro forma adjustments to present income taxes of X-ray
Georgia on the basis on which they will be reported in future periods.
<TABLE>
<CAPTION>
MARCH 30 THROUGH
DECEMBER 31, 1996 MARCH 29, 1996 MARCH 30, 1995
----------------- -------------- --------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Net sales
PSS and Taylor combined. $470,357 $483,294 $366,285
X-ray Georgia........... 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 Georgia........... 938 1,153 62
-------- -------- --------
Net income (loss) as
reported................. $ 7,077 $ 1,339 $ (847)
Pro forma tax provision
for X-ray Georgia........ (357) (438) (23)
-------- -------- --------
</TABLE>
F-22
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARCH 30 THROUGH
DECEMBER 31, 1996 MARCH 29, 1996 MARCH 30, 1995
----------------- -------------- --------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
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 Georgia.......... (1,100) (455) (516)
------ -------- -------
Total................ $ 346 $151,885 $23,585
====== ======== =======
</TABLE>
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 MARCH 30, 1995
--------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net sales
PSS......................................... $ 73,670 $236,188
Taylor...................................... 31,640 130,097
-------- --------
Combined.................................. $105,310 $366,285
======== ========
Net income (loss)
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 year 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
F-23
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
retained earnings of the Company.
During fiscal year 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 retained earnings of the Company.
Asset Purchases
During fiscal year 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 year 1996, the Company acquired certain assets, accounted for
by the purchase method, including accounts receivable, inventories, equipment,
and other assets of eight medical supplies and equipment distributors for
approximately $6.2 million. The aggregate purchase price paid consisted of
cash of approximately $3.3 million, assumption of accounts payable and accrued
liabilities of approximately $2.7 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 $1.7 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 $1.3
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 year 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 year 1995, Taylor acquired certain assets of three medical
supplies and equipment distributors for approximately $2.2 million.
F-24
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 years 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.
F-25
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 years 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.
During fiscal year 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 purchased three imaging and
equipment distributors with annual revenues of $76 million for aggregate
consideration of approximately $16.5 million comprised of approximately
868,000 shares of PSS common stock and approximately $2.5 million cash. In
addition, the Company acquired two physician supply businesses and one imaging
and equipment distributor with annual revenues of $18 million for aggregate
consideration of $4.4 million in stock-for-stock mergers accounted for using
the pooling of interests methods of accounting. The consolidated financial
statements have not been restated to account for these acquisitions.
During October 1997, the Company issued 8.5% senior subordinated notes due
in 2007 (the "Notes") in the amount of $125.0 million. Interest on the Notes
will accrue from their date of original issuance and will be payable semi-
annually on April 1 and October 1 of each year, commencing on April 1, 1998,
at a rate of 8.5% per annum.
During December 1997, the Company signed a definitive agreement to acquire
Gulf South Medical Supply, Inc. ("GSMS") in a merger (the "Merger") to be
accounted for as a pooling of interests by issuing approximately 28.5 million
shares of PSS common stock. Consummation of the Merger is subject to the
approval of the shareholders of both the Company and GSMS and various state
and federal regulatory agencies and other customary conditions.
F-26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
------ ----------- ----
<C> <S> <C>
23.1 Consent of Arthur Andersen LLP.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference of our report dated December 18, 1997 included in
this Current Report on Form 8-K into the Company's previously filed
Registration Statement File Nos. 33-80657, 333-15043, 333-15107 and 333-30427.
/s/ Arthur Andersen LLP
Jacksonville, Florida
December 22, 1997
